Restaurant Finance Monitor: On Crumbs’ Crumbling Sales

We read with interest this Wall Street Journal piece on the cupcake fad, in light of sales declines at the New York-based cupcake shop Crumbs. But a deeper look at the sales declines show that Crumbs’ issues are not so much related to the end of the cupcake fad, so much as they’re due to concerns about Crumbs itself.

In short: Crumbs overestimated demand for its cupcakes, primarily in its home market. But it remains to be seen whether the cupcake fad is actually fading.

There’s no doubt that Crumbs is struggling. Consider this: two years ago, when the chain went public through a reverse merger with a blank check company, its average unit volumes were an impressive $1.1 million. Today, those unit volumes average $788,000. That’s a decline of more than 28 percent in just two years. And remember: Crumbs is supposed to be a growth concept.

Last year, sales at the 37 stores in the company’s same-store sales base declined $5.9 million—an average of nearly $160,000 per store.

“I’m not happy about our past or present performances,” CEO Julian Geiger said on the company’s most recent earnings call. “No excuses. We should have done better.” The company reported a net loss of $7.7 million last year and recently agreed to sell $10 million in convertible promissory notes to a company controlled by Michael Serruya, the co-founder of the Canadian Yogen Fruz frozen yogurt chain.  The chain’s lower store cost was supposed to protect profits in case of a sales decline.

Crumbs’ sales problems started early. Crumbs went public in 2011. The second quarter of that year, the company reported a 6-percent fall in its same-store sales. By the end of that year, it had replaced its CEO and quit reporting same-store sales numbers. When a young restaurant chain has sales numbers like that, “you either overpenetrated, or customers went in for a trial and either didn’t like the product or thought it was too expensive,” said the restaurant consultant John Gordon.

It may have overpenetrated. Crumbs has 21 locations in Manhattan alone. The chain sells primarily one product, cupcakes. Those cupcakes are good. But they’re heavy and dense, and people don’t need to eat them that often. A recent visit to New York found a Crumbs shop there completely empty at 1:30 p.m. on a beautiful day. “It’s not an impulse buy,” Gordon said. A cupcake shop cannot penetrate a market in the same way that a coffee chain can because people don’t get cupcakes as often as they buy coffee.

Then again, maybe it’s the product, because we also noted this: according to its latest annual report, Crumbs’ e-commerce, catering and wholesale sales fell 28.3 percent last year. That’s not over-penetration. People are simply not using these other avenues to get their cupcakes.

Crumbs’ stock, which had traded in the $13 range in 2011 before the sales problems became evident, is now trading below $2 a share. The company is now focused on the questionable strategy of aggressively opening new locations when its current sales are suffering so much—the chain kept opening new stores through sales declines and sales at existing locations have only worsened. The company is opening in different types of locations, focusing on suburban mall development rather than its traditional urban locations. Geiger did indicate on the company’s conference call that it may look to terminate leases for underperforming stores, and he said the company needs to “do a better better job of energizing the in-store customer experience.”

Crumbs is also working with a well-known but still-unnamed chef to create a line of sandwiches for those struggling New York locations. Will it work? We don’t know, but its last effort to use a non-cupcake product to bring in business didn’t work, either.

Last year, Crumbs enjoyed a share price spike after it announced that it would replace its coffee with Starbucks coffee in the hopes that the coffee would lure cupcake buyers. That didn’t work. The company increased the price for its coffee, and sales subsequently fell. Sales of regular coffee fell “significantly.” Suffice it to say, that didn’t help same-store sales. (By the way: why go to a Crumbs for Starbucks coffee when you can just go to Starbucks, which probably isn’t that far away?)

It can be argued that Crumbs’ sales decline could be a precursor to a broader end of the cupcake fad—after all, New York is the epicenter of the movement, the home of Sex and the City, which popularized the cupcake. If consumers in New York have taken their treat business elsewhere, perhaps consumers in other areas will, too, eventually.

Yet other chains that have emerged in recent years haven’t had the same troubles. Magnolia Bakery appears to be doing OK—the company told the Journal that its same-store sales grew last year, though it didn’t say by how much. The California-based chain Sprinkles appears to be doing well and just got an investment from the private equity firm Karp Reilly, which generally has a good track record of making restaurant investments. Then there’s the Nashville, Tennessee-based Gigi’s, which has grown from zero to 84 units in just four years.

None of these concepts are nearly as saturated as is Crumbs. Magnolia, also based in New York, has just five locations there, compared with the 27 (including six in the suburbs) for Crumbs. Sprinkles has six locations in its home Los Angeles area, but those are spread out, too.

New York Post: Subway Franchisees Decry Discounts

This summer wasn’t the best time for Subway sandwich shops — the world’s largest restaurant chain — to stumble.

Founder and owner Fred DeLuca — the driving force and vision behind the Milford, Conn., chain’s growth into a 40,000-unit chain — is in a Connecticut hospital getting treatment for leukemia and, he has told associates, is awaiting a bone marrow transplant.

Still, the 65-year-old billionaire businessman is directing the chain’s operations from a hospital bed.

The hands-on owner is still in daily contact with regional managers trying to find new ways to reverse the sales decline, a Subway development agent told The Post

Same-store sales at the closely held company dipped 2 percent last month and are down over the last several months — the first declines in recent memory, sources close to the company tell The Post.

Faced with the business setback, DeLuca is not letting his hospital stay stop him from continuing a recent discount marketing blitz aimed at igniting revenue growth, the sources said.

DeLuca in June launched a $4 lunch special — a six-inch sub, beverage and chips — and plans the re-introduction next month of its popular $5 footlong campaign.

But the plans are not going down well with many of its franchisees.

At that price, franchisees complain, they just barely cover their costs.

DeLuca, sources said, feels these multiple promotions are necessary to reverse the recent declines at the 48-year-old chain.

John Gordon, who runs the Pacific Management Consulting Group, said Subway’s 2 percent same-store sales decline came as McDonald’s and Wendy’s saw slight increases.

For the moment, Brooklyn-born DeLuca is ignoring the pushback from the franchisees.

“There are not any subway owners who like it,” a franchisee who owns thee stores told The Post. “Everybody is pissed off.”

Margins at a typical store, where revenues are about $400,000 a year, are now between 8 percent and 10 percent, the franchisee said.

That is because of the price cuts.

Just a few years ago, margins were 12 percent, the franchisee said.

In mid-July, as whispers started to circulate around the fast-food chain about the founder’s health, Subway announced that DeLuca, who started the chain in 1965 to earn money for college, was battling leukemia.

DeLuca’s condition hasn’t slowed expansion yet — subway has opened nearly 1,800 locations this year.

In February, DeLuca said he hoped to reached 50,000 stores in four years.

Rival McDonald’s is the No. 2 fast food chain with about 35,000 locations.

“He’s working every day from his bed,” said the development agent, who participated a few days ago in a conference call with his boss.

“He tells us he fully expects to be back at work in a year.”

DeLuca, married with one son, has no successor and a very small corporate structure. His founding partner, Peter Buck, is involved in the day-to-day running of the business.

DeLuca who splits his time between homes in Fort Lauderdale, Fla., and Milford, is one of the most low-key billionaires in the business world.

He is known for not wearing suits, and driving old cars.

For example, several years ago he drove from Florida to Subway’s Milford headquarters, making surprise trips at Subways along the way.

Without a clear succession plan, if DeLuca were forced to step aside from running the chain, it is likely it would be sold, sources said.

The privately held chain does not report results and profits, and total revenue could not be learned.

Gordon of Pacific Management said the chain generates about $400 million in earnings before interest and taxes.

Subway did not return calls.

Nation’s Restaurant News: Johnny Rockets Owner Considers Sale

Johnny Rockets’ parent company is considering a sale of the classic Americana-themed burger chain.

Officials confirmed Monday that parent Red Zone Capital Management Co. LLC has hired North Point Advisors to explore a possible sale of the nearly 300-unit casual-dining concept.

Cozette Phifer Koerber, vice president of brand management and communications for The Johnny Rockets Group Inc., based in Aliso Viejo, Calif., said the company could offer no further details on the process.

John Gordon, principal of Pacific Management Consulting Group in San Diego, said he was familiar with the offer and that the company’s asking price was in the range of $100 million to $150 million, which would be about nine to 13 times earnings before interest, taxes, depreciation and amortization, or EBITDA, of about $12 million.

“To get those kinds of numbers, one must demonstrate growth or potential growth,” Gordon said.

