Welcome to Dana Delivers by Aprio podcasts, the podcast that helps restaurant owners and operators learn from industry experts about trends and opportunities. On every episode, Dana Zukofsky, the leader of Aprio’s restaurant advisory team, explores a topic impacting our industry in a candid conversation. And now, let’s hear what Dana is serving up on this episode. 

So today, we have Kyle with us from KMG. Kyle, thank you so much for joining us.

You’re welcome, Dana. Thank you.

Of course. So, Kyle, first I like to always start the podcast with the first time I met somebody because I think it’s fun to kind of reminisce and let people know that I have a life outside of just this. So Kyle and I met at the Restaurant Leadership Conference. And it was at the suggestion of Tommy Lee, who is my partner here at Aprio, who kept telling me, you have to meet these two amazing people, Kyle and Lauren. And for those of you who listen to the podcast, we had Lauren already, Lauren Fernandez on. And Kyle, it’s your turn today. So thank you so much for joining.

Well, I appreciate it. It should be a lot of fun. Looking forward to it.

Yeah. So Kyle, why don’t you start off a little bit with your background for people who don’t know who you are and what you’re doing?

I am the entrepreneurial kid. I was a neighborhood kid who mowed yards growing up. I had a mom who was very strong and encouraging and said, ‘You know what, you have too much energy to sit around the house. So I need you to get out of the house and do something with all of that energy.’ And so I was the little eight year old kid pushing a mower up and down the street, built that business all the way through college and sold that right as I graduated college. I graduated from Wichita State with a degree in entrepreneurship, took all of that capital, the knowledge that I had, and started a concierge service. For those who don’t know, that’s basically a Johnny on the spot, do whatever you need, calls for whatever needs you have, and we can do it.

So you’re like the original TaskRabbit.

Exactly. But this was Wichita, Kansas, Midwest, right in about ‘07, ‘08, ‘09. And so if anybody remembers that time, it was not the strongest spot for our economy. But I had no idea. I didn’t know any different. So I had a pretty good business, and all of a sudden, everything started to dry up in that I met a former business partner, and he’s like, ‘Well, this company is not doing what you want it to do. What would you want to do? I am coincidentally related to the family that started Freddy’s Frozen Custard & Steakburgers out of Wichita, Kansas, and had an affinity for the brand.’ And I said, ‘You know what? I want to be an owner of that brand and find a good partner to kind of help build that out.’ And so that’s exactly what we did. Over the next five or six years, we opened about five or six locations between Colorado. We then went to California. California was not as fun, as exciting as we thought.

Can’t say I’m surprised.

Yeah.

Any business owners in California.

Yeah, so we took that ball and we went to Florida, which is the most logical place to go when you’re trying to concentrically have an operation team for restaurants. My partner and I parted ways about three plus years ago. And we formed what is now known as KMG Companies. We operate eight Freddy’s between Colorado and Florida. We have divested out of California, thank goodness. Tomorrow we are opening our ninth location, which is why you find me in a hotel room in Colorado Springs.

And for those listening now, by the time you listen, it will have been open because we’re recording on October 24. 

Thank you for clarifying. And we have most recently jumped into the brand called Rock N’ Roll Sushi and are really excited about what that may bring.

So entrepreneurial, obviously franchising seems like a perfect place for someone with that kind of a background, right? There’s no better business to be in than being a franchisee. You could have as much autonomy or as little as you want, depending on the topic. We understand why Freddy’s, why Rock N’ Roll Sushi?

Rock N’ Roll Sushi, to me, is on the leading edge of a new segment category. There are very few players that are out there like that. Rock N’ Roll Sushi makes the sushi culture very approachable. It almost Americanizes all of the food, but we still have extremely high quality fish, great hibachi, great rolls, but it’s also in a very fun, energetic atmosphere. But I also can’t scoff at the financial segment of it too.

And by that you mean, things don’t look good.

No, the financials look great. The ROI is great. The cost of entry is low compared to a lot of other concepts out there. The returns look very promising. In the cost to run the business, the big two of food and labor are really quite a bit lower than what we were used to. And so the flow through to the bottom line is a lot better.

