It’s 12:45 p.m. on a weekday in May at the Place Vertu food court, and the only counter with a lineup is Thai Express. The 1970s-era shopping centre in Montreal’s Saint-Laurent suburb has seen better days but, in at least one way, it’s cutting-edge: unbeknownst to the diners, this food court serves as a laboratory for MTY Food Group, where it develops and perfects its new fast-food concepts. The company, whose office is located kitty-corner to the mall, currently has eight banners here, and the landlord allows it to test new formats when a location opens up. MTY’s most recent introductions — Tandori, Kim Chi Korean Delight and Vie&Nam — were all fine-tuned at Place Vertu.
With 21 different dining options, the food court, like those in most other large malls, resembles an international food bazaar, a huge change from what peckish shoppers would have found a few decades ago. “When I started 30 years ago, you’d have Chinese, Italian, a burger place and maybe one more, and that’d be it,” says Stanley Ma, MTY’s founder and chief executive. “Now you walk in and say, ‘Wow! I have $20. What am I going to have today?'”
No one has been more responsible for this transformation than Ma. The Hong Kong immigrant has developed, licensed or acquired 26 brands of quick-service fare — from Mexican to Japanese, from doughnut to health nut — and he’s busy expanding his smorgasbord. Already the most diversified food franchisor in the country, MTY has quickened its pace of growth in the past three years, during which it almost doubled its number of outlets. Last year’s surprising acquisition of Country Style Food Services Holdings, Ontario’s second-largest coffee chain, boosted MTY’s store count by nearly 50%, and the most recent addition — Quebec hot-dogs-and-fries specialist Groupe Valentine, a deal that closed earlier this month — has brought the total to more than 1,700 restaurants that ring in about US$400 million in annual sales. The company bought three chains in 2009 alone, and launched four internally developed banners within the past two years.
It’s not just the growth that’s impressing industry observers but the company’s consistently strong performance. MTY’s most recent quarterly results widely beat market expectations. “It’s an extremely well-run business,” says Leon Aghazarian, a consumer products analyst with Industrial Alliance Securities in Montreal. “Stanley is very experienced. The strength lies there.”
Yet while Ma has made no secret of his acquisitive hunger, he’s a growth-focused entrepreneur with a deeply conservative streak. He eschews debt. He only buys profitable players with clear synergies for MTY. And he’s wary of easy money. When restaurant franchisors converted en masse to income trusts a decade ago, he resisted calls to follow suit. Now, with trusts set to lose their preferential tax treatment next year, the sector is scrambling for alternatives and “I look like a genius,” says Ma with a chortle. More important, his rivals’ predicament positions MTY, long an industry consolidator, to take advantage of those who’d rather sell than face the cost of another conversion.
A middle-aged man with a formal manner occasionally lightened by corny jokes, Ma isn’t rushing into any hasty unions. Known as a very private individual who says no to suitors much more than he says yes, he seems to prefer to fly under the market’s radar. Few people outside the industry have heard of him or his company, and investor interest remains muted despite the rapid proliferation of MTY banners.
A teenage immigrant from Hong Kong (his English remains heavily accented and he doesn’t speak French), Ma opened his first venue, a Chinese and Polynesian restaurant, in 1979, at the age of 29. Within a few years, however, he switched to fast-food franchising — then a novel business model in Canada — seeing an opportunity in supplying immigrants like himself with a chance to run their own operations.
Food courts presented ideal locations for new brands with little name recognition, since consumers tend to choose where they take their trays based on gustatory whim rather than brand loyalty. As such, there is little need for marketing beyond mouth-watering menu boards and frequently changing specials. And, as Ma added new banners to his original Chinese chain Tiki Ming, he was able to leverage his landlord relationships. “He would typically own the lease, so if one brand didn’t work out, he could put in another,” says Brian Pow, vice-president of research at Acumen Capital Finance Partners in Calgary and a longtime MTY watcher. Ma’s dominance of shopping malls and cinemas bestowed on him the moniker “king of food courts.”