Founded in 1986, Johnny Rockets is known for its diner-style burgers, sandwiches, fries served with a ketchup smiley face and milkshakes. Tableside juke boxes play 1950s-era music, and servers are encouraged to dance and sing along.

The 75-percent franchised concept grew rapidly in the 1990s but later became mired in debt. Toward the end of the decade, growth was put on hold while the company closed underperforming locations.

Red Zone bought Johnny Rockets in 2007 from former owners Centre Partners Management LLC and Apax Partners Inc., two private-equity firms that owned the chain along with heirs of late founder Ronn Teitelbaum, who died in 2000. The acquisition price for the chain was not disclosed, though it was described by company officials at the time as “a high single-digit multiple” of corporate cash flow.

Red Zone is the investment vehicle of Daniel Snyder, an owner of the Washington Redskins football team and Six Flags amusement parks.

In recent years, Johnny Rockets has been aggressively building its presence overseas, opening for the first time in Nigeria, for example, where five units are planned over the next seven years. The company has also struck franchise agreements in Colombia, Honduras, Costa Rica, Nicaragua, El Salvador, Guatemala, Pakistan, Indonesia and the Philippines.

Johnny Rockets has restaurants in more than 16 countries. Growth in the U.S., however, has been slow.

For the fiscal year ended April 2012, Johnny Rockets had 223 restaurants in the U.S., including 26 company-operated locations.

The chain had U.S. systemwide sales of $212.7 million, which was virtually flat, or down 0.1 percent, compared with the prior year, the company reported.

In recent years the company has experimented with dual branding and new formats, adding alcohol service to some restaurants.

Last year, a Johnny Rockets franchisee in Phoenix began testing a new fast-casual variant called JR’s Burger Grill, featuring smaller dishes at a lower price point that would compete with the growing number of fast-casual burger concepts that have threatened to eclipse older brands like Johnny Rockets.

Nation’s Restaurant News: Aug. 29 Strike

Labor organizers are calling for quick-service workers across the country to stage a day of strikes on Aug. 29, what could be the largest event in an ongoing campaign to pressure restaurant chains to raise wages.

Low-wage workers have organized one-day job walkouts in various cities across the country this summer, such as New York, Washington, D.C., St. Louis, Milwaukee and Detroit.

The event planned for Aug. 29, however — timed to commemorate the 50th anniversary of the March on Washington for Jobs and Freedom — will be the first national effort in the campaign, and organizers are predicting that it will be the largest strike in quick-service history, impacting dozens of cities in all regions of the U.S.

Next week’s strike will target the entire quick-service industry, including McDonald’s, Wendy’s, Burger King, Taco Bell, KFC, Pizza Hut, Domino’s, Little Caesar’s, Subway, Jack in the Box, Jimmy John’s, and more, according to a spokesman for the unidentified group behind the website LowPayIsNotOK.org, which is promoting the event. He asked for his identity to remain anonymous.

At issue is the argument that the median wage of about $8.94 an hour puts most workers below the poverty line. Workers are calling for a pay increase to $15 an hour and the right to form a union.

Rather than focus on the wage issue, chains such as Domino’s and McDonald’s, as well as officials at Burger King, have noted the career path offered to all in the industry, even those who start out at the lowest pay levels.

In a statement that was not attributed to a spokesperson, McDonald’s USA said the Oak Brook, Ill.-based burger giant aims to offer competitive pay and benefits, providing training and professional development for all who wish to take advantage of such opportunities. “Our history is full of examples of individuals who worked their first job with McDonald’s and went on to successful careers both within and outside McDonald’s,” the statement said.

Tim McIntyre, vice president of communications at Ann Arbor, Mich.-based Domino’s, said 90 percent of U.S. franchisees started as delivery drivers or at in-store positions. “We are a company of opportunity,” he said. “In addition to our store owners, most of our managers, supervisors, franchise consultants, trainers, operations auditors, even some of our executives, started in the stores,” he said.

Additionally, pizza delivery staffers earn a combination of wages and tips, allowing them to make more than the minimum wage. And, for many, work at Domino’s is a second job they can do at night and on weekends, supplementing a traditional day job or school, McIntyre said.

Miami-based Burger King Corp. said the almost-all franchised burger chain has also served as a workforce entry point for millions of Americans, and that restaurant compensation and benefits are consistent with the QSR industry.

“In addition, through the Burger King McLamore Foundation, all Burger King employees and their families are eligible for college scholarships to encourage further growth and education,” Burger King said in a statement from the media relations team.

John Gordon, principal of San Diego-based Pacific Management Consulting Group, said the industry has a strong argument for offering opportunity — noting that he also got his start in high school working at the now-defunct Burger Chef chain in 1973.

Still, he said, “They may be off base in arguing that everyone can advance up. Only a few can. Practically speaking, the cream always rises to the top, but that’s a harsh message.”

At the same time, Gordon said a $15 wage in the restaurant industry is unsustainable and would roughly double the average hourly restaurant wage rate in the country — an increase that would be very difficult for the franchise operators that dominate the space to take on, given their small profit margins.

“Progress has to be slower and more gradual over time,” he said.

Depending on how workers respond to the call for a national strike next week, a larger number of restaurants and brands could be impacted, Gordon said.

“When a restaurant loses a sale, about 50 cents of that drops to the bottom line,” he said.

Nation’s Restaurant News: Carl’s Jr. Hardee’s Owner Exploring Sale

CKE Restaurants Holdings Inc., parent to the Carl’s Jr. and Hardee’s quick-service chains, is exploring a possible sale, according to a Reuters news report that ran Thursday.

The affiliate of private-equity firm Apollo Global Management LLC that took CKE private three years ago is working with Goldman Sachs Group Inc. to explore a possible sale, according to the report, which cites three unnamed sources.

The company could be valued at more than $1.7 billion, the report said.

Spokesmen for both Apollo and CKE said they could not comment on the report.

The move comes after CKE registered for an initial public offering last year that aimed to raise as much as $230 million. By August, however, the company put the IPO on hold, citing market conditions.

In April this year, CKE completed a $1 billion refinancing of debt, according to filings with the U.S. Securities and Exchange Commission. Observers said reports of the possible sale indicate the IPO is not going to happen, so the private-equity firm is likely looking to move on.

“They needed an exit,” said Kevin Burke, managing director of Trinity Capital LLC in Los Angeles, whose firm often handles such company sales in the restaurant space.

Burke noted that Apollo will likely benefit from the deal.

Apollo affiliate Columbia Lake Acquisition Holdings Inc. acquired CKE Restaurants in 2010 in a deal valued at about $1 billion. At the time, the offer from Apollo trumped an earlier offer from another private-equity firm, Thomas H. Lee Partners, for about $615 million in cash and the assumption of $309 million in debt.

In recent years, however, CKE has stepped up international growth. The company has 500 units in 28 foreign countries, and the company has pledged to double that number within the next five years.

Over the past two years, the company has seen 148 international locations open in 10 new countries, a rate that outpaced domestic growth. Pending deals include plans to bring 100 units to Brazil, expand the existing presence in Russia and first-time moves into Denmark, Guatemala and Puerto Rico.

At the end of the last fiscal year ended Jan. 28, the company operated and franchised 3,318 restaurants, including 1,369 Carl’s Jr. and 1,944 Hardee’s units in 42 states and around the world.

For the January-ended year, CKE reported revenues of $1.3 billion, an increase of $46 million, or 3.6 percent, compared to the prior year, according to SEC filings. Adjusted earnings before interest, taxes, depreciation and amortization for the year were expected to be between $195 million and $197 million.

Consolidated same-store sales rose 3 percent for the year at company locations, with Carl’s Jr.’s comparable sales rising 3.6 percent and Hardee’s’ increasing 2.3 percent.

John Gordon, principal with Pacific Management Consulting Group in San Diego, said it’s unusual for private-equity firms to sell after less than three years of ownership. “What has the company gotten out of it?” he posed. “What has Apollo gotten out of it, other than debt-driven dividends?”

The answer will largely depend on what sort of price CKE could get if it does find a buyer. The environment for quick-service remains challenged, which could scare potential investors away from the space, Gordon said.

On the other hand, Gordon said CKE’s growing international profile could make an investment more attractive.

“What sells in these big levered transactions is the potential for growth,” said Gordon. “My opinion is they have to find a private-equity firm not interested in a quick flip.”

Nation’s Restaurant News: Del Frisco’s Stock Volatile

Del Frisco’s Restaurant Group Inc., which reported solid second-quarter performance on Tuesday, has bounced back from a slight dip in its stock price that came the same day its largest shareholder, Lone Star Funds, announced it would be selling 5 million shares.