Why do you think that is? What’s the layout of the land there? Because food is food, we know that part. But as far as the labor goes, what’s the labor model look like? Because if you’re able to get it low, I’m sure everyone listening is trying to figure out how to lower their labor model as well.

From a labor standpoint, it is not as labor intensive to what I know as Freddy’s. And so we can teach just about anybody to portion the fish the right way and cut it the right way. And then you’re building the rolls or the sashimi or the sushi, or you’re cooking up the rice. So it’s a very low barrier. The price points are higher. And so that’s where we kind of get those yields, is from a high perception of value with sushi to what the actual cost is and the cost to produce it.

And bringing kind of back to what you said before about Americanizing sushi, I think coastal, we know it. There’s some great companies like Fusion in Ohio that are helping bring it to the Midwest. How do you introduce something like sushi to the rest of the country? Or do you think that they’re there, and I’m just being a coastal, having a coastal attitude?

I think you might have a little bit of a coastal attitude on that. But sushi is widely regarded across the country as a phenomenal dining option. But I believe that there is a slight bit of apprehension in dining at a traditional sushi house, if you will. I know, at least for me and my family, we have sushi once or twice a week. And there’s always just a little bit of a language barrier. There’s always some apprehension if there’s an issue with the order. And so I think when we can have the opportunity to strip all of that away and still provide you the same great quality, there’s just a really good opportunity to really serve a lot of guests.

No, that’s awesome, I think. I mean, I’m excited. It sounds fun. And Freddy’s, let’s go back to that for a little bit. Freddy’s is growing as a brand, Freddy’s is exciting. I have on my panel for restaurant finance, someone from Freddy’s. And the excitement is just there. What do you think Freddy’s is doing different than some of the other brands that’s creating such a buzz?

Freddy’s, in one word, is a strong American culture. They are extremely hospitable. They really go above and beyond to take care of all of their guests. And they lean very heavily on an extremely high quality of product. And so when we couple all of those together, you have a really unique opportunity to be quick, to be hospitable, and a really great product. And you’re right, Freddy’s is growing, it is on a giant tear, which is really exciting to be a part of. 440 give or take units out there in the industry or in the marketplace right now. And I think that it is kind of a throwback to an old style handcrafted steakburger in a very fun, hospitable environment.

Yeah, no, it’s awesome. So let’s step away a little bit from those, from your two brands. You are in a lot of different networking groups. You have an amazing board of people that you work with. So I’m sure you’re hearing a whole bunch of stuff that maybe everyone else isn’t. Besides labor and supply chain, what’s hot right now? Talk about what else you’re hearing that someone else might be interested in.

What is hot right now is what we call 3PD – third party delivery. Convenience is an extremely attractive opportunity for the guest. It opens up a lot of opportunities for those who are creative, whether you are in casual, full serve, or quick serve, you have now opened up a third, potentially fourth option, to serve a guest. And so you need to understand how to capitalize on that, how to charge appropriately, how to package appropriately, and how to serve your guests in the quickest, best way possible, but still retain as much quality in your product when you serve. That’s the biggest segment that we’re seeing right now as the leader in the industry right now.

Yeah, and I think what you hit on, a good point is, how do you package and serve and make sure that when the customer gets it, they’re getting the same experience? Because a bad experience, we all know, could be the last experience. 

Exactly. 

Automation, super hot also. 

It is hot.

What are you guys doing? Are you using a lot of it in either of the concepts? Are you changing stuff? Have you seen anything new and exciting?

We are slowly dipping our toe into automation. I think, in Freddy’s themselves, we are going to a kind of burger smash opportunity where it’s taking a lot of labor out for basically a big arm that comes down and still crafts the burger as we would like to see it. 

Oh wow.

We’ve not dug into automatic toppers of buns, quite yet, we have not jumped into the fryer basket automation yet. And so we’re slowly starting getting into that. I’m not sure if the ROI is there, but it’s slowly getting there. But I also see technology really coming strong in the hospitality side, on the front end side, ease of access for guests to order, whether it be a tablet, through their iPhone, through an app, or at a kiosk. I think that’s kind of the next wave, paired together, that’s a really good option over the next 5-10 years.

