Fast-casual burger chain BurgerFi is about to go public after reaching a $100 million merger-acquisition agreement with Opes Acquisition (NASDAQ:OPES), a so-called blank check company created to use investor money to buy companies.
When the deal is completed, which is expected to be sometime before Nov. 1, BurgerFi will be listed on the Nasdaq exchange under the ticker symbol BFI.
The casual burger restaurant has survived the high-end burger bubble, and is described as one of the nation's fastest-growing better-burger chains with about 125 restaurants. But is now really a good time to be going public, and more importantly, should investors consider buying in?
The end of the better-burger bubble
The fast-casual space was looking for the next new thing to capitalize on the strength of Chipotle Mexican Grill, and though Shake Shack (NYSE:SHAK) was not the first better-burger shop, its IPO in 2015 seemed to kick the concept into high gear.
Soon there appeared to be a fast-casual burger joint on every corner. Now we have Five Guys, Smashburger, Umami Burger, Burgerim, Jake's Wayback Burger, Bobby's Burger Palace, FAT Brands' (NASDAQ:FAT) Fatburger and Elevation Burger, In-N-Out Burger, and The Habit Burger Grill. And, of course, BurgerFi.
While many of the restaurants remain in business, Burgerim was a notable flameout that ended up going bankrupt, while Habit Burger was acquired by Yum! Brands (NYSE:YUM) for $14 a share -- or $4 per share less than its own IPO five years ago, as sales growth faltered.
Shake Shack itself was feeling pressured by slowing sales even before the coronavirus pandemic, and its stock trades for $53 today, just 13% above when it went public, compared with a 54% gain for the S&P 500.
Fatburger also used a process to go public that circumvented the traditional IPO process called Regulation A+ that lets companies raise $50 million from the general public rather than only from accredited investors. Its stock has lost 70% of its value since its debut.
Where's the beef?
While BurgerFi has grown to over 100 restaurants, that's a glacial pace for a company founded in 2011. It's true the acquisition with Opes could provide the financing it needs to expand its footprint, but the intensely competitive nature of the industry means it's still going to have a difficult time standing out from its rivals.
There's little that distinguishes BurgerFi from any of the other fast-casual chains, and vice versa. They're all using similar higher quality ingredients, and all offer that "built to order" freshness.
Yet even McDonald's, Wendy's, and Restaurant Brands International's Burger King have greatly improved their menus and the quality of their ingredients, while their ubiquity allows them to overcome the constraints of being quick-serve rather than fast casual.
Consumers have a lot of choice, and price is also a potential pitfall for BurgerFi. Its basic burger goes for $6.50 in my area, while adding in fries and a soda puts you over $13 for the meal. That's slightly more expensive than a ShackBurger meal that goes for around $11.50, but much more than a Habit charburger meal, which costs just $8.60.
Restaurants also need to consider social distancing for their dining rooms, which will limit customer capacity in the near term. Takeout efficiency is going to be crucial to growing the business, and BurgerFi may find itself at a disadvantage.
Drive-thru has been key to McDonald's and Wendy's longevity, and while BurgerFi has takeout and delivery options in place, its fast-casual peers like Habit also have drive-thru lanes in many locations already, and Shake Shack is installing them where possible (it's also punching holes in its walls for added contactless pickup).
As BurgerFi expands, it will need to consider such options as well, which could increase the costs of growth.
Better as a meal than as an investment
A publicly traded BurgerFi doesn't seem to offer much to investors. It's an exceptionally crowded market where rivals have had a hard time growing sales. As the pandemic has imposed new limitations on growth for the foreseeable future, the fast-casual chain may find it difficult to show investors a decent return, if any.
Restaurants are going to be hard-pressed to survive, with suggestions that same-store sales growth is impossible for the foreseeable future. Going public now, even through a merger as BurgerFi and Opes Acquisition are doing, seems like a losing investment.