Goodbye downtown, hello suburbs: What the new Second Cup owner has in store

oronto, Ontario, Canada - May 06, 2018: A Second Cup Coffee shop in Toronto.
Aegis Brands announced last week it had reached a deal to sell its Second Cup Coffee Co. chain to Foodtastic, a Quebec-based restaurant franchising company. (Getty)

The new owner of the Second Cup Coffee has set its sights on an expansion in suburban Canada, the latest turnaround plan aimed at bringing the struggling coffee chain to its former glory.

Last week, Aegis Brands announced it had reached a deal to sell its Second Cup Coffee Co. chain to Foodtastic, a Quebec-based restaurant franchising company. Aegis Brands did not disclose the sale price of the deal, but said it includes a $14 million cash payment and a post-closing earn-out.

While the immediate focus for the new owners of the chain will be making it through the pandemic, Foodtastic chief executive Peter Mammas said that the company has set its sights on expanding the brand in a few years time. The goal is to have 300 locations by 2025, up from the existing store count of 190.

“We’re going to be looking to open smaller locations, with drive-thrus, in suburban markets,” Mammas said in an interview.

“Right now, a lot of these Second Cup locations in malls, downtowns and transit locations – all three parts of the business that have been extremely hurt by the COVID-19 pandemic. We want to diversify the exposure of Second Cup and move it more into the suburbs.”

Foodtastic has long been eyeing a potential coffee acquisition, Mammas said, as the category was not one in its portfolio of restaurants.

Foodtastic is a relatively young player in the Canadian restaurant space. The company, which was launched in 2016, operates 16 restaurant franchises accounting for approximately $250 million in annual revenue. Second Cup will be the biggest chain in its portfolio, alongside smaller Quebec brands like La Belle & La Boeuf, Big Rig Kitchen & Bar, and Rotisseries Benny. Foodtastic is owned by Mammas and his brother, and has received funding from Oaktree Capital Management, a global alternative investment management firm backed by Brookfield Asset Management. While the company is privately held and does not disclose its financials, he said the Foodtastic has a budget of approximately $85 million for further acquisitions.

“We have a plan, but it’s not going to be done overnight,” he said. “It will be done over 18 months, but that’s how we’ll proceed.”

Mammas said the first priority for Second Cup will be to evaluate the company’s existing staff. Foodtastic’s leasing team will then look at the company’s existing store agreements and analyze operations at all Second Cup locations. After that will come marketing and strategies around modernizing and improving the offerings, as well as renovating outdated stores.

“Our messaging is going to be: we have better coffee, we have a great atmosphere, we have better service, and we’re Canadian,” he said. “We’re going to play on on all those four points. It’s not something that’s going to be done overnight, but I think that’s what we’re going to strive for.”

Coffee is the No. 1 menu item in Canada, according to NDP Group, but it’s a highly competitive market dominated by three players – Tim Hortons, McDonald’s and Starbucks. Those three brands have dominated about 75 per cent of the coffee market in Canada over the last five years, with smaller players battling it out for the remaining 25 per cent.

“There’s lots there. It’s a 2 billion plus serving market every year, so there’s a lot of coffee being served to go around,” Vince Sgabellone, a foodservice industry analyst with NDP Group, said in an interview.

“Certainly there’s a lot for Second Cup to take back.”

Since 2016, Foodtastic acquired 10 of its 16 brands, creating the remaining six from scratch. Of the 10 brands that the company purchased, Mammas said six had sales that were between negative five and 15 per cent. He points to one brand – pizzeria chain Monza – which had sales down in the double digits when Foodtastic took over. He says sales are up 40 per cent since the acquisition.

“We feel confident in our team," he said. "And we're going to leverage our team for Second Cup, just like we did with the other brands. They were suffering, same-store sales were bad, franchisee relationships were bad, and we turned them around.”

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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