And by putting in kiosks and tablets and those other options, without taking away the other option of having someone there as a human, for the person who likes to talk.

Exactly. And so we’ll certainly keep the front of house attendants. But those who would traditionally run multiple POS systems, who are taking multiple orders at a time, we’re going to relocate them to hospitality. So they’re going to be in the dining room, they’re going to be engaging with the guests, making sure that they have any questions, they’re able to answer them appropriately and in a proper amount of time.

Right. So more of a reallocation of labor as opposed to, necessarily, true elimination of.

Correct, correct. 

That’s amazing. And what else are we talking about now? Automation, technology. Are we getting into loyalty? Are you guys changing or doing anything as it relates there to kind of keep your customer happy and keep them coming around?

Certainly, loyalty is a big one these days, I know that there’s a lot of questions around the value of that loyalty, given a lot of the most recent changes with some of the other brands, I still think that the guest loves that opportunity to earn some type of reward on the back end for their commitment to you. I think that’s really coupled well with a good app, it gets back to ease of access. And so I think the technology function just gets back to, can I make it easy, can I remove as many barriers, and can I have a value add? I think those few items are really going to be leading the charge over the next wave in the future. But you’re absolutely right. Making sure that we take care of the guests on the back end to make sure that they feel valued and taken care of is a whole new component that a lot of the airline industry and hotels have really capitalized on and we can learn from.

Right. And I think that’s one of the things that we’ve been talking about a lot. What are some of the things people are doing? Where is the value? What are people excited about as opposed to just points? Is it getting the item first? Is it access to a special menu? All of those kinds of things. I mean, recently, we spoke about NFTs and getting into that world. I know it’s not something you guys are doing yet but it sounds like who knows what comes next for anyone? Right?

I really think that the NFTs segment for restaurants can be very unique. I think you have a really good opportunity. It was Burger King and Taco Bell are going pretty aggressively at those, I think that it’s fun. It’s a really good way to engage with your guests and something that could potentially be worth something in the future if there’s an opportunity for it.

Right. I’m still trying to figure it out.

I barely understand it. 

Each day, I’m learning a little bit more and more from all the people who I work with who are a little bit younger than I am. Upcoming, we have RFDC coming up. What are you excited to learn about and hear about? What are some of the things as you look through the catalog?

Looking through the catalog for RFDC, I truly enjoy finding ways to get as educated as I possibly can. We’re talking about real estate. Right? We’re talking about great ways to finance great ways to develop, great ways to capitalize on it. Are there some really good people I can network with? We’re trying to be active in the M&A space and so we take a lot of meetings with some brokers, with some capital partners, making sure that we’re aligned properly to seize an opportunity with what’s coming. But also just general connection with people. I love getting out, meeting a lot of new people and kind of hearing the buzz that they have. Just like this kind of conversation, we need to have over drinks in Vegas. And I think it’s really a good time. Aren’t you hosting a really good panel? And I think you’re bringing in Bill Valentas?

Yes, I’m bringing Bill, yes, I have Papa John’s. I have focused brands. I have you guys and we’re going to have a good conversation. 

Looking forward to it.

Right? It’s going to be wonderful. I really am excited. There was just something else you said. As you’re growing, you’re doing M&A, you’re excited. Obviously, you are going to look for people to work with on the growth. Interest rates are going up. People are hoarding capital a little bit where they have it. They don’t necessarily want to put it to work. Are you seeing that? Have you seen any creative solutions to this? I mean, do you have cash that you’re sitting on so you are waiting for distress? What is Kyle and team thinking?

