We are about to close out 2023, although a few more surprises may yet come our way. We are expecting Darden’s (DRI) earnings to come up on December 15, which will tell us much about the casual dining and fine dining segments. Darden is a powerful operator and has been adjusting value messaging. However, smaller M&As (ex Subway—more on that later) and proxy board battles—(see discussion on SOC (SEIU proxy organization) battle to gain 3 Starbucks board seats by proxy battle later) issues have popped up lately. We got confirmation of the 2023 lessons and trends from the great Restaurant Finance and Development Conference last month where some key takeaways were presented. We hear more 2024 perspectives at the 2024 ICR Conference next month in Orlando, where many public and private restaurants will present.
We did not get a recession in 2023 but….
Despite forecasts, the US and most of the world dodged a recession. Consumers kept spending, although weakly. At McDonald’s Investor Day last week, CEO Chris Kempczinski rather cheerfully admitted “I was wrong” on his projections for US and global mild recessions. However, many restaurant brands, QSR, fast casual, casual dining, and fine dining are reporting: (1) weakness in the under $45K income cohort (2) weakness in the over $125K income cohort. That dual observation is not typical. Over time, the upper-income spending holds up in all except situations like the 2009-2010 recession.
What we did get fortunately is…..general food commodity moderation (except beef). QSR brands that had decent SSS had restaurant margin improvement. What we got that was expected but very troublesome was higher interest rates (plus 500bpts) which makes remodels and new unit ROI much more difficult. The cost of new unit builds is up 30-40% since 2019, another Pandemic effect. Restaurant equipment and permitting were also difficult. The most important development is that we have finally hit the wall on too much pricing. The industry, especially limited services restaurants, has been taking price increases way above food-at-home (grocery store) prices. [1] See the historical Food Away From Home (FWFM) price trend via the footnote below. It is stunning.
In my view, it is only logical that the middle of the P&L must receive greater attention. Many initiatives can be done in addition to targeted pricing. [2]
2024 Projections upcoming. Projections from various sources are now coming up. However, I’m going to study Q4 projections as well as the direct person-to-person sentiment to be heard at next month’s ICR Conference to provide you that will be a more studied recap and projection.
2023 Restaurant Finance and Development Conference: Key Truth Moments for the Industry
RFDC2023 was outstanding with over 3400 attendees. At this conference, there were two moments of truth for this industry worth mentioning:
All the readers of this column know that some franchisor priorities vary widely around this imperative; while all talk about supporting franchisees. It is industry wisdom that a strong franchisee economic model has to produce growth and success, and ultimately higher EV and market capitalization if publicly traded. [3]
Through the presentation, I was impressed by the new dedicated Global Business Services (GBS, VP Skye Anderson), to work with corporate field staff on internal reengineering projects; as well as a large number of future themes the CMO presented ( global events) that McDonalds can build upon.
The ongoing Roark/Subway acquisition process runs on and on… readers by now probably thought this process had ended, but no. The FTC is reviewing it per their regular competitive process, but this seems to be the first restaurant review on the FTC’s books, as I noted to Jonathan Maze last week. Jonathan was kind enough to invite me into the Deeper Dive podcast on December 6 [11] to talk about the FTC and Roark. I pointed out that franchise business structures were not specifically noted in the FTC analysis procedure but they had discretion. Employees could be a review factor. Looking at Roark, their restaurant brands are so diverse they populate 6 groupings with only 3 existing QSR /sandwich brands. It is hard to see where a critical anti-competitive cluster would emerge.
What may have gotten the FTC’s attention is the sheet risk of the Roark deal. Every restaurant universe potential buyer but Roark walked away from the Subway/DAI deal, and even then they did not get the $ 9.6 billion price at first, they have a $800M earnout. US franchisee profitability was very low in the base case, now it is even lower as Subway is mandating accepting digital discounting.
More to come//
About the author:
John A. Gordon is a long-time restaurant industry veteran, with 47 years of industry experience in operations, corporate staff (20 years), and 21 years via his founded management consultancy, Pacific Management Consulting Group. He does operations, financial analysis, organization reviews, and special investigations for clients who need detailed restaurant perspectives. Please see his website, Linked In profile, and X links at https://www.pacificmanagementconsultinggroup.com. He is always available at 858 874-6626, jgordon@pacificmanagementconsultinggroup.com.
[1] Bureau of Labor Statistics, November 14 2023. See trend at https://fred.stlouis.org/series/CUUR000SEFV
[2] In California, due to the disastrous AB1228 effect coming on wages in 2024, QSR restaurant chains have no choice but to take large price increases. Recall the chief actors in this mess were SEIU, the Governor, the California Legislature, and the IFA.
[3] Recommend compare the publicly traded restaurant stock tables with the brand values and franchisee strengths.
[4] https://www.franchisetimes.com/franchise_news/rfdc-panelists-suggest-looking-beyond-discounts-in-case-of-recession/article/_cde4206c-9455-11ee-ad3d-afdb24d37bac.html
[5] https://www.cnbc.com/2023/12/06/mcdonalds-investor-day-aims-to-open-nearly-9000-restaurants.html
[6] True on “cash flow” or EBITDA as it really is. On credit, while MCD franchisees should get good rates, interest rates have risen 500 bpts year over year.
[8] For more discussion in a future column.
[9] See Businesswire.com November 21 2023, Strategic Organizing Center Nominates Three Candidates to Starbucks Board of Directors