Why Fast Food’s Smartest Operator Is Expanding When Business Is Terrible

Food & Drink

Neal Aronson has spent the past decade buying iconic brands like Arby’s, Buffalo Wild Wings and Jimmy John’s. But Covid-19 is terrible for restaurants. His solution? Buy more.


Above: Inspire Brands cofounders Neal Aronson (right) and Paul Brown (left), at company headquarters. Inspire owns 24% of its restaurants compared with 1% for Burger King parent Restaurant Brands International.


This spring, when restaurants across America were struggling to survive or closing down, business was booming for Neal Aronson’s Sonic. The retro chain of car-hop joints he acquired through Roark Capital in 2018 was perfect for the pandemic. Sales were booming, including a record 30% jump in May. But Paul Brown, CEO of Inspire Brands, the Roark holding company that owns Sonic, wasn’t satisfied. He called Aronson, wanting to shake things up.

Brown wanted to speed up the rollout of a new format for the 67-year-old chain that would reduce its dependence on drive-up stalls to make room for take-out and add covered patios so guests could leave their cars and dine outside under string lights. Never mind that there was no prototype, no proof of the format’s appeal and no way to know if the sudden Covid-19 uptick would last long enough to see it through. 

“Those builds weren’t in our budget and we’re in the middle of the pandemic,” says Aronson, the 55-year-old private equity titan who quickly gave Brown the go-ahead. “Always do what’s right and long-term smart, regardless of conventional wisdom.”

He added: “The call lasted for a minute.”

The pair were fiddling with a rare bright spot in an $18 billion (assets under management) portfolio of more than 20 fast food chains and other franchising businesses that have a retail footprint totaling 39,000 locations. Aronson controls most of the food operations through two holding companies: Inspire Brands, which he co-founded with Brown two years ago and built into the country’s fourth-largest restaurant business with $14.6 billion in systemwide sales that includes Sonic, Arby’s, Buffalo Wild Wings and Jimmy John’s; Focus Brands is deep into mall staples including Jamba Juice, Auntie Anne’s and Cinnabon. The two companies, along with a handful of Roark’s non-food franchises that include fitness studio Orangetheory, Batteries Plus, which sells batteries, cords and lightbulbs and Petco competitor Pet Valu, give Roark a value the Forbes estimates is at least $800 million, with Aronson its majority owner.

Today, those franchises look like a sizeable portion of risk. Roark’s restaurant investments had systemwide sales of more than $24 billion last year, according to food industry research firm Technomic. Roark declined to provide data for 2020 but the best case scenario, if its publicly traded peers are any indication, is that sales are flat. Drivers at sandwich chain Jimmy John’s spent key lockdown weeks idle because the delivery zones of the stores were narrowly focused on the suddenly shuttered areas full of offices and university campuses. Sales at Buffalo Wild Wings, which contributes about 35% of Inspire’s annual cash flow (EBITDA) of $260 million, were down 40% by May. At Focus, where more than 20% of its locations sit in closed shopping centers and many of the rest in empty highway rest areas, Moe’s Southwest Grill has been scraping by selling make-at home taco kits.

In April, S&P downgraded Inspire’s publicly traded debt to negative for the first time with warnings of “deterioration” of revenue and profits and “very high leverage.” In May, when the economy remained shut down by the pandemic, an S&P credit report estimated that operating cash flow would fall by half to $100 million this year. Inspire said performance has improved since then, but declined to provide specifics. The price of publicly traded debt for both holding companies dropped by double digits in early April before recovering some of the losses to leave both down more than 6% on the year.

“This pandemic has done a lot to tug at all of our heartstrings,” says the media shy Aronson, who spent about three hours with Forbes in July 2019 and May 2020. “But I do believe it is exposing where the industry was headed and is just clarifying it.”

Aronson created Roark in 2001, and in the past decade has been the money behind half the industry’s biggest deals. Some trophies: Carl’s Jr. and Hardee’s, purchased for $1.75 billion in 2013 and, most recently, preferred shares in The Cheesecake Factory, snapped up for $200 million in April, just as the pandemic was taking hold. It’s a bid for scale that Aronson sees as essential to maintain leverage over suppliers, landlords and data providers and to push operational changes across multiple chains, such as the pandemic pivot that prioritized digital sales over sit-down meals. 

“The question is, who is going to have the experience, the time frame, and the capital to make the investments that offset some of those headwinds,” says Aronson, who named Roark after the ruthlessly competitive lead character in Ayn Rand’s The Fountainhead, a favorite of individualists and Libertarians. “Not everybody will. What we’ve decided to do is not sit there and take it.”

Aronson  got into restaurants by way of another service industry: hotels. The ambitious son of a stockbroker and schoolteacher from Livingston, New Jersey, Aronson supported himself during his years studying finance at Lehigh University by trading collectible baseball cards. After graduating in 1987 he landed gigs with some of the finance industry’s biggest names including Drexel Burnham Lambert and Acadia Partners (now Oak Hill Partners) before ending up at Odyssey Partners under the tutelage of Wall Street legends Leon Levy and Jack Nash, the buyout pioneers best known for building institutional brokerage firm Oppenheimer & Co in the 1970’s. 

In 1995, at age 30, he joined his uncle, the former president of Holiday Inn, as a cofounder of U.S. Franchise Systems. They grew a chain of 27 regional hotels into the tenth largest hotel franchisor in the country with a nationwide network of more than 1,100 properties before selling it to the Pritzker family’s Hyatt Hotels for $100 million in 2000. A year later, after pocketing an estimated $10 million from the deal, Aronson went solo. With backing from Nash and Levy, he took aim at an overlooked segment of the buyout business: franchises. 

Buyout firms at the time preferred operating companies with lots of divisions that were easier to dismember over the messier entrepreneur-driven franchise operations. It was slow going at first, each deal funded with one-off capital raises. 



