Food Service & Agriculture, Real Estate, and Retail

Meritage is ready for another helping

November 27, 2015
| By Pat Evans |
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Meritage CFO and COO Gary Rose, left, and Robert Schermer Jr., president and CEO, are excited about the new Wheelhouse restaurant, under development in Arena Place. Photo by Michael Buck

Within about a mile of the Medical Mile, Meritage Hospitality Group has three restaurants under construction.

The publicly traded company has more than 150 restaurants across the Midwest, Mid-Atlantic and South, and is doubling down its efforts locally.

Included in the Grand Rapids construction are the now-underway renovation of the Michigan Street Wendy’s and two new “chef-casual” restaurants.

The Wheelhouse will be an anchor retail tenant at Arena Place, an 11-story development under construction at 55 Ottawa Ave. SW in downtown Grand Rapids. A yet-to-be-named second restaurant will be part of Orion Real Estate Development’s Gateway at Belknap just north of the Medical Mile. Those two “chef casual” restaurants join Grand Rapids’ Twisted Rooster and Crooked Goose and Port Huron’s Freighters.

The renovation of the Michigan Street Wendy’s is a sleek and modern concept with a double drive-thru — a drastic change for the 35-year-old building.

Meritage’s growth in Grand Rapids, which will include moving its headquarters to Arena Place, is part of a double-edged growth strategy. Currently, the headquarters is on East Beltline Avenue. Approximately 80 people will move downtown initially, but new hiring will begin to fill out the 17,000-square-foot space.

The company as a whole has more than 5,100 employees and served 51 million people last year.

“We’re growing aggressively on both fronts, locally and regionally,” said Bob Schermer, Meritage’s CEO who has been with the company since 1998.

In 2010, Meritage had 78 restaurants and set a goal of 150 for 2015. This year, it surpassed that goal with 167 restaurants, including 162 Wendy’s in seven states — a territory Schermer likes to describe as “Mackinac Bridge to Miami.”

Schermer said this year Meritage expects a sales growth of 30 percent, EBITDA growth of 90 percent and a net earnings growth of 110 percent. The company should see about $250 million in sales this year.

The company’s current status is a far cry from when Schermer took over the company that owned three hotels and restaurants in 1998 and then purchased and renovated 20 Wendy’s locations.

“At the time, Wendy’s had 40 percent of the market penetration that the other major chains had,” Schermer said. “We saw an opportunity to build.”

By 2002, the fast-food chain’s growth in West Michigan began to plateau. Schermer said that led Meritage to look at the “chef casual” segment. Together, fast-food and chef casual make up $438 billion of the $700 billion restaurant industry. Schermer said it was a strategic decision to focus on the two market segments that take up the most bandwidth.

Meritage’s first stab at the market was with five O’Charley’s restaurants, which he said was a financial belly-flop but couldn’t say more because of contract obligations.

“We learned a hard lesson,” he said.

Instead of plugging into another franchise, Meritage came up with a new concept and opened Twisted Rooster at 1600 East Beltline Ave. NE.

“We’re trying to break the chain,” he said. “Millennials don’t frequent chain concepts. So we want unique, local and independent bars and restaurants.”

Now, Schermer said the group hopes to have more than 300 restaurants in the next five years. Another doubling of its restaurants might seem like a stretch, but the group has a plan. Wendy’s currently has more than 300 franchisees and would like to whittle that number down to approximately 30. Currently, many of the franchisees are original owners and nearing retirement, Schermer said, providing an opportunity to purchase many more nearby and in the territories where Meritage currently has a presence.

A third of Wendy’s franchise agreements end in the next three years, and Mertiage, because of its standing relationship with the company, has first dibs on many of them. The company has completed 14 of these acquisitions in the past five years. Wendy’s wants franchisees that have platforms in place to run the restaurants successfully. Meritage has a 24-hour a day, seven-day a week IT department and more than 100 metrics to track performance.

“If you can’t measure, you can’t manage,” Schermer said.

For a publicly traded franchisee company, Meritage is actually small. The average publicly traded franchisee company has more than 1,100 restaurants, so Schermer said there’s lots of room for growth.

“We’re still very small for our industry,” he said. “That’s part of our opportunity; that’s what gets us out of bed every morning.”

As for current activity, Meritage will open a new or renovated store every two and a half weeks for the next three years, Schermer said. It’s a lot of activity for the company, but Schermer said there’s “no rest for the weary.”

Meritage’s stock has risen from $0.98 when Schermer took over to more than $10 a share now. The company began offering dividends in 2012, starting at $0.01 and up to $0.06 this year.

Schermer said as it’s a small company, investors need to think of the investment as private equity. He added he has several local companies to look up to for guidance, including Amway, Universal Forest Products and Meijer.

“We’re a small growing company; it takes patience,” he said. “We have several multi-billion dollar companies that we can learn a lot from around here.”

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