Though fast casual IPOs have had notable success, a Soho House IPO will likely not happen at all. Knowing this, Soho House should abandon its IPO ambitions, and instead reinvest in service and training — not just new clubs.
— Jennifer Parker
Nick Jones, the founder of Soho House, has put on hold plans for an initial public offering of the membership club-slash-restaurant brand after nine months of testing the waters.
Jones’ network of private clubs was founded in 1995 and is currently (though perhaps temporarily) unprofitable as it shoulders the costs of expansion. The company is planning to open as many as five new houses a year in cities around the globe (with sights set on Paris, Milan, Rome, Lisbon, Austin, and Nashville). “We are well on our way to becoming the first global club,” the entrepreneur recently told the Financial Times. Meanwhile, chief financial officer Peter McPhee reported a loss before tax of $76 million (£60 million) last year.
Clearly, capital for expansion is necessary. When asked whether an initial public offering was being considered both Jones and McPhee said it remains a possibility. But isn’t growth antithetical to the kind of exclusivity Soho House promises?
Shareholders Vs. Tastemakers
The logic of a Soho House IPO is to export the brand’s exclusivity to untapped markets. It makes sense, theoretically. But going public comes with intense quarterly pressure to grow shareholder returns, and if that pressure manifests as multiple clubs in the same market, they risk dilution of the brand. (Just look at Soho House’s three clubs in New York.) New markets are great, but only up to a point. Does Nick Jones need a Soho House in St. Louis? No.
Opening 10 to 20 more clubs — even with the windfall investment that an IPO can provide — won’t necessarily improve service at its restaurants and hotels. Management will instead be forced to spend its time dealing with things like construction, permitting, hiring, insurance costs, and real estate brokers.
Considering the current volatile stock market, an IPO could provide more risk than it provides cash. Luxury products (steaks and caviar included) are discretionary, and therefore economically cyclical — meaning when the economy does badly, your stock does worse.
Considering all this, it is no surprise that there are more companies going private than public in the restaurant space right now. Since January 2017, nearly $15 billion worth of restaurant stocks in the U.S. delisted, as nine companies left public stock exchanges for private hands. (For example, the Brazilian steakhouse chain Fogo de Chão, Inc. went public on the NASDAQ in 2015, only to go private three years later when it was acquired by private equity firm Rhône Capital.)
These public-to-private deals are coming at a time when very few restaurant companies are making initial public offerings. Over the same period, restaurant IPOs accounted for only $59 million in value, according to the industry research and consultancy firm Aaron Allen & Associates.
Their findings reflect today’s market, which is characterized by cheap capital and robust buyside demand. “This is as cheap as money’s been for decades,” says consultant Aaron Allen. “Private Equity firms have huge amounts of capital to invest, and they need good returns. So, they’re fighting to give money to scalable restaurants.”
Scalability is replicability, in this context. And it is often the deciding factor between staying private or going public. For example, McDonald’s and Shake Shack are public because these businesses are replicable, automated, quick service operations that work exactly the same way in hundreds of different locations. They are very different from upscale restaurant models that thrive on top chef celebrity, specialized skills, and highly customized menus that can easily adapt to seasons and styles.
In other words, a franchise can’t do what Noma is doing. And you’d have a difficult time convincing investors to make 3,900 Per Se restaurants. “Generally speaking, an IPO is for a company that will grow larger than what you can do on the private equity side,” added Allen.
What Retail Investors Want
“Public restaurant companies are fast-casual, because public investors are looking for growth. High-end restaurants can’t grow at the pace the retail investor demands,” says Chad Spaulding, Managing Director at Capital Spring, a U.S.-based investment firm focused solely on restaurants. “I can’t think of any good public company candidate in the high-end space right now.”
At Capital Spring, each fast-food build is considered a ‘small footprint’ bet, because for, say, $5 million they can build up to 20 locations for the cost of just one upscale restaurant. Expand these numbers exponentially, and you’re looking at the public restaurant market.
The bulk of the market cap in the public market comprises thousands of restaurants, which are diversified across different demographics. By contrast, the failure of one restaurant out of a five-location portfolio has an outsized impact, putting shareholder money at risk.
Of course, some upscale restaurants are making great returns out there (here’s looking at you, Daniel Humm). They’re just considered high-risk.
“How much can you grow without hurting your base? If you’re telling investors that you can double in size, you must be able to also enhance the brand through consumer awareness, and produce an infrastructure that can support the same quality,” says Spaulding. “Rapid growth without brand implosion is very difficult at the high-end.”
The Jean-Georges Approach
For star chefs like Jean-Georges Vongerichten, private equity can be a lifeline. His company, Jean-Georges Management, runs 38 restaurants around the globe, and has no intention of going public.
“I never say never, but a company like mine is very specialized, so I don’t think an IPO would be good for us. No restaurant has the same décor, or the same architect. Every detail is custom-created for the niche, and the market,” says Vongerichten. In 2004, the chef was approached by the private equity firm Catterton Partners to create Spice Market, in partnership with Starwood Hotels. Over the course of five years, Jean-Georges built it into a successful business, and sold it back to Starwood.
“Spice Market was a work of love based on my memories in Thailand. But they made me an offer I couldn’t refuse,” says Vongerichten. “That would be the route I would go before going public, because you’re dealing one-on-one, instead of the corporate world.”
Today, his empire is a well-oiled machine made up of Jean-Georges Management-owned restaurants and corporate hotel licence deals. Hotel companies (think Four Seasons, Oetker Collection, One&Only) pay all the costs to build and operate a restaurant, and hand the chef the keys — expecting success. In this way, chefs get a strong platform on which to build, while the hotel can raise its food and beverage sales and room rates based on the chef’s caché.
In the case of Soho House, it seems there is plenty of private funding willing to bet on its proven exclusivity. But, only if exclusivity — a delicate and somewhat ephemeral concept — is protected.
Jennifer Parker is a writer and reporter based in New York City, covering culture, travel, and the travel industry. Her work frequently appears in esteemed publications such as Bloomberg Pursuits, Saveur magazine, Watch Journal, and the Washington Post.