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In case you ask me, nothing personifies the post-COVID restaurant industry higher than Taco Bell’s latest drive-thru.

This hovering, burrito-filled bank branch just goes to point out how modern trends and consumer preferences are forcing big changes within the sector.

And where there’s change, there’s opportunity.

But where should investors start looking? How do you put money into restaurants? And considering how overall sector performance stays erratic, how will you hedge your risk?

Furthermore, must you trouble investing in restaurants in any respect?

Let’s dive into tips on how to put money into restaurants in 2022.

The Short Version

• The Restaurant Performance Index (RPI) shows a slow recovery for the restaurant sector after the grim pandemic years. This will create opportunities for investors to fund seed rounds, crowdfund, or buy stocks and ETFs.
• Nonetheless, short- and long-term trends like inflation, the labor shortage, and provide chain hangovers create huge risks — as does the truth that 80% of restaurants fail inside five years.
• For that reason, money, passion, and a high risk tolerance may very well be considered prerequisites to restaurant investing.

Spend money on Restaurants Directly

Your first option for investing in restaurants is to go the old-fashioned route: hear a pitch and cut a check.

By playing the role of the angel investor, you may get in early on a promising restaurant concept, capture a double-digit equity stake, and take a much larger share of the (potential) profits later.

Angel investors typically find opportunities in considered one of 3 ways:

• Family and friends;
• Word of mouth from other investors; and
• Through incubators.

For instance, let’s say you’re an accredited investor on the lookout for a hot investing opportunity within the Boston restaurant scene. You may join an angel investing network like Branch Enterprise Group and begin flipping through pitches and business plans.

Naturally, angel investing isn’t for everybody. To do it right, you would like passion, patience, and big piles of money since a typical solicitation could be $100,000 for a ten% to twenty% stake.

And considering that 80% of restaurants fail by yr five, pouring an excessive amount of capital right into a single opportunity could be devastating to your bottom line.

Nevertheless it’s an option nonetheless and should be a fit for the restaurant lover with institutional knowledge and capital to spend.

Restaurants are dangerous business >>> Risk/Reward Ratio: What It Is and How you can Calculate It

Pros and Cons of Investing in Restaurants Directly

pros

• Get in early — Angel investing in restaurants will be exciting as you join incubators, hear pitches, and support a promising latest concept from the bottom up.
• Own real equity — The quantity of equity you may secure on the seed stage will be enormous: well into the double digits.
• Largest profit potential — Picking the proper restaurant on the seed stage will generate much more profits than crowdfunding or hopping on the bandwagon during a Series C.

cons

• Time intensive — Unless you trust your gut or throw caution to the wind, picking the proper restaurant on the seed stage requires networking, poring through business plans, and more.
• Expensive — Angels typically invest six figures for a double-digit equity stake, which doesn’t leave much room for diversification.
• Mega-high risk — Most angel investing opportunities are in a single restaurant location, 80% of which fail inside five years. Statistically, the percentages are higher in Vegas.

Invest Through Crowdfunding

With profit margins hovering within the 3% to five% range, restaurants often struggle to secure loans from traditional lenders. On the flip side, seed funding will be difficult to secure promptly and almost all the time involves forfeiting a major equity stake.

That’s why so many restaurateurs turn to a 3rd option: crowdfunding.

Unlike Kickstarter — which is more geared towards soliciting donations in exchange for perks, early product access, etc. — restaurant crowdfunding sites offer something more substantial:

• Honeycomb Credit operates like a P2P lending site, where investors fund loans to restaurateurs in exchange for fixed interest payments over time. Rates range from 5% to 14%.
• Mainvest eschews fixed interest payments for a revenue-sharing model, so investors who put their money in the proper restaurants can earn as much as 25% ROI. Take a look at our full review of Mainvest.
• FranShares enables you to speculate in latest franchise locations – including restaurants – for a lockup period of around five years and goal returns of between 16% and 21.86%. Take a look at our full review of FranShares.

For investors, crowdfunding is magnitudes more convenient and simple than angel investing. The chief drawbacks are that the profit potential is proscribed, and the ~15% returns only come if the restaurant survives — which many don’t.

But crowdfunding could be the shoe that matches in case you’re willing to trade profits to support another person’s passion.

Read more >>> Reg CF vs. Reg A+ Crowdfunding Offerings: Similarities & Differences

Pros and Cons of Crowdfunding

pros

• Convenient — Platforms like Honeycomb Credit and Mainvest allow you to register, browse, perform due diligence, and put money into a restaurant with no visit to the local incubator.
• Higher selection — In case you expand your scope to multiple platforms, you’ll typically have dozens of opportunities to contemplate directly.
• More predictable short-term returns — Whether operating on a set interest or revenue-sharing model, crowdfunding returns are inclined to be priced out for investors (although not guaranteed).

cons

• No equity — Most crowdfunding opportunities don’t involve an exchange of money for equity — just fixed interest or revenue sharing.
• Illiquid — Restaurant crowdfunding sites (and crowdfunding sites normally) typically haven’t got a secondary market, so that you’re locked in for around five years.
• The “default” rate continues to be high — If latest restaurants had a Corporate Credit Rating, it will probably hover somewhere within the C or D range. In other words, each your earnings potential — and the likelihood you’ll get 100% of it — are low.