Southlake, Texas-based Del Frisco’s, which went public last summer, saw its stock price dip by nearly 6 percent Tuesday, when it also reported a 22-percent increase in profit for the second quarter, which ended June 11.

But the parent of the Double Eagle Steakhouse, Sullivan’s and Del Frisco’s Grille chains saw its stock rebound by Thursday, when it closed at $22.64 a share. The shares were trading near $23 by Friday afternoon.

Proceeds of the secondary offering announced Tuesday will go to Lone Star Funds, the private equity firm that bought Del Frisco’s in 2006. When Del Frisco’s went public, Lone Star held about 18 million shares, and it sold 4.9 million shares earlier this spring.

Secondary offerings aren’t necessarily a negative signal, but rather a part of the private-equity process, said John A. Gordon, principal with Pacific Management Consulting Group.

“These offerings aren’t really a surprise,” said Gordon, noting that the investors typically will divest. “The backer has other liquidity requirements or is trying to book a profit while things are relatively good.”

He added, “Del Frisco’s did make it last quarter onto my restaurant standouts list.” He also noted that the good performance has extended to other upper-end steakhouse companies like Ruth’s Chris, Capital Grille and Fleming’s.

In announcing the secondary offering, Del Frisco’s said it will not receive any proceeds from the sale of those shares.

On Tuesday Del Frisco’s Restaurant Group reported net income of $4.4 million, or 19 cents per share, for the second quarter, compared to $3.6 million, or 20 cents per share, in the year-earlier period. Revenue increased 19 percent to $60.4 million from $50.7 million a year earlier.

DFRG has 35 restaurants in 19 states and Washington, D.C. The company has 10 Double Eagle units, 19 Sullivan’s and six Del Frisco’s Grille locations.

LA Times: Some Dollar Menu Items Are Passing the Buck

Craving a burger off a fast-food dollar menu? Chances are that it now costs more than a buck.

Customers are still reeling from McDonald’s move last week to update its Dollar Menu, which for more than a decade offered burgers, fries and other items for less than a dollar apiece. The menu accounts for as much as 14% of the chain’s overall U.S. sales.

But soon, the list will morph into what’s being called the Dollar Menu & More, which mixes the standard $1 items in with $2 goods and $5 shareable family meals designed to, as McDonald’s puts it, “fill the need for choice, flexibility and other preferences.”

The fast-food behemoth isn’t the only one ditching the traditional dollar deal.

Rising costs and changing tastes are pushing prices past the buck barrier. In a quick-service market overrun with more upscale outlets and foodies seeking premium ingredients, the dollar deal may be doomed.

In January, Wendy’s 99-cent bargain menu transformed into Right Price Right Size and includes items that cost as much as $2 each. At Burger King, the changing value menu recently included a limited-time $1.29 Whopper Jr. deal. And Arby’s this spring introduced a menu called Snack ‘n Save, with baked potatoes, chocolate molten lava cake and other products that top out at $3.

“The dollar menu will have to evolve,” said John Gordon, founder of Pacific Management Consulting Group. “If you talk dollar too much, it erodes the customer’s perception of you over time — you don’t find a Maserati for a dollar.”

Some experts say there’s little economic incentive for chains to continue offering dollar meals, which are less profitable than beverages or limited-time promotional items.

More chains are experimenting with pricing, offering different tiers of deals instead of a flat menu of super-cheap options. Restaurants have raised prices to cover increasing food and other costs, hoisting some favorites out of dollar territory.

In the last three years, the number of menu items priced at $1 or less plunged 26% at quick-service restaurants, according to a report from the research firm Mintel.

And one-buck menus might not survive looming legislative changes, analysts said. Many fast-food outlets have warned that impending healthcare reforms will squeeze their already slim margins, possibly forcing more price hikes.

Dollar menus could face additional pressure from higher worker pay. In late September, California Gov. Jerry Brown signed off on raising the minimum wage in the state to $10 an hour from $8 by Jan. 1, 2016, a move that analyst Gordon said probably will push the quick-service industry to raise the lowest prices to $1.99 from 99 cents.

“In California, you’re not going to see dollar menus for long in the big chains,” Gordon said.

At least not in their traditional forms. Value menu makeovers are rampant as restaurant chains try to reverse a slide in popularity.

Budget menu orders at fast-food outlets tanked 12% in 2011 and 7% last year, according to NPD Group Inc. Demand for combo meals slid 13% in the last five years.

Customers are turning away from cut-rate cuisine in part because it isn’t as cheap as it used to be, analysts said. But also, consumers have begun questioning the quality of budget menus, which seldom include fruits and vegetables.

Health researchers who blame fast food for a plethora of ailments, including diabetes and obesity, have become more vocal in arguing that value menus make such meals even more accessible. Low-income consumers who can’t afford more nutritious items are especially vulnerable, such experts say.

Some formerly loyal customers such as Aesha Adams Roberts would now rather buy a bag of dried beans for dinner than order a 99-cent entree.

The Ventura stay-at-home mom, 35, once was proud of her ability to save money using value menus. But after a bout of illness while pregnant, she converted to organic food.

“Dollar menus are horrifying to me now,” she said. “They may be budget friendly, but the food is just really bad.”

McDonald’s is trying to lure back Roberts and health-minded patrons. In its largest markets, the chain plans to offer side salads, fruit or vegetables as alternatives to French fries in value meals.

Other chains are tapping into the stunt-eating and convenience-seeking demographics to boost their bargain and combo offerings. Burger King this summer debuted a $1 burger stuffed with French fries, which it touts as “new twists on American classics.”

KFC this month unveiled a patented container called the Go Cup targeted at consumers increasingly eating small snacks behind the wheel. The container, which is tapered to fit in a car’s cup holder, contains seasoned potato wedges and a choice of chicken for less than $3.

KFC may be on the right track. A key quality that draws customers to fast food — its convenience — is still available sans dollar menus, said William McCarthy, professor of health policy and management at UCLA.

“Economics is only part of what contributes to people’s decisions to eat fast food,” he said. “As appealing as the low cost is, the time cost is even more important if you ask me. Fast-food places will not lose too many customers if they do away with dollar menus.”

Taco Bell, however, is still charging ahead. The Mexican-style chain is testing a menu called Cravings in Sacramento and Kansas City, Mo., including 12 items for $1 each. It could replace the current Why Pay More menu if rolled out throughout the chain later this year.

“This is an industry that’s in a state of flux,” NPD analyst Bonnie Riggs said. “It’s going to be a real battle for market share. They are all trying different ways to drive traffic.”

The Exchange: Burger Giants Roll Out Remodels

The biggest fast food burger chains in the U.S. are eager to fight sluggish sales trends and the perception that they’re downscale shops serving nutritionally deficient or bland fare. But the battle for a better reputation isn’t just about the food.

Yes, a hefty part of the bid to counter the traditional view of fast food establishments can be seen on the menus, where offerings billed as healthier, more creative or both are finding space. McDonald’s (MCD) recently started selling a new chicken-based line called the McWrap, an egg white McMuffin and chicken wings as a special promotion. Burger King (BKW) put a turkey burger on sale at its stores for a limited time and tweaked its veggie burger. Wendy’s (WEN) went pub-style with a pretzel-dough bun. And salads, we all know, are frequently found options at the hamburger sellers.

But store remodels, while less publicized than menu changes, also play a critical role in the industry’s customer-acquisition plan. With an ever-growing number of updated exteriors and dining rooms under their banners, the burger giants are aiming to appeal to customers not just with what’s on the tray but with features such as wall-mounted TVs, Wifi and lounge seating. And they could use the boost: In the second quarter, McDonald’s had U.S. same-store sales growth of only 1%. For Wendy’s, second-quarter comp sales at North American corporate stores increased 0.4%, and at franchised locations it was 0.3%. Burger King’s U.S. and Canada same-store sales fell 0.5%.

John Gordon, principal at Pacific Management Consulting Group and a long-time analyst of the restaurant sector, says the new looks do matter to American diners.

“In the restaurant space, particularly in the United States, but really worldwide, customers judge the perceived price value of the restaurant not just about the food, but also the appearance of the store, the location of the store [and] how the employees act,” he says.

Throughout the industry, remodeling is a goal, although the financial resources might not always be there. This push toward fresh visuals, when it can be done, is driven by several factors, among them the nicer chains such as Chipotle (CMG) and the fact that the competition is doing it – no one wants to be left behind.

While the cost and extent of the remodels vary by chain, quite often the bulk of the expense falls on franchise owners, who run the vast majority of McDonald’s, Burger King and Wendy’s locations. Regardless of who pays, redoing one store is going to cost several hundred thousand dollars, generally speaking. There does appear to be a positive result, with Wendy’s saying sales at company-operated remodeled or new-style restaurants “have increased on average by more than 25 percent.”

Though not a guarantee, boosting the receipts is clearly at the top of a restaurant owner’s wish list when they undertake an expensive remodel. “In almost every case, not every case, though, but in many cases, there is incremental sales and profit flow-through that results from a remodel, and they wouldn’t do it if that kind of incremental gain wasn’t being realized,” Gordon says.

Below, we look at the largest U.S. burger chains by unit count and some of what they’re putting into their facelifts.

The Exchange: Fast Food Value Menu Too Cheap?

You can buy a Hot ‘n Spicy McChicken at McDonald’s for $1, a Junior Whopper from Burger King for $1.29, and 4-piece chicken nuggets at Wendy’s for 99 cents. Is it possible that fast food is getting too cheap?

As these restaurants contend with increased competition, cost-conscious consumers and a still-uncertain economy, they’re trying to outdo each other by slashing prices ever more in the hopes of getting customers through the door. But some franchisees are grousing, suggesting those rock-bottom prices are getting too cheap for their comfort.

A recent report from Janney Montgomery Scott on McDonald’s (MCD) surveyed several franchisees. Many seemed to feel it was a problem for restaurants to rely so much on discounted items. As one franchisee responded in the survey: “We need ‘new’ news – not just cheap food.” That sentiment was echoed by others, who on the whole said their stores’ level of discounting was too high. “It’s one or the other, the Dollar Menu or other discounting. We can’t continue to do both,” one said. Another McDonald’s store owner griped that all the discounts aren’t strategic, while another said, “Every item introduced comes with unlimited coupons for FREE and a ‘suggested price point’ that is ridiculous and does not meet franchisees’ needs for profitability.”

Widespread discounts

To get a sense of how widespread the discounts are among the major fast-food players, just check out the latest promotions. McDonald’s late last year brought back its Dollar Menu after trying to push more premium items. In January Taco Bell, which is owned by YUM Brands (YUM), began testing a new $1 Cravings Menu in two markets featuring nine items, three of them new. Also in January, Wendy’s (WEN) introduced a revamped menu called “Right Price Right Size,” with items, including the Crispy Chicken Sandwich and Double Stack burger, ranging from 99 cents to $1.99. Subway fans who thought $5 footlongs were too pricey started getting 6-inch subs for $3.

And following McDonald’s, Burger King got aggressive with its menu and launched a limited time offer for a Junior Whopper for $1.29 in February. At the time, Steve Wiborg, head of Burger King’s North America business, said a stronger “value message” will hopefully “drive more customers to Burger King – some of whom will end up ordering higher-priced items once they get there,” according to a Wall Street Journal report. This practice is known in the restaurant industry as a barbell strategy.

The value push, though, hasn’t been sufficient to bolster weak sales, if McDonald’s earnings report Friday is any indication. Global sales at restaurants open at least 13 months fell 1% in the first quarter, and the company warned that sales would be slightly lower in April.

Competition in this space has been especially intense, says John A. Gordon, principal of Pacific Management Consulting Group, a chain restaurant analysis and advisory firm. The reason: Same-store sales – the all-important benchmark of a restaurant’s positive growth – in the latest quarter were being compared with performance during winter 2012, which was relatively positive. Sales and traffic were higher then, driven in part by relatively good weather and an election-year bump, says Gordon. McDonald’s same-store sales trend was up 7.7% in January 2012 (for the U.S.), 11.1% in February and 8.0% in March.

“Those are big numbers to go up against,” Gordon says, adding that, as we went through balance of 2012, the sales trend began to fall a bit. Compare those numbers with this year: up 0.9% in January, down 3.3% in February and up 0.3% in March.

While the fast-food industry might be synonymous with “value,” the big players have also been introducing new, more premium offerings. Last month McDonald’s added chicken McWrap sandwiches (suggested price is $3.99) to its menu and Wendy’s announced limited-time Flatbread Grilled Chicken Sandwiches, in an attempt to appeal to healthier eaters and upgrade some of its product line – with the hope of boosting margins.

“In theory, over time if you drive traffic and you take care of customers, and it’s a good product, they will come back and you’ll do well,” says Gordon. But in the short term, the more discounted the products are, the more eroded the brands are in consumers’ eyes. “If you pound away too long on a low price point, it tends to alter a perception over time,” Gordon says. “And customers start to ask, what is the real worth or value of this brand or product?”

Chicago Business: Smile Last Straw for McD’s Owners

It was a seemingly benign request designed to improve customer service and possibly sales, but asking employees to smile more was viewed as just the latest demand McDonald’s Corp. was putting on its already strained franchisees.

Independent owners control roughly 90 percent of Oak Brook-based McDonald’s 14,000 domestic restaurants. A sampling of them characterized their relationship with corporate as 1.93 on a scale where 5 would be excellent and 0 awful.

“We have more complicated items, with more elements coming from the (distribution center), more equipment coming from suppliers so everyone else is making more money sending us more ‘stuff’ and we are expected to deliver a product that takes 55 seconds on the best day in less than that, do it consistently and with a smile on our face,” one franchisee wrote in a quarterly survey released today by Janney Capital Markets in New York. “There’s little to smile about.”

McDonald’s declined to comment on the customer service plans, stating the company was in a quiet period leading up to its first-quarter earnings release scheduled for Friday.

Franchisees have swallowed several corporate demands in the past three years ranging from massive restaurant overhauls costing up to $1 million per store, aggressive discounting and staying open on Thanksgiving and Christmas day.

Independent owners find their hands are tied when it comes to corporate edicts, including the latest one of improving customer service by being faster and friendlier.

“You have no choice in certain situations,” said Susan Kezios, president of the American Franchisee Association in Chicago. “They signed an agreement that says they’ll do whatever management says.”

The 25 franchise owners, representing 180 domestic restaurants, that participated in Janney Capital’s survey were also dissatisfied by McDonald’s aggressive stance on discounting and promoting its Dollar Menu.

“Every quarter we sell a smaller percentage of our menu at a full (and profitable) price,” one franchisee said in the survey.

Shareholders and analysts, however, are encouraged by McDonald’s product promotions. The company’s stock is trading at an all-time high with its share price up 14 percent for the year; it closed at $103.04 today.

But because McDonald’s is beholden to its investors, monthly sales performance is key, said John Gordon, founder and principal of Pacific Management Consulting Group, a San Diego, Calif.-based chain restaurant consulting group.

“That’s where the real rub comes in with franchisees — same-store sales,” he said.

After nine years of ever-higher sales at restaurants open for at least a year, the traditional measure of retail success, the streak snapped in October.

“The good news is that the chain has had a lot of success in the last four to five years,” said Jack Russo, an analyst at Edward Jones & Co. in St. Louis. “Unfortunately for owner-operators, it is bad news because the bar has been raised. (Corporate) is trying to do everything it can to get sales up.”

Janney Capital Markets expects first-quarter sales to be up 2 percent from a year earlier.

Columbus Dispatch: Bravo Brio Embraces Expansion

Bravo Brio Restaurant Group keeps growing, come recession or flat market.

The Columbus-based parent of Bravo Cucina Italiana and Brio Tuscan Grille restaurants expects to build between 40 and 50 restaurants in the next five years — about half of each format — some of them in high-population cities on the East and West coasts.

“We’re an aggressive growth story in a tough environment,” said Jim O’Connor, Bravo Brio’s chief financial officer, during a recent interview.

Considering that the casual-dining industry is not expected to expand in coming years, achieving that growth means Bravo Brio will have to take business away from other restaurants.

“We don’t look at the pie growing. We think this is a market-share battle,” O’Connor said. ” Those folks with better mousetraps are going to win.”

Winning restaurants put their stores in the right places, he said. Bravo Brio works with Buxton, a consumer analytics firm in Fort Worth, Texas, to pick the right spots.

Buxton finds locations where the best customers for each restaurant concept like to eat, said Paul Schlesinger, senior vice president of business intelligence for the Texas firm.

“You’re going to grab share” if you build restaurants in those locations, Schlesinger said.

Saed Mohseni, Bravo Brio’s president and CEO, told securities analysts on a conference call last week that he wants to add 50 percent to his restaurant count by 2018. That’s a slightly faster growth rate than during the past five years.

