Quebec-based food franchising business Foodtastic Inc. announced a deal Monday to buy troubled coffee chain Second Cup Coffee Co. and has big plans for the brand, including opening more than 100 new locations.
Foodtastic CEO Peter Mammas said Monday the company is buying the Canadian coffee retailer and roaster from Aegis Brands Inc. in part for its national infrastructure.
"Second Cup has operations teams across Canada and we want to take our other brands out of Quebec and Ontario and into other parts of Canada, so we're going to use that platform to do it," Mammas said in an interview.
"It gives us more of a national footprint."
Mississauga-based Aegis Brands didn't disclose Second Cup's sale price but said it includes $14 million in cash, plus a post-closing earn-out.
Mammas said Foodtastic is also taking over a "very, very large lease liability."
Still, the franchisor of multiple restaurant concepts, including Big Rig Kitchen & Brewery, Chocolato, La Belle & La Boeuf, Rotisseries Benny and Souvlaki Bar, is planning to grow the Second Cup brand.
Foodtastic will begin selling Second Cup coffee in all of the company's 130 restaurant locations within six months of acquiring the chain, Mammas said.
The company also plans to expand the coffee chain to about 300 locations within 36 months, up from 190 locations currently, he said.
But the store count will likely drop before the expansion begins, Mammas said, as Second Cup first goes through a "stabilization period."
Currently, the coffee shop's locations are concentrated in downtown cores, malls and transit locations, he said.
Those locations are struggling the most, Mammas said, while the chain's suburban counterparts are fairing better.
Some unprofitable locations will likely close, though they could reopen as one of Foodtastic's other brands, he said.
Some Second Cup locations just need to be renovated, Mammas said.
"Some locations look great but others look like they're still in the '80s," he said. "They haven't been renovated and they look a little worn out."
Foodtastic's equity partner is Oaktree Capital, an asset management firm majority owned by Brookfield Asset Management, which puts the Montreal-based company on strong financial footing, he said.
"Our balance sheet is very strong … and we're really well-financed," Mammas said. "I think it's going to be easier for the franchisees to secure the capital required to renovate."
Meanwhile, new Second Cup locations will likely be smaller, located in more suburban, high-traffic areas and feature drive-thrus, he said.
"By mid to late next year we'll probably be reopening locations, and we definitely want to be coast to coast," Mammas said.
"Our main focus is to keep as many Second Cups open until mid 2022," he said. "After that we're confident the brand itself will do well and at that point we'll start expanding."
Aegis Brands said the sale will strengthen its balance sheet and allow it to accelerate its growth strategy through acquisitions.
"We are pleased that the Second Cup brand and franchisees have the opportunity to evolve with a new Canadian partner," Steven Pelton, president and CEO of Aegis, said in a statement.
"At Aegis we will now focus on further development of Bridgehead Coffee and Hemisphere Cannabis, while seeking out exciting new growth and acquisition opportunities."
The Second Cup Ltd. changed its name to Aegis Brands as part of a plan to diversify beyond coffee shops.
In addition to Second Cup, Aegis Brands owns the Ottawa-based Bridgehead coffee shop chain and Hemisphere Cannabis Co.
"This is a pivotal moment for Aegis Brands," Pelton said. "We are excited about the opportunity to uncover new opportunities for growth."
This report by The Canadian Press was first published Feb. 8, 2021.
Companies in this story: (TSX:AEG)
Brett Bundale, The Canadian Press