Ma’s early ambition was to be able to drive from Montreal to Quebec City and stop every hour at one of his outlets. While most Canadian restaurant companies have either a single brand (like A&W or Pizza Pizza) or a handful they oversee as a master franchisee (Priszm Income Fund, for example, is the Canadian parent to KFC, Taco Bell and Pizza Hut), MTY’s multiplying offerings allowed it to match the cuisine to each location and demographic. Ma has tended to look for master franchisees with strong financial know-how and expansionist ambitions. MTY simply collects royalties, with little need for capital investment, says Aghazarian. “The business is a cash cow. There is almost no risk associated with it.”
This low-risk philosophy is how MTY ended up in the Middle East, of all places. In the mid-2000s, the company was approached by a restaurant operator serving the Arab Emirates who was looking to franchise three of its banners. The relationship has since grown to encompass seven brands and several nearby countries, but MTY is protected: it doesn’t sign the leases and has no liability exposure. “Even if it flops, it won’t damage MTY’s image here,” says Aghazarian. Nevertheless, the region is on track to account for 5% of MTY’s stores by year-end.
So when, in April of 2009, MTY bought Country Style, observers found the deal uncharacteristically rife with pitfalls — an also-ran brand in a highly competitive market. It was also an unusually large acquisition for MTY. Still, the chain had been sprucing up its stores since it emerged from bankruptcy protection seven years earlier, adopting a format similar to market leader Tim Hortons. For MTY, which ran Yogen Fr??z and Cultures banners in Ontario but was largely clustered in Quebec, Country Style represented a quick surge within Canada’s biggest province. Ma also saw co-branding opportunities, and within months of purchase, he started teaming more than a dozen Country Styles with his TCBY yogurt chain. Other pairings will follow. He points out that in a 3,000-square-foot store, Country Style can do $600,000 per year in revenue and, say, Thai Express another $750,000, thus raking in $1.3 million from a single venue. The approach fits MTY’s operating philosophy: “The returns are good, the investment small,” says Ma.
Ma’s long been interested in the coffee sector. “Coffee is a good business,” he says, tenting his fingers thoughtfully. “The profit margins are very good, and it will help MTY’s other brands because of the buying power of the coffee bean.” MTY had looked at Country Style several years earlier but walked away. Ma won’t specify the reasons — “I don’t want to hurt the feelings of other people we dealt with,” he says in his typically courtly manner — but it came down to sticker shock. By 2009, Country Style’s revamp was further along and MTY had greater financial means, says Ma. “I also felt comfortable with the Country Style management.” (Rick Martens, who has run the chain since it emerged from bankruptcy protection, remains at the helm.)
Since the takeover, MTY’s operating expertise has proven useful. Observers say that Ma has trimmed slack in distribution and at the head office. Ma simply observes: “If you’re a hockey player and become a coach, you know it makes sense to do it this way because you know what it’s like.” Acumen’s Pow, however, questions whether the Country Style game plan has played out as smoothly as Ma claims. “It’s been a big challenge for Country Style to cater to a different audience with a different product mix,” he says. “And Stanley’s idea that he could bring in other brands, I don’t think it’s been as successful as he’d hoped. [The transition] has been longer and slower than expected.”
Ma has grown accustomed by now to strategic second-guessing. The pressure was at its height back in the early 2000s, when numerous financiers were banging the drum for him to convert to a royalty trust, in which cash distributions are set as a percentage of top-line revenue. “When we trade over $2, they say, ‘You’re ready [to convert],'” recalls Ma. “When we trade over $5, they say, ‘I guarantee, Stanley, if you convert, you’ll go to $8.’ Then they say, ‘Stanley, if you don’t go to income trust, don’t come to see me anymore.'”
Ma clearly relishes having been proven right, though he had no inkling about Ottawa’s tax treatment flip-flop. His motivation was simply to use his cash to grow the company without taking on debt. When he was first urged to make MTY a trust, he had fewer than 200 stores. “I thought they were pushing MTY to run too fast,” he says.
One of MTY’s strengths is its willingness and ability to respond to consumers’ changing tastes. Of the 26 brands MTY controls today, 10 were developed in-house to exploit new trends. The past few years have been all about Asian food, says Ma — Korean, Indian, Vietnamese. Thai Express became MTY’s most successful brand after Ma bought the small chain in 2004 and merged it with his nascent Pad Thai. Meanwhile, pizza and Italian food more broadly are in decline.
But for all that ethnic variety, the single best-selling fast-food item remains french fries. And that happens to be the strong suit of Groupe Valentine, a 95-store, family-run chain based in small-town Saint-Hyacinthe east of Montreal. Valentine mainly serves rural and suburban markets — areas where MTY has little presence and wants more. And though MTY has a competing banner in the 20-store Franx Supreme, Franx has been a performance laggard. According to MTY spokesman Jean-Francois Dub?, Franx will likely be merged with Valentine, and then under the Valentine name will venture into Ontario, where Franx has one location and Valentine has none.
Ma is eager to keep growing his Ontario business where, thanks to the Country Style purchase, MTY now has 41% of its stores — more than in Quebec. He gained a foothold out west, meanwhile, with the 2008 purchase of Canadian rights to American banner Taco Time. However, he has no plan to head across the border, despite another chorus of investment bankers pushing him on. “I believe the States is a dangerous place for retailers,” says Ma. “It’s a different animal, has different rules, mentality.” Canada still has lots of room for MTY, he argues. Instead, he wants to reach 2,000 locations before he considers an American expansion.
Besides, Ma may get tasty opportunities amid the income trust shakeout. Ottawa’s move to phase out trusts depressed many restaurant operators’ shares, as investors assumed no other structure would be as lucrative and the roughly half-a-million cost of conversion to a corporation would cut into profits. Most food franchisors, like MTY, rely on royalty fees paid by franchisees and so lack assets they can depreciate to offset taxes. “These structures are not viable post-tax,” wrote Turan Quettawala, a Scotia Capital analyst, in a 2009 report. Nevertheless, some — including Pizza Pizza, Boston Pizza and A&W — have opted to remain trusts for now. Prime Restaurant Royalty Income Fund (owner of East Side Mario’s and Casey’s, among others) and Imvescor Restaurant Group Inc. (Pizza Delight, Baton Rouge), meanwhile, have chosen to convert to corporations. So far, there haven’t been many deals. Private equity, which prefers operating control, has shown little interest.
Will MTY make a move? “There’s definite potential for them to move in on one of the pizza guys,” says Aghazarian, and Priszm is rumoured to be looking for a buyer. Ma says he’s holding numerous talks — mainly with those pesky investment bankers looking to arrange a marriage from which they can profit. But he adds, “We’re not going to do a deal just to be in the newspaper for 24 hours.”
Meanwhile, MTY has some challenges of its own to address. Most notably, its same-store sales have been dwindling by 1% to 2% for several quarters, though the rate of decline has slowed and the fast-food market is improving. “If they’re only acquisition-driven, that’s dangerous,” says Aghazarian.
Acumen’s Pow is more concerned with Ma’s poor job of exploiting public markets. In May, MTY moved from the TSX Venture Exchange to the main board, but “[Stanley] doesn’t really market his stock,” says Pow. “There are days I ask why he hasn’t gone private. Since he went public, he did only one [equity] raise.” It merits noting that Acumen was one of the investment firms that nudged MTY toward income trusts a few years ago. Today, Pow credits Ma with managing to finance his business while resisting the pressures of the market’s expectations. But, he says, “Stanley has to ask himself, What’s the succession plan? The more control is in the marketplace, the better you’ll do in a takeout.”
Ma shows little interest in being taken out. His three kids all work in the business, and his ambitions keep growing — at his own conservative pace. He long ago achieved his initial goal of an MTY restaurant every hour along the Monteal-Quebec route. His next target — 2,000 stores — isn’t far away; by this summer, the company opened more new locations than it had projected for all of 2010. Ma’s current focus lies in an area he worried little about when he started: building brand equity. While 80% of MTY’s stores were once in food courts, today only about 30% are, due largely to the acquisition of Country Style, Taco Time and a few other banners that all had a heavy street presence. There, promotion matters for building destination traffic, so MTY is shifting marketing dollars from menu upgrades to billboard and bus advertising. The king of food courts, accustomed to the low-investment and low-risk climate of indoor counters, realizes that to grow to 3,000 restaurants and beyond, he needs to expand outside. “We’re gaining confidence that, yes, we can handle the street, that brand power is there now,” says Ma. “Customers know what to expect from Thai Express, like they know what to expect from McDonald’s.”
The reclusive immigrant is ready for some spotlight. “I want [my brands] to be like the big boys, recognition-wise,” says Ma. “Hopefully, one day someone travels to Dubai and says, ‘Oh, Thai Express! I know it.'”