For a chain that has only 103 stores, “closing two units is a big deal,” said John Gordon, principal at Pacific Management Consulting Group in San Diego. “That is an indicator that the concept didn’t work in certain geographies.”

So far, Mohseni and O’Connor aren’t saying which two restaurants will close.

But they are saying they are more likely to put Brio, the chain with the more-expensive menu, rather than Bravo restaurants in areas that get a lot of business travelers who use expense accounts, such as New York City and San Francisco.

Brio customers spend an average $5 more than Bravo customers, Mohseni said.

“We like to say, if you see a Nordstrom’s, you’re likely to see a Brio” nearby, O’Connor said. ” If you see a Macy’s, you’re more likely to see a Bravo.”

In Columbus, the company operates Bravo restaurants on Hayden Road, and in Crosswoods Commons and Lennox Town Center. It operates Brio restaurants in Easton Town Center and Polaris Fashion Place, both higher-end shopping centers.

Analysts have both upgraded and downgraded Bravo Brio’s shares in the week since the company slightly scaled back its earnings and sales expectations for 2013.

The shares have risen more than 8 percent to $15.85 since Feb. 27, when the company released its 2012 results after the market closed.

Columbus Dispatch: Nostalgia Keeps Franchises Alive

Rax, Arthur Treacher’s Fish & Chips, York Steak House, Ponderosa Steakhouse and Damon’s franchises – all but one born in central Ohio – hit their stride in the 1970s and 1980s by appealing to customers with everything from British fish and chips to big-screen televisions.

During passes through Lancaster on business, Gary Ford usually stops for lunch at the Rax fast-food restaurant. Ford grew up in Indiana eating the Ohio chain’s Uncle Alligator kids’ meals and drinking from its alligator-shaped cups.

“I love Rax, too,” chimed in Ford’s lunch partner and business colleague, Sandy Carter. “I grew up on it in Columbus.”

Rax, Arthur Treacher’s Fish & Chips, York Steak House, Ponderosa Steakhouse and Damon’s franchises — all but one born in central Ohio — hit their stride in the 1970s and 1980s by appealing to customers with everything from British fish and chips to big-screen televisions.

The chains were bought and sold, often by investors who added debt and churned through managers, leaving them with tired menus and neglected restaurants, said John Gordon, restaurant analyst for Pacific Management Consulting Group in San Diego.

Today, the chains survive in small pockets in Ohio and elsewhere mostly because customers fondly remember their food.

“I really believe it’s all about loyalty,” said Bonnie Riggs, restaurant analyst for consumer and retail market research firm NPD Group. “People grew up with them, so they’re very loyal to them. That’s the staying power for these concepts.”

Rax Roast Beef

Started in Springfield in 1967, Rax peaked in the 1980s with more than 500 restaurants in three dozen states, said Rich Donohue, who owns five Rax restaurants, including three in central Ohio.

But Rax strayed from roast beef, confusing customers with offbeat menu items and driving them away with high prices. A management buyout in 1991 leveraged the company with debt.

Donohue got a management job at the Ironton Rax in 1982 after graduating from high school. He left the chain shortly after it filed for bankruptcy protection in 1992.

Donohue bought the Ironton Rax in 2002 when the company sold all its assets. He also owns restaurants in Lancaster, Circleville and Ashville, Ky., as well as the Rax trademark.

All 14 Rax restaurants in Ohio, Kentucky, Indiana, Illinois and West Virginia are independently owned but buy food and supplies as a group, Donohue said.

He refocused the menu on the roast beef customers remember. The BBC beef, bacon, cheddar — sandwich is a best-seller at the Lancaster location, manager Ashley Deyo said.

“I believe the product that we sell is quality,” Donohue said. “We are still doing the things the same way we did back when I first started.”

Arthur Treacher’s Fish & Chips

Dave Thomas, founder of Dublin-based Wendy’s, was among investors who launched Arthur Treacher’s Fish & Chips in Columbus in 1969. Its anchor menu item: cod fried in a proprietary batter served with British-style fries, called chips, and cornmeal hush puppies.

Unable to achieve profitability, the chain’s third owner sought federal bankruptcy protection in 1983. More investors tried to invigorate the brand in the 1990s by testing new concepts, including grilled fish, but operations continued to flag.

For Tim Hopkinson, who bought his first two Arthur Treacher’s franchises in 1984, renewed support from his franchising company might have come too late.

Hopkinson’s seven restaurants in the Youngstown area “did well” in the 1980s and 1990s, he said. But his “operating costs flew through the roof” in 2009 after a bump up in the minimum wage, said Hopkinson, who had just finished a costly store remodeling project.

He began closing the restaurants in 2011 and now is down to two stores, in Warren and Austintown. “I don’t blame Treacher’s for my problems,” he said about his franchising company. The economics up here are still very poor. And as I get older, I don’t want to fight the battle.”

York Steak House

Elliott Grayson and Berndt Gros started York Steak House in Columbus in 1966. General Mills bought the chain in 1977.

York customers ordered their steaks, and then picked up bowls of fried onions or parfait glasses of gelatin cubes topped with whipped cream at cafeteria-style lines. The restaurants were popular during the 1970s.

“Everybody went to the mall, shopped, ate and went to a movie. That was your Friday night,” said Jay Bettin, who bought the York Steak House on W. Broad Street in 1989.

“We’re still going strong,” Bettin said. “Unfortunately, the others have gone under.”

“We still have all the favorites: sirloin tips, honey-glazed chicken, baked fish almondine,” said Bettin, who draws nostalgic customers from as far as Massachusetts and Texas.

Ponderosa Steakhouse

Ponderosa was started in Kokomo, Ind., in 1965 and tried to grow in Canada first. Its restaurants offer steaks accompanied by a hot side dish, salad and dessert buffets.

“Columbus used to be one of our strongest markets,” said Gordon of Pacific Management Consulting, who spent a decade as a Ponderosa cost analyst in the 1980s.

Ervin and Vickie Campbell bought the Ponderosa restaurant on S. High Street in 2006. “In the heyday, I think they had eight or nine restaurants in Franklin County,” Ervin Campbell said. “This is the only one that’s left.”

Ponderosa had 650 restaurants in 1990, but it’s down to about 200 restaurants, said Gordon, who keeps tabs on his former employer.

Ponderosa discounts meals served to veterans and active military members, and is one of the rare restaurant chains that’s open on Thanksgiving and Christmas. “It’s on those days that you really feel good about what you do,” Campbell said.

Damon’s Grill

Damon’s was founded in Columbus in 1979. It grew through the 1980s and 1990s because it was on the cutting edge of the TV sports-bar concept and among the few northern chains serving ribs.

But over time, sports bars cropped up on almost every corner, and many restaurants started serving ribs.

“It was a chain that failed to evolve over the years,” said Dennis Lombardi, executive vice president of food-service strategies at WD Partners in Columbus. “And their original point of difference, which was their sports-viewing area, became dated and fundamentally noncompetitive.”

Additionally, challenging economic times in the Midwest, where most Damon’s restaurants were located, cut sales at most of the stores.

In 2006, Damon’s and its 88 restaurants — down from 150 just a few years earlier — were sold to a North Carolina real-estate developer. Two years later, the concept was bought by a Pittsburgh developer. And in 2009, Damon’s, down to 90 locations, filed for bankruptcy protection.

Columbus Dispatch: Shareholder Urges Bob Evans Split

A major shareholder of Bob Evans Farms is urging the company to split its restaurant and food-service businesses, and to sell and lease back its substantial real-estate holdings to “unlock shareholder value.”

Bob Evans “has traded at a perennial discount to its restaurant peers, and at an even greater discount to companies in the packaged foods space” because shareholders undervalue the company’s assets, New York hedge fund adviser Sandell Asset Management said in a letter this week to board members of the Columbus food company.

Sandell’s solution? Split up the company.

“The best way to create value is to sell BEF Foods,” which is Bob Evans’ food-service business, said Thomas Sandell, the asset manager’s CEO.

Many shareholders prefer “pure plays” — companies that operate in a single market segment. Bob Evans operates in both the restaurant and the food-service businesses, so its stock sells at a ” conglomerate discount,” according to Sandell.

Bob Evans executives, who have been building their company’s value by remodeling restaurants, emphasizing bakery and carryout food, and acquiring complementary food-service businesses, see such a strategy as a positive thing.