Spend money on Restaurant Stocks and ETFs

If angel investing and crowdfunding aren’t your style, there’s all the time the great ol’ stock exchange.

The restaurant industry operates like a microcosm of the greater stock market, with its own blue chips, rising stars, and risk-adjusted ETFs. As you would possibly expect, the blue chips include heavyweights you see on highway signs like Starbucks (SBUX), McDonald’s (MCD), and Domino’s Pizza (DPZ).

Rising stars/investor darlings include Yum China Holdings, Inc (YUMC), which split off from Yum! Brands in 2016, and rotating sushi giant Kura Sushi USA (KRUS), each of which have smashed recent earnings expectations.

And for something somewhat less spicy, there are ETFs just like the AdvisorShares Restaurant ETF (EATZ) and the Invesco S&P SmallCap Consumer Discretionary ETF (PSCD).

Restaurant stocks appear to be making a slow recovery from pandemic-era lows, but a long-term windfall is way from guaranteed. The continued labor shortage, record inflation, and the rise of takeout-only “ghost kitchens” mean high volatility for anyone entering the sector.

Pros and Cons of Investing in Restaurant Stocks and ETFs

pros

• Liquid and convenient — You’ll be able to buy, sell and trade stocks all day, whereas direct investing and crowdfunding typically involve lockup periods of 5+ years.
• Easier to diversify — Restaurant stock investors can hedge their overall risk by diversifying way easier than angel or crowdfunding investors.
• The post-COVID landscape creates opportunities — Restaurants that adapt quickly to changing consumer preferences could see huge windfalls by the mid-2020s.

cons

• 99% percent of restaurants aren’t listed — You won’t find local mom-and-pops or pie shops within the Russell 1000, so in case you’re trying to support local, stocks aren’t a fit.

The post-COVID landscape also creates volatility — The labor shortage, wage disputes, efforts to unionize, burning inflation, and ongoing supply chain woes are all wreaking havoc on restaurant stocks.

Should You Spend money on Restaurants at All?

Whether it’s a neighborhood donut shop or a world mega-chain, investing in the proper restaurant at the proper time will be difficult.

Surviving local restaurants may only generate 3% to five% profits for years. Even blue chips like McD’s and Chipotle face an uncertain future with supply chain woes, high inflation, and shifting diner preferences.

That’s to not say that profit opportunities don’t exist — just that restaurants aren’t any money cow. If profits are your sole motivator, it is advisable to look into faster-growth sectors. But when you’ve gotten the fervour, risk tolerance, and institutional knowledge, a restaurant investment might make sense in 2022.

Pros and Cons of Investing in Restaurants

Now that we have covered the advantages and downsides of various restaurant investing styles, listed here are the overall pros and cons of investing in restaurants.

pros

• Recent trends could create huge winners — Delivery apps, ghost kitchens, the vegan food revolution… Industry shakeups create profit opportunities, so picking the proper restaurant investment today could repay in a giant way later.
• More points of entry than ever before — Aspiring restaurant investors have never had more selection or convenience with stocks, ETFs, and multiple crowdfunding platforms.
• You’ll be able to support your neighborhood restaurateur — Foodies and ESG investors alike may find intrinsic reward in supporting the proper restaurant at the proper time.

cons

• Data will be extremely limited — Just 1% of restaurants are listed on a stock exchange, and the remainder will be difficult to research. Even with pitch decks and piles of analytics, predicting a single restaurant’s growth trajectory could be a shot at nighttime.
• Most restaurants fail inside a yr — In consequence of the uphill battle facing latest restaurants, 60% fail inside the first yr of opening, and 80% fail inside five years. That’s nearly the casualty rate of the common startup, which is 90%.
• Industry volatility could hammer restaurant stocks — Labor shortages, wage disputes, efforts to unionize, food inflation, supply chain woes, and rising rates of interest could all severely impact restaurant stocks within the near term.

Alternatives to Investing in Restaurants

If, after reading this you realize that investing in restaurants is not for you, you’ve gotten loads of options.

The Bottom Line:

Despite a fresh smorgasbord of options, restaurant investing will be tricky. The high failure rate is sufficient to scare away the common investor, however it presents a tasty challenge for those with the fervour, purse, and experience.

Chew on these food-related investment options: