Background and Challenge

A leading private equity firm was considering an investment in a casual dining restaurant chain and hired L.E.K. Consulting to perform commercial due diligence to validate the investment thesis and provide an objective view of the growth potential for the target business.

Approach and Recommendations

We first conducted a rigorous diagnostic of the chain’s store portfolio to identify core drivers of performance, such as local market demographics and spending behavior, competitive dynamics, restaurant location and size, market share/store concentration, labor turnover, menu and pricing variances, and strength of business by day- and week-part, among others. We also evaluated how performance was impacted when a new competitor entered the market, and specifically which competing brands presented the greatest risks.

From this work, we assessed the strength of the company’s portfolio and identified at-risk stores as well as those which could potentially yield more upside. We also used these insights to quantify new store growth potential in current and new markets.

We also conducted research and analysis, which included the synthesis of secondary data and interviews with market participants and expert observers to define and quantify the impact of key trends on consumer dining out spend in this market segment. We also forecasted shifts in market segment and competitor share over the client’s likely investment horizon.

To assess the chain’s market position, we executed a consumer survey of both the restaurant’s customers (current and lapsed) as well as other consumers who had considered but not dined at the restaurant. We used the feedback to answer critical questions such as:

  • Who is the core consumer?
  • What is the restaurant’s value proposition, and how compelling is it to consumers?
  • Is the concept unique? Why or why not?
  • Which restaurants are most preferred, and how loyal are the chain’s customers?
  • How does the restaurant perform relative to key customer purchase criteria? What are its sources of strength and weakness?
  • Why don’t lapsed and non-customers dine at the restaurant?
  • How can the restaurant enhance its offering and ultimately increase customer visit frequency and spend in the future?

The research revealed a loyal customer base among current customers, however, there was potential to grow spend through greater menu variety and other tactics to drive traffic frequency. Among non-customers, there were pockets of consumers where lack of brand awareness and “understanding” were key barriers, highlighting the need for additional marketing and promotion strategies to drive conversion.

Finally, we provided an objective opinion on the commercial strength of the business, key risks and their relative importance, and the achievability of the management’s forecast. We provided a quantification of the growth potential of the business during the next five years. This included both unit and comp store sales growth forecasts, accompanied by sensitivity analysis, which isolated the performance drivers most critical to realizing the projected growth.


The client acquired the company and the investment is on track to be a success. Since acquisition, the restaurant chain has performed very well, with store count and operating profit up double digits, even with a fairly conservative strategy.

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