Restaurant Business – Value Takes Center Stage, Again, At Quick-Service Chains

McDonald’s, Subway, others introduce new offers this week as industry competitiveness continues.

Earlier this week, Subway officially announced its controversial $4.99 Footlong offer. On Thursday, McDonald’s will introduce the latest iteration of its dollar menu, an offering that will give customers a selection of items for $1, $2 or $3.

Those are the two largest restaurant chains in the U.S. by unit count—operating 50,000 locations, combined.

And, like clockwork, their efforts have helped usher in a new era of value-making in the restaurant business.

“50,000 units in the U.S. will be banging on value this week,” said John Gordon, a restaurant consultant out of San Diego. “That’s going to make it very tough” for everybody else.

On Wednesday alone, Wendy’s announced an expanded 4 for $4 value menu, adding eight new entree options to its meal deal. The Charlotte, N.C.-based chicken chain Bojangles’ announced value offers at $4 and $5.

And Taco Bell, which has long had a $1 menu, announced new Nacho Fries that will be priced at $1 when it debuts Jan. 25.

To be sure, restaurants frequently push value in January, largely because it’s the slowest month of the year. Consumers are adjusting their budgets after the holidays, and weather frequently keeps people home.

“The first quarter is always the lowest volume quarter of the year,” said Richard Adams, a former McDonald’s franchisee turned consultant. “And you’re coming out of the fourth quarter, which is the highest volume quarter, and suddenly you’re confronted with doing half the volume you did in December. So, it’s a good time for you to goose sales.”

The value wars are taking on new importance these days because the restaurant business is increasingly competitive. Industry same-store sales have been weak for the past two years, and the chains are hoping the offers will put them front and center in front of consumers who have more choices than they’ve ever had.

But they also come as the industry relies more heavily on franchisees to run the restaurants, and generate profit. McDonald’s and Wendy’s, for instance, have refranchised most of their company-operated restaurants in recent years. Subway has no company locations.

The discounts can highlight a tension between franchisors that rely on royalties, paid as a percent of sales, versus franchisees, which rely on the profits they earn off those sales. The value offers come amid a difficult operating environment in which labor costs and rent costs are skyrocketing.

This tension exploded to the surface in recent weeks as media outlets, including Restaurant Business, reported on complaints from Subway operators over the planned $4.99 Footlong offer.

On Monday, the Milford, Conn.-based sandwich giant started selling a selection of five Footlong subs for $4.99. Operators petitioned the company to stop the offer, complaining about the offer’s profitability after years of sales declines.

“Rents have doubled in almost every store,” Stuart Frankel, a Subway operator who invented the $5 Footlong but has been a critic of the $4.99 deal, said last month. “There’s nothing that goes backwards. And food costs are significantly higher” than when Subway first introduced the $5 sandwich.

Still, Subway’s offer is limited only to a few of the chain’s sandwiches, including Black Forest Ham, Meatball Marinara, Spicy Italian, Cold Cut Combo and Veggie Delight.

McDonald’s $1 $2 $3 Dollar Menu is a new generation of the Dollar Menu that the chain had for years and largely ended in 2012. Four items on the new menu are priced at $1: any size drink, Cheeseburger, McChicken and the Sausage Burrito. Sausage McGriddles, small McCafe beverages, two-piece Buttermilk Crispy Tenders and a Bacon McDouble are all at $2.

The Sausage McMuffin with Egg, a new Classic Chicken Sandwich, Triple Cheeseburger and a Happy Meal are priced at $3. It’s the first time McDonald’s has put its iconic kids meals on a value menu.

“We know that customers motivated primarily by value and deals come more often and spend more,” McDonald’s CEO Steve Easterbrook said on the company’s third quarter earnings call in October.

In past years, McDonald’s operators complained about the Dollar Menu, especially as costs increased. But Adams said the new offer is better from a profit standpoint because of the higher prices. “That makes a big difference,” he said.

McDonald’s new Dollar Menu is clearly moving other competitors to join in. Wendy’s, which arguably ushered in the new value era with the introduction of its 4 for $4 offer back in 2015, expanded that offer with new entrees this week.

The entrees available in that offer include the Jr. Bacon Cheeseburger, Crispy Chicken BLT, Spicy Go-Wrap, Double Stack, Crispy Chicken Sandwich, Grilled Go-Wrap Jr., Jr. Cheeseburger or the Jr. Cheeseburger Deluxe. Customers also get nuggets, fries and a drink.