“As we hired, I paid people’s salaries, their bonus, the office, the travel and the legal,” says Aronson. “I didn’t try to raise a fund. I probably could have, but didn’t want to. I just wanted to build something special and just wanted to invest. I had to be dead honest, including saying, ‘I don’t know,’ more than anybody. These people can smell bullshit a mile away.”

After Levy died in 2003, Aronson decided he needed a more permanent, diversified source of capital, and closed a $413 million fund in 2005, which he used to acquire Moe’s, McAlister’s Deli  and Schlotzsky’s. Three years later Nash died and the 43-year-old investor found himself sitting on a freshly closed billion-dollar fund Roark II but without his long-time mentors as America entered the worst economic crisis since the Great Depression.

“It paralyzed me actually,” recalls Aronson, after a deep pause, his tall and stocky body tensing up on the couch in his office in Atlanta last July. Adding to the woes were two deeply troubled non-food investments: Ace Mortgage and Wood Structures. “What saved this place was my wife Wendy one day grabbing me by the shoulders and saying, ‘I know you love Jack and I know how important he was, but there are people that are counting on you. You’ve got to get it together.’”

He called his investors to deliver the bad news: He was writing off both failures and using the remaining capital to invest exclusively in franchising businesses. He also told them not to expect the typical private equity life cycle of three-to-five years. His fund was a long-term value play and by 2010 he was placing bets, first with Wingstop and Auntie Anne’s, followed quickly by Corner Bakery and then, what would become his biggest conquest, Arby’s, the undisputed champion of fast food roast beef.

The 3,000-store chain was in dismal shape. Under the stewardship of Nelson Peltz’s Triac Companies, which also ran Wendy’s, the 56-year-old chain had gone through a series of management shuffles and was running at an annual operating loss of $51 million. Aronson committed $130 million in equity to buy 81.5% of the chain in July 2011, assumed $190 million of its debt, invested $50 million up front and agreed to another $50 million over the next three years. Then he brought Brown onboard, an industry outsider fresh from recent stints at Hilton and Expedia.   

 “[Coming from hotels] gave me the excuse to ask a lot of questions,” Brown, 53, recalls in an interview at Inspire’s headquarters just north of Atlanta last July. “It gave me the latitude to not be expected to come in with the answers.” 

One answer: make the beef the star of the show. He moved preparation of the 13-hour smoked brisket sandwich to the front of the kitchen so the customer could see it being sliced. He began testing a dozen new items a year, up from two, and launched each new sandwich at a discount. Only those that secured a minimum of 3% of gross sales were moved to full price. Four made it, including the Smokehouse Brisket, which lifted sales 12% when it launched in 2013. 

The chain got a surprising assist from Comedy Central’s late night host Jon Stewart, who spent years lampooning the chain, despite never tasting its food. The chain decided to own it, broadcasting an ad during Stewart’s last show in August, 2015 highlighting the years of abuse. It worked. The next day, the chain delivered its single best day of sales, a record the company says it has surpassed hundreds of times since, which has helped lift systemwide sales to $4 billion, with Inspire collecting about $1.5 billion of that. Forbes values Arby’s at $2 billion, a near 10x return on Roark’s $230 million investment, not including dividends of $600 million that the company says have gone back into Inspire.

“The easy thing would have been to sell Arby’s in 2014 and everybody would have done really well,” Aronson says. “We’ve never taken the easy way out.” 

His decision to dig deeper into fast food came one evening in 2014 during a monthly dinner with Brown at their favorite chophouse in Atlanta. They were discussing the rumors swirling around the potential merger of hotel chains Marriott, IHG and Starwood, which were being squeezed by insurgents like Expedia, and agreed that the fast food industry was ripe for disruption thanks to data-driven startups like GrubHub and DoorDash. Brown scribbled the words “mavericks” and “culture” on a napkin and slid it over to Aronson as he chewed. The food part of fast food is a commodity. They wanted to invest in chains with a culture created by mavericks like Ray Kroc at McDonald’s, or Colonel Sanders at Kentucky Fried Chicken.

Brown returned to Arby’s while Aronson set about raising funds for the project. Four years later they made Inspire’s first investments, Buffalo Wild Wings and Sonic, with each of them holding a direct stake in Inspire outside of Roark. Last year they added a majority stake in sandwich shop Jimmy John’s, which Roark acquired in 2016 from founder Jimmy John Liautaud.

Aronson won’t disclose his war chest, but has not slowed his activity during the pandemic. Inspire bought 22 additional Buffalo Wild Wings locations for an undisclosed amount in February. In April Roark paid $200 million for a stake in Cheesecake Factory following news that the chain had furloughed 41,000 workers and notified landlords it couldn’t make the rent, which sent shares plummeting 65%. Roark has already seen a 26% return on that investment and within three years could end up with one-fifth of the chain’s equity. 

Inspire then issued $500 million worth of corporate bonds in May. The company tapped borrowers again last week with an $825 million offering that it plans to use to retire higher cost debt. It has also invested $100 million to improve digital marketing and mobile ordering since March, including a deal making DoorDash Buffalo Wild Wings’ preferred delivery partner.

Aronson’s investors have learned to be patient. Roark has only ever exited 12 of its 77 investments, including just one IPO, Texan takeout restaurant Wingstop, which raised $126 million in a 2015 offering and delivered Roark a 5.5x return on investment. Aronson still owns Roark’s first purchase, the ice-cream chain Carvel, which he bought in 2001 for $48 million and has since streamlined to more than 300 locations, around 25% less than when he bought it. 

“We’re sticking to what’s important, what we believe in, what we talk about and what we do,” Aronson says. “In tough times, that’s when people stray. We’re not straying.” 

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