That’s a fantastic question. We have been very fortunate to hoard a lot of our cash. We were very fortunate over the last few years. But I truly get back to creativity. It’s that word you used. Creativity in this marketplace is going to be critical. One of the concerns that I have in regards to trying to get creative is, I believe that there’s still a lot of capital on the sidelines, looking for opportunity. And when there’s a potential distressed opportunity, or just a traditional non-stressed opportunity, I am curious to think that there’s still going to be a lot of competition, because of the amount of capital on the sidelines, even with the cost of debt right now. And so a lot of the creative solutions that we’re looking at are, ‘Okay, how do we get creative on valuation?’ There’s an opportunity that I’m reviewing right now. And we’re trying to come to a proper valuation that everybody can agree on. Because what has happened over the last few years is non-traditional. So if you are riding really high during ‘21, or ‘22, is that really indicative of historical performance? And so I’m looking at a 60 month kind of runway on valuation. 

Oh, wow.

Just your traditional 13 period or 12 month look back. Because there were some highs and there were some lows, and I think that that might even outperform over a historical period. I think there’s a lot of sellers that potentially have to hold some paper back on the back end, or potentially have to hold in some equity to make sure that the deal structures out properly. I know more and more financial partners that we’re talking to, whether it be family offices or traditional banks or private equity. They’re looking at a 50-50 LTV at this point, which is pretty heavy. And then when you’re looking at debt at the 6 to 7% mark, that really changes the algorithm on where your covenants need to be. And so that’s what we’re looking for, sellers to potentially hold back or hold on to some equity with some burn offs on the back end.

And 6 and 7% is if you do it today. If you wait another month, who knows where we’re going to be.

Oh my goodness.

Right?

It’s going to be incredible.

That’s the crazy topic. That’s today’s crazy topic.

It’s a hot topic. I mean, I have Robin Hood on my phone, and I’ve seen nothing but all of my stocks, my portfolio just dropped today. I’m going okay, that’s another fun day.

Right. I figure I’m young enough where ignorance is bliss.

Yeah, exactly.

For now. So no, I think that, listen, it’s all exciting. We have a lot to look forward to, a lot of good conversations. I love talking to you. Is there anything else that you’ve heard, or you want to talk about or plugs to anyone or anything that you’ve seen that you’re just blown away by?

I am really excited for what’s to come. I think a lot of people have apprehension and anxiety. And I think it’s a really good opportunity for everybody to double down on what they are truly good at. I was told in a most recent meeting with all of my advisors that patience is key. And I think that that is something that everyone should be very mindful of as we go forward. But I also talk out of the other side of the mouth, but I want to go, I want to find a really good opportunity in the next 12 to 18 months to capitalize on and see what can happen. But I think patience is going to still kind of win today.

So is KMG going to look for a third brand, or is KMG going to keep expanding the two they have? Or is that for a crystal ball?

Currently, no, I just got done. We’re calling it Project 13k. The goal is to be at a billion revenue or a billion valuation by 2035 by leveling up our people over the next 12-13 years. And so with that, yeah, we’re looking at other brands. Currently, we are with Rock N’ Roll Sushi, and Freddy’s Frozen Custard & Steakburgers. There are plenty of other segments that we’re looking at whether it’s coffee, or chicken, or taco, something along those lines, I think we’ll certainly be interested in. I’m cautious with coffee and chicken at the moment. I think the markets are oversaturated. And so I’m trying to find those niches that we can really capitalize on.

Well, we’ll keep our eyes out for you, for brands.

I appreciate it.

Thank you, and thank you so much for taking the time to speak today, and I look forward to seeing you soon. 

Yeah, thanks, Dana.

Thank you to all of our listeners to the Dana Delivers by Aprio podcast. If you liked today’s podcast, please hit the subscribe button. Dana Delivers is brought to you by Aprio, a premier accounting and business advisory firm with offices across the US and clients around the globe.

About Kyle Gerstner:

Kyle Gerstner is from Wichita, Kansas, the original birthplace of Freddy’s Frozen Custard & Steakburgers. He owns nine franchises across the country. Before Freddy’s, he started his own landscaping business, Green Zebra Landscape Management, which he ran for about ten years, before selling it after graduating college.

Kyle received his Bachelor’s degree in Entrepreneurship from Wichita State University.

The post What New Things Are Restaurants Doing to Stand Out? appeared first on Aprio.