Their company’s food-service business makes items such as pork sausage and mashed potatoes mostly for retail stores. It also, however, does a lot of commissary work for its restaurants, lowering their operating costs.

It’s what some companies consider a “portfolio effect,” said John Gordon, restaurant analyst and principal at Pacific Management Consulting Group in San Diego.

“After you develop your restaurant business, you can take what you’ve developed and find other ways to use it,” Gordon said.

 Bob Evans wasn’t saying much yesterday beyond acknowledging having received Sandell’s letter.

“We always welcome shareholders to express their views, and management and the board of directors regularly take into consideration shareholder concerns and suggestions,” said Scott Taggart, Bob Evans’ vice president of investor relations.

Sandell’s firm, which recently added to its Bob Evans holdings for between $55.29 and $55.94 a share, is thinking the company could buy its shares in a “self-tender” transaction for more than $60 a share.

“We feel the stock is worth $80” a share, Sandell said. His firm owns 1.4 million Bob Evans shares, or 5.1 percent.

Self-tenders sometimes are used as a defense against hostile takeovers.

“The only reason I mention the takeover possibility is because there’s been a lot more chatter from the likes of Sandell in the last month or so,” said Stephen Anderson, senior restaurant analyst for Miller Tabak & Co.

The chatter insinuates that if Bob Evans management doesn’t sell its food-service division or real estate, then someone else will, Anderson said.

“I have not heard of a specific deal,” he said. Bob Evans executives “have been doing the right things all along, I think.”

Bob Evans shares rose less than 1 percent to $57.43 yesterday. The shares are up 43 percent for the year.

Bloomberg: Youngest American Woman Billionaire Found with In-N-Out

Lunchtime at the flagship In-N-Out Burger restaurant in Baldwin Park, California, is a study in efficiency. As the order line swells, smiling workers swoop in to operate empty cash registers. Another staffer cleans tables, asking customers if they’re enjoying their hamburger. Outside, a woman armed with a hand-held ordering machine speeds up the drive-through line.

Such service has helped In-N-Out create a rabid fan base — and make Lynsi Torres, the chain’s 30-year-old owner and president, one of the youngest female billionaires on Earth. New store openings often resemble product releases from Apple Inc, with customers lined up hours in advance. City officials plead with the Irvine, California-based company to open restaurants in their municipalities.

“They have done a fantastic job of building and maintaining a kind of cult following,” said Bob Goldin, executive vice president of Chicago-based food industry research firm Technomic Inc. “Someone would love to buy them.”

That someone includes billionaire investor Warren Buffett, who told a group of visiting business students in 2005 that he’d like to own the chain, according to an account of the meeting on the UCLA Anderson School of Management website.

The thrice-married Torres has watched her family expand In-N-Out from a single drive-through hamburger stand founded in 1948 in Baldwin Park by her grandparents, Harry and Esther Snyder, into a fast-food empire worth more than $1 billion, according to the Bloomberg Billionaires Index.

Biblical citations

Famous for its Double-Double cheeseburgers, fresh ingredients and discreet biblical citations on its cups and food wrappers, In-N-Out has almost 280 units in five states.

The closely held company had sales of about $625 million in 2012, after applying a five-year compound annual growth rate of 4.6 per cent to industry trade magazine Nation’s Restaurant News’s 2011 sales estimate of $596 million.

In-N-Out is valued at about $1.1 billion, according to the Bloomberg ranking, based on the average price-to-earnings, enterprise value-to-sales and enterprise value-to-earnings before interest, taxes, depreciation and amortisation multiples of five publicly traded peers: Yum! Brands Inc, Jack in the Box Inc, Wendy’s Co, Sonic Corp and McDonald’s Corp Enterprise value is defined as market capitalisation plus total debt minus cash.

One private equity executive who invests in the food and restaurant industry said the operation could be valued at more than $2 billion, based on its productivity per unit, profitability and potential for expansion. The person asked not to be identified because he is not authorised to speak about his company’s potential investments.

Plane crash

“In-N-Out Burger is a private company and this valuation of the company is nothing more than speculation based on estimates from people with no knowledge of In-N-Out’s financials, which are and always have been private,” Carl Van Fleet, the company’s vice president of planning and development, said in an emailed statement.

Torres, who has never appeared on an international wealth ranking and declined to comment for this article, came to control In-N-Out after several family deaths. When her grandfather Harry died in 1976, his second son, Rich, took over as company president and expanded the chain to 93 restaurants from 18.

Torres’s father, Harry Guy Snyder, became chief executive following Rich’s 1993 death in a plane crash at age 41. The chain expanded to 140 locations under Guy, who inherited his father’s passion for drag racing.

Ford cobra

When he died of a prescription drug overdose at age 49 in 1999, Snyder’s estate included 27 cars and other vehicles, including a 1965 Ford Cobra and a pair of 1960’s-era Dodge Dart muscle cars, according to his will.

Torres’s grandmother Esther — Harry’s widow —maintained control of the company until her death in 2006 at age 86. When she died, Torres was the sole family heir. She now controls the company through a trust that gave her half ownership when she turned 30 last year, and will give her full control when she turns 35. The company has no other owners, according to an Arizona state corporation commission filing.

Few in the restaurant industry have met or know much about the hamburger heiress.

“I have no clue about her,” said Janet Lowder, a Rancho Palos Verdes, California, restaurant consultant, who said she was one of the few people to extract the company’s internal finances from Esther Snyder in the 1980’s for industry-wide surveys. “I was even surprised there was a granddaughter.”

Limited menu

Torres has little formal management training and no college degree. The company was structured to carry on after the demise of its founders, according to a 2003 Harvard Business School case study. In-N-Out has never franchised to outside operators, the Harvard researchers said, giving up a low-cost revenue stream in exchange for maintaining quality control.

In a 2005 article in the Harvard Business Review, Boston- based Bain & Co consultants Mark Gottfredson and Keith Aspinall attributed the company’s estimated 20 per cent profit margins at the time to the simplicity of its limited menu. Contrast that with competitors such as Oak Brook, Illinois-based McDonald’s and Miami-based Burger King Worldwide Inc, which regularly change their food offerings.

“Other chains seem to change positions as often as they change their underwear,” said Bob Sandelman, chief executive officer of San Clemente, California-based food industry researcher Sandelman & Associates.

‘Calculated growth’

Butchers carve fresh beef chuck delivered daily to the company’s distribution facility in Baldwin Park, where hamburger patties leave for restaurants on 18-wheeled refrigerated trucks outfitted with over-sized tires so the In-N-Out logo can be better seen on the highway. The company only expands as far as its trucks can travel in a day, either from the Baldwin Park complex or a newer facility in Dallas, the only two places where the company makes hamburger patties.

In-N-Out expanded to Texas in 2011, after building a warehouse and the patty facility. There are now 16 units in the state. Conrad Lyon, a Los Angeles-based senior restaurants analyst for B Riley Caris, said additional expansion will continue to be gradual.

“I would expect slow, calculated growth,” he said in a phone interview. “To outsiders the company’s growth out West likely appears sluggish. However, it was management carefully leveraging its brand, real estate and distribution. As a private company-owned system, In-N-Out has the luxury of calling the shots to replicate its success without succumbing to potentially detrimental outside influences.”

Complaints, Allegations

The company’s pace of expansion was one of the issues at stake in an exchange of lawsuits in 2006 between Torres, In-N- Out executives and Richard Boyd, the company’s former vice president of real estate and development. Boyd was one of two trustees overseeing the trust that controls the company’s stock on behalf of Torres.

Among other allegations filed in California state court in Los Angeles, Boyd claimed Torres and Mark Taylor — her brother- in-law from a half-sister — conspired to remove Esther Snyder from the company to gain control of In-N-Out. He filed a separate petition with the probate court seeking to prevent Torres from removing him as a trustee.

Torres denied the allegations in both a formal answer to Boyd’s complaint and a 2006 letter to the editor published in the Los Angeles Times, in which she said she only had “minimal involvement” in the company’s business decisions, and didn’t favour rapid expansion.

16 Bathrooms

The company in turn filed a breach of contract lawsuit against Boyd, alleging fraud and embezzlement in connection to Boyd’s relationship to one of In-N-Out’s outside construction firms. Boyd’s lawyer, Philip Heller of Fagelbaum & Heller LLP in Los Angeles, said all the litigation was dismissed following a confidential settlement. Boyd resigned from the company and the trust.

“They were all in the end amicably resolved,” Heller said.