Taco Bell, meanwhile, will introduce its Nacho Fries later this month. Taco Bell said it would introduce 20 $1 items on menus and in test markets this year on top of its existing, 20-item $1 menu.

The quick-service Mexican chain had been testing the product in West Virginia and Bakersfield, Calif., this spring.

The fries are seasoned with a Mexican seasoning and served with warm Nacho Cheese. Customers can get them “Supreme” for $2.49 or “Bel Grande” for $3.49.

Gordon said that quick-service chains should not rely on these discounts for too long, and that any discounts should come alongside more profitable, higher-priced items for bigger-spending customers.

“I don’t see it as a tactical failure to discount in January,” he said. “The greater question is how it’s done, and what’s done after it.”

The Street – Starbucks Shows Other Companies That Worker Benefits Don’t Have to Hurt Margins

Retailers and restaurants now have more incentives than ever to
consider generous family leave policies, thanks to the corporate tax
cuts.

BY CATHALEEN CHEN
Jan 24, 2018 3:31 PM EST

Starbucks Corporation (SBUX) is sharing the tax-cut pie with its employees.

The coffee giant announced Wednesday, Jan. 24, it will spend $250 million to raise employee wages and offer family and sick leave benefits, following Wal-Mart Stores Inc.’s (WMT) similar announcement a week ago. The decision to offer an extended benefits package was “accelerated by recent changes in U.S. tax law,” the company said in its announcement Wednesday. That includes $120 million allocated to wage increases, based on regional costs of living and local laws.

Starbucks and Walmart employees, however, won’t be the only ones reaping the benefits, experts say, as the retail and restaurant industries at large will get a cash boost from the federal tax cuts signed into law in December. Even if the costs of these worker benefits strain profit margins, chains like Starbucks likely will realize business growth by improving employee retention and brand marketing.

This could be the start of an entire industry shift, according to Brianna Cayo Cotter, the chief of staff for PL+US, an advocacy organization for paid family leave. “The [Starbucks] news today, so close on the heels of Walmart’s announcement about extending paid leave to the hourly workforce, reflects the beginning of a tectonic shift in corporate America,” she said.

Cotter also predicted that, to stay competitive, companies like CVS Health Corp. (CVS) may quickly follow the two companies’ lead.
Starbucks may be spending more cash on the benefits package, but they’ll likely save money by retaining more employees, according to John Gordon, principal at Pacific Management Consulting Group. “What’s nice is that as these companies are increasing benefits, they’re moving from a tax rate in the mid-30s to the high-20s,” he told TheStreet. “And it’s so hard to get employees to stay right now for restaurant operators.”

Employee retention, for instance, has long plagued the restaurant industry. In 2016, the hospitality sector, which encompasses restaurants, had a turnover rate of 70%, according to the National Retail Federation.

In spite of the federal tax cut, Starbucks suffer too much from losing some cash in the first place, Gordon added, pointing to the Seattle-based chain’s increasing EBITDA margins in the past three years. “Starbucks is already doing better than a lot of others in the space,” he said. “Last year, they had a company-operated EBITDA margin of 22.6%, compared to 21.4% three years ago.”

Starbucks’ new family leave policy will allow full-time and part-time “partners” — that’s what the coffee company calls its employees — to accrue one hour of sick leave for every 30 hours worked. An extended parental leave policy will now allow all non-birth parents up to six weeks of paid leave. Since the end of 2016, Starbucks has granted six weeks of paid leave for birth parents.

Companies like Chipotle Mexican Grill (CMG – Get Report) and Panera Bread Company, owned by the German JAB Holdings, according to Gordon, could be pressured into enacting similar benefits packages because like Starbucks, because they also have high margin rates. According to Glassdoor, Panera, for instance, does not offer paid maternity leave.

Walmart’s new family leave changes, announced on Jan. 11, is more comprehensive, but is extended only to its full-time employees. Under its new policy, full-time hourly workers get 10 weeks of paid maternity leave and six weeks for parental leave.
Before, only eight weeks of maternity leave and two weeks of parental leave were available to full-time workers.

Ninety-four percent of low-wage working people — such as retail workers — have no access to paid family leave, according to PL+US. The U.S. is the only industrialized country without a federally mandated paid parental leave policy.