In a bustling corner of a Montreal café, Eric Lefebvre gestures animatedly as he outlines his vision for MTY Food Group’s future. The CEO’s enthusiasm belies the significant hurdles the restaurant franchising giant has encountered in its once-aggressive acquisition strategy—a cornerstone of the company’s growth for nearly four decades.
“The market has fundamentally changed,” Lefebvre admits, stirring his coffee thoughtfully. “We’re seeing valuation expectations that simply don’t align with reality in today’s economic climate.”
MTY, which operates over 80 restaurant brands including Cold Stone Creamery, Thai Express, and recently acquired Wetzel’s Pretzels, has built its empire through strategic acquisitions. Last year alone, the company completed five deals worth a combined $343 million. However, this acquisition engine has noticeably downshifted in 2023, with no new purchases announced since January.
Industry analysts point to several converging factors creating this challenging environment. Interest rates have skyrocketed from near-zero during the pandemic to over 5% today, dramatically increasing the cost of financing acquisitions. Meanwhile, restaurant owners, still recovering from COVID-19 disruptions, have inflated expectations of what their businesses are worth.
“There’s a significant disconnect between seller expectations and what buyers can reasonably pay in the current market,” explains Vince Sgabellone, foodservice industry analyst at NDP Group. “Many owners are pricing their businesses based on pre-pandemic metrics or post-reopening surges, neither of which reflect today’s reality.”
MTY’s financial performance underscores these challenges. The company reported solid revenue growth of $291.2 million in its second quarter, up 23% year-over-year, largely driven by previous acquisitions. However, same-store sales growth has slowed to just 0.6%, indicating organic growth challenges across its existing portfolio.
For a company that built its reputation on acquiring and optimizing restaurant chains, this acquisition drought presents strategic concerns. MTY’s market capitalization has dipped approximately 8% year-to-date, compared to the S&P/TSX Composite Index’s 3% gain during the same period.
At MTY’s sprawling headquarters, teams that once worked feverishly on integration plans now focus more intensely on operational improvements and technological innovation. The company has accelerated investments in digital ordering platforms and loyalty programs across its brands, seeking to extract more value from existing operations while acquisition opportunities remain scarce.
“We’re absolutely still in the market for the right acquisitions,” Lefebvre insists, “but we won’t compromise our disciplined approach to valuation. Each potential deal must meet our strict criteria for long-term value creation.”
This measured stance marks a notable shift for a company that completed over 60 acquisitions since its founding in 1979. Restaurant industry experts suggest this pause might ultimately benefit MTY’s long-term health, allowing for better integration of recent purchases like BBQ Holdings and Wetzel’s Pretzels.
The challenges extend beyond MTY to the broader restaurant franchising landscape. Industry data from the Canadian Franchise Association indicates a 22% decrease in restaurant franchise transactions during the first half of 2023 compared to the same period in 2022.
“Smart buyers are waiting for the market to rationalize,” notes restaurant consultant David Hopkins of The Fifteen Group. “There will likely be a correction in seller expectations as operational challenges and higher interest rates continue to pressure margins.”
For shareholders and industry observers, the key question remains: Is MTY’s acquisition slowdown temporary, or does it signal a fundamental shift in the company’s growth strategy?
The answer will likely emerge in the coming quarters as interest rate trajectories become clearer and restaurant valuations potentially normalize. Until then, MTY’s focus on operational excellence and digital innovation may provide the growth runway needed while the acquisition market recalibrates.
As Lefebvre concludes our conversation, his determination is evident. “The opportunities will come—they always do in this business. Our job is to be patient, disciplined, and ready to move decisively when the right deals emerge at the right valuations.”
For a company built on a foundation of strategic acquisitions, this period of restraint may ultimately prove to be one of MTY’s most important strategic decisions yet.