Since then, Torres has refused most interview requests, even by author Stacy Perman, who wrote a 352-page book about In- N-Out in 2009. Torres asked to set up a meeting with the author after the book’s publication, but it never occurred, Perman wrote in an afterword to the 2010 paperback edition.

Torres popped up in real-estate blogs in September, after buying a $17.4 million, 16,600-square-foot mansion in the wealthy enclave of Bradbury, California, in the foothills of the San Gabriel Mountains. A Realtor.com listing for the house described it as having seven bedrooms, 16 bathrooms, a pool, a tennis court and other amenities.

Drag Racing

Torres is one of almost 90 hidden billionaires discovered by Bloomberg News since the debut of the Bloomberg Billionaires Index in March 2012. Among them: Dirce Camargo, the richest woman in Brazil, and Elaine Marshall, the fourth-richest woman in America.

Like Camargo and Marshall, Torres maintains a low profile. Her most visible presence has been on the drag strip. She competes in the National Hot Rod Association’s Super Gas and Top Sportsman Division 7 categories, alternating between a 1970 Plymouth Barracuda and a 1984 Chevrolet Camaro, according to NHRA results. Her third husband, Val Torres Jr., is also a race- car driver.

Whether the mother of twins will maintain ownership in the chain after she gains full control in five years is uncertain, said John Gordon, founder of San Diego-based restaurant consultant Pacific Management Consulting Group.

“It’s an open question whether she may have different feelings later,” said Gordon. “Like most kids, or second or third generations of a very wealthy family, I don’t know that she has restaurant blood in her veins, or if she’s a trust fund baby.”

Bloomberg: McDonald’s Luring Starbucks Crowd with Pumpkin Lattes

McDonald’s Corp. is adding pumpkin-spice lattes to lure the Starbucks crowd and boost traffic.

The McCafe pumpkin latte — a mix of espresso, milk and flavored syrup — will come in three sizes and be available with whole or nonfat milk, the Oak Brook, Ill.-based company said. A 16-ounce latte with whole milk has 340 calories and will cost $2.89. A regular coffee is $1. The lattes are being introduced this month and will sell through mid-November.

McDonald’s, the world’s largest restaurant chain, has been introducing pricier items such as chicken wings, McWraps and steak breakfast sandwiches to maintain profitability in the face of higher labor, occupancy and operating costs. At the same time, the company is expanding its value menu to draw bargain-seeking diners.

The operating margin at McDonald’s U.S. company-owned restaurants narrowed to 18.7 percent in the quarter ended June 30 from 19.8 percent a year earlier.

The shares rose 0.4 percent to $97.28 at the close in New York Sept. 23. McDonald’s has advanced 10 percent this year, while the Standard & Poor’s 500 Restaurants Index has gained 18 percent. Starbucks has added 41 percent.

Starbucks Corp. has sold 200 million pumpkin spice lattes in the nine years since it introduced them, said Alisa Martinez, a company spokeswoman. The drink has the same number of calories as McDonald’s offering and a 16-ounce one sells for $4.55, on average. The Seattle-based company, which has about 11,200 U.S. cafes, also sells salted-caramel mochas, hazelnut lattes and is introducing new bakery items nationwide.

McDonald’s may be able to steal some Starbucks customers because Americans are focused on finding deals now and pumpkin has become such a popular flavor during the fall season in the U.S., John Gordon, principal at San Diego-based Pacific Management Consulting Group and adviser to restaurant franchisees, said.

McDonald’s also will begin serving hot beverages in paper cups, instead of polystyrene foam containers, bowing to customers’ preference for a recyclable option, Ofelia Casillas, a spokeswoman, said. Changing all 14,100 U.S. locations to paper will be a “multi-year” process, she said.

McDonald’s has recently struggled in the United States, where it is facing a tough consumer environment. In August, sales at stores open at least 13 months rose 0.2 percent domestically, falling short of the 0.8 percent gain projected by analysts. Earnings have trailed estimates for the past two quarters.

The fast-food company’s new Dollar Menu, which it’s testing in five markets in the U.S., includes items that sell for as much as $5. McDonald’s Dollar Menu was introduced in 2002 and it rolled out the McCafe lineup of lattes, cappuccinos and mochas to the U.S. in 2009.

McDonald’s is scheduled to report third-quarter results Oct. 21.

Bloomberg: McDonald’s Franchisees Rebel

McDonald’s Corp., already struggling to sell burgers in the U.S., now must contend with a brewing franchisee revolt.

Store operators say the company, looking to improve its bottom line, is increasingly charging them too much to operate their restaurants — including rent, remodeling and fees for training and software. The rising costs are making franchisees, who operate almost 90 percent of the chain’s more than 14,100 U.S. locations, less likely to open new restaurants and refurbish them, potentially constraining sales.

McDonald’s is “doing everything they can to shift costs to operators,” said Kathryn Slater-Carter, who in June joined other franchisees in Stockton, California, to brainstorm ways of getting the chain to lessen the cost burden. “Putting too much focus on Wall Street is not a good thing in the long run.

‘‘It is not as profitable a business as it used to be,’’ said Slater-Carter, who owns two McDonald’s stores and backs California legislation that would require good faith and fair dealing between parties in a franchise contract. It would also allow franchisees to associate freely with fellow store owners.

Asked if McDonald’s is shifting costs to franchisees, Heather Oldani, a spokeswoman, said in an e-mail: ‘‘We are continuing to work together with McDonald’s owner/operators and our supplier partners to ensure that our restaurants are providing a great experience to our customers, which involves investments in training and technology.”

‘Productive’ Meetings

Lee Heriaud, who chairs the National Leadership Council, a group of franchisees that meet regularly with company executives to discuss ideas and concerns, attended the Stockton meeting and others. In an e-mailed statement provided by Oldani, he said “owner/operators’ feedback and perspectives have been shared with McDonald’s and owner/operator leadership in the spirit of open dialogue.” The meetings were “productive,” he said.

Cooperation between McDonald’s and its store owners is deteriorating, according to an April 11 letter from a franchisee to other store owners reviewed by Bloomberg News.

“Many of you have said that you don’t feel that the top management understands the economic pressures that we face,” the letter said. “The tone has become much more controlling and less inclusive.”

This isn’t the first time the world’s largest restaurant company has found itself at odds with the people who own and operate its stores. McDonald’s in the mid-90s alienated U.S. franchisees when it expanded too quickly and new stores began cannibalizing other locations, said Dick Adams, a former McDonald’s store owner and restaurant consultant in San Diego.

Slowed Expansion

Under pressure from franchisees, the company slowed the expansion. It opened 1,130 net new domestic restaurants in 1995; by 1998, it had cut that number to 92.

“There was a time at McDonald’s when the franchisee morale was extremely low and everyone was extremely upset,” Adams said. “We’re getting there again.”

Today’s tensions between Oak Brook, Illinois-based McDonald’s and store operators coincide with the company’s struggles to grow after consumer confidence fell in July after increasing for the past three months and with the unemployment rate stalled at 7.4 percent or higher. On July 22, the shares fell 2.7 percent, the most in nine months, when McDonald’s reported second-quarter profit and revenue that trailed analysts’ estimates. Chief Executive Officer Don Thompson said economic weakness would hurt results for the rest of the year.

McDonald’s fell 0.2 percent to $99.11 at 9:37 a.m. in New York. The shares increased 13 percent this year through yesterday, trailing the 20 percent gain for the Standard & Poor’s 500 Restaurants Index.

Franchisee Income

The Big Mac seller, which owns or leases most of its U.S. stores, has been generating more income from franchisees. Revenue from franchised stores, which includes rent and royalties, increased 8 percent on average during the past five years, while total revenue rose 4 percent.

Some franchisees are paying as much as 12 percent of store sales in rent, according to notes of an April 23 meeting attended by store operators. Instead, they want the company to return to a historic rate of about 8.5 percent, the document shows.

U.S. McDonald’s restaurants average about $2.5 million in annual sales, according to Chicago-based researcher Technomic Inc. That means franchisees who have recently renewed leases are paying an average of $300,000 a year, up from $212,500 at the 8.5 percent rate.

Local Markets

“Across the country, the rent owner/operators pay for their McDonald’s restaurants is determined by local market real estate costs, as well as the cost of doing business in a particular market,” Ofelia Casillas, a McDonald’s spokeswoman, said in an e-mailed statement. “The range for rent has historically varied based on these and other regular business variables.”

At the April meeting at a community center in Paramount, California, a group of franchisees spent five hours discussing ways to get the company to reduce rents and other costs. Another cadre of McDonald’s store owners met in Stockton in June to discuss similar issues. The group in Paramount suggested reducing rents, royalty rates and creating a regional real- estate team of store owners to help set lease rates.

Rent is “the firmest of fixed expenses,” said John Gordon, principal at San Diego-based Pacific Management Consulting Group and a consultant to restaurant franchisees. “You pay that before you remodel, you pay that before you take owner salary out.”

Alienating Customers

As a result, some run-down stores aren’t getting fixed up, which in turn is alienating customers, he said.

“People don’t want to be in an old space, even if they’re going through the drive-thru,” Gordon said. “You get better employees, you just get a better vibe if it’s a newer store.”

As it is, remodeling a McDonald’s store costs at least $800,000, according to Slater-Carter. That’s more than twice as much as at Burger King Worldwide Inc., which after franchisees revolted cut the expense for its remodeling program by half to about $300,000, on average. Wendy’s Co. is also paring its upgrade costs and has said it will get to $375,000 for its least-expensive model.

Oldani, the McDonald’s spokeswoman, said that it costs about $600,000, on average, to remodel a McDonald’s restaurant and $1 million to build a new store.

McDonald’s recently told franchisee Slater-Carter she must pay $80 a year to switch to the company’s e-mail system and she’s now forking over an extra $10,400 per store annually for new software, Wi-Fi and employee training costs — all fees that McDonald’s has tacked on in the last five years. She won’t know until 2016, when her lease must be renewed, how much extra she may be paying in rent.

“What I see going wrong is the corporation itself is forgetting that its fiscal strength rides on the fiscal strength and the creativity of the operators, and it’s just going for such centralized control,” said Slater-Carter, whose family has owned McDonald’s franchises since 1971.

Bloomberg: Krispy Kreme to Jamba?

Following the biggest surge in takeovers of restaurant and coffee companies since the last recession, Krispy Kreme Doughnuts Inc. (KKD) and Jamba Inc. could be next on the menu.

Acquisitions of U.S. restaurant, tea and coffee companies from Peet’s Coffee & Tea Inc. to Teavana Holdings Inc. reached $6.1 billion last year, the highest level since 2008, according to data compiled by Bloomberg. Deals are on the rise as sales growth at coffee and snack shops are forecast to outpace fast- food chains through 2017, data from IBISWorld Inc. show. Since Joh. A. Benckiser Group announced plans Dec. 17 to buy Caribou Coffee Co., Krispy Kreme shares have climbed 21 percent to the highest in more than five years as Jamba rose 19 percent.

Krispy Kreme, which introduced a new coffee lineup in 2011, and Jamba (JMBA), the smoothie maker projected to post its first profit since 2005 this year, may be targeted for their well-known brand names and the chance to expand into grocery and mass retail stores, said B. Riley & Co. and Pacific Management Consulting Group. Even after Krispy Kreme shares climbed 43 percent in a year, the doughnut seller still trades at a lower earnings multiple than 97 percent of U.S. restaurants valued at more than $100 million, data compiled by Bloomberg show.

“They’re iconic brands and it takes forever to build that brand equity,” Conrad Lyon, an analyst at Los Angeles-based B. Riley, said in a telephone interview. “To be able to write a check and add that to your portfolio is probably pretty attractive.”

Takeover Wave

Brian Little, a spokesman for Winston-Salem, North Carolina-based Krispy Kreme, and Matt Lindberg, a spokesman for Emeryville, California-based Jamba, declined to comment on takeover speculation.

In addition to its pending $340 million purchase of Caribou, Benckiser also acquired Peet’s last year for about $1 billion. Starbucks (SBUX) Corp.’s approximately $620 million takeover of Teavana was disclosed in November and completed last week.

Those acquisitions helped push industry takeovers last year to the highest since 2008, when deals peaked at $7.5 billion before consumers curbed spending amid the longest U.S. recession since the Great Depression, data compiled by Bloomberg show.

Sales at coffee, hot-beverage and doughnut chains are outpacing fast-food revenue as on-the-go consumers shift to snacks instead of full restaurant meals, according to June and July reports from IBISWorld. Coffee and snack shop sales are forecast to increase 4 percent annually to $33.9 billion in 2017, compared with growth of 1.9 percent a year for fast-food chains, the Santa Monica, California-based researcher said.

Jamba Juice

Acquirers may be interested in a coffee or beverage chain with a brand that is “strong in the consumer mind,” Lyon at B. Riley said. The profit margin for selling beverages is higher than for food, he said.

“Two brands out there that are largely the strongest in their category are Krispy Kreme for doughnuts and Jamba for smoothies,” Lyon said.

Jamba, operator of the Jamba Juice chain, sells hummus-and- cheese wraps, flatbreads and frozen yogurt alongside its signature fruit smoothies. The juice maker, founded in 1990, also sells smoothie kits and 90-calorie energy drinks at Wal- Mart Stores Inc. and Target Corp. (TGT) locations in the U.S.

While Jamba shares rose 71 percent last year as the company announced new store openings and started selling more food, the closing price of $2.48 last week was still 80 percent below its 2006 peak. The company has a market value of $192 million.

Starbucks Interest

“Jamba juice could be pick-up-able,” said John Gordon, a San Diego-based principal at restaurant adviser Pacific Management Consulting, with clients including Dunkin’ Donuts franchisees. “It would be relatively cheap from a strategic acquisition standpoint. They already have a very large store presence. It’s already a brand name.”

The company could fetch about a 15 percent premium in a sale, Gordon estimated.

Jamba is projected to post a profit of $7.3 million this year following losses since 2005, analyst estimates compiled by Bloomberg show. After three consecutive years of declining sales, the company also may report revenue gains of 2 percent for 2012 and 6.3 percent this year, the estimates show.

Starbucks may seek to buy Jamba if its Evolution Fresh juice brand, purchased in 2011 for $30 million, doesn’t catch on fast enough, said Lyon. There are four Evolution Fresh shops that sell items including spiced carrot juice, mango smoothies and eggs scrambled with brown wild rice. Jamba has about 755 stores in the U.S., of which 301 are company owned, according to the company’s November earnings statement.

Breakfast Foods

“It’s maybe a great opportunity for Starbucks if they really want to get into that smoothie business and juice business more,” he said.

Zack Hutson, a spokesman for Seattle-based Starbucks, declined to comment on whether it’s interested in buying Jamba.

Krispy Kreme, founded in 1937, may lure bids from other eateries looking to boost morning food and drinks sales with its cult-like following, Lyon said.

Wendy’s Co. (WEN) may look at Krispy Kreme as a way to boost its breakfast sales, Lyon said. The Dublin, Ohio-based chain, which sells chicken biscuits and home-style potatoes at some locations, has struggled to compete with McDonald’s Corp.’s morning menu. The $1.86 billion company backed off testing breakfast in some U.S. markets last year after a disappointing financial performance.

Coffee Appeal

“Most fast-food restaurants in the burger category have a huge opportunity in the breakfast arena,” Lyon said. Krispy Kreme is a “great way to expose customers to products in the morning — and then later in the afternoon, the burgers take over.”

Bob Bertini, a spokesman for Wendy’s, said the company doesn’t comment on speculation.

Krispy Kreme, which began selling a new line of “signature” coffees in 2011, has said it plans to increase coffee to about 12 percent of sales by the end of fiscal 2015. Coffee currently accounts for about 4 percent of sales, the company said in August.

Part of the allure of purchasing coffee companies now is that coffee-bean prices have been falling, Sharon Zackfia, an analyst at William Blair & Co. in Chicago, said in a phone interview. Coffee prices dropped 37 percent in 2012, the biggest annual decrease since 2000, according to data compiled by Bloomberg.

Profit Return

Krispy Kreme returned to profit in fiscal 2011 after six straight years of losses, data compiled by Bloomberg show. Earnings for the third quarter topped analysts’ estimates, and the company said that in the fiscal year ending Jan. 31 it will earn more than previously thought. Krispy Kreme has a net cash position of $24 million, the data show.

“It’s still a very recognized brand,” Gary Bradshaw, a Dallas-based money manager at Hodges Capital Management Inc., which oversees about $800 million including Krispy Kreme shares, said in a phone interview. “The company has returned to profitability. They really cleaned up their balance sheet. It could certainly be bought.”

While the improvements sparked a 48 percent stock gain since the Nov. 19 earnings report, Krispy Kreme still trades for 5 times its trailing 12-month profit. That’s a lower price- earnings ratio than 97 percent of U.S. restaurants larger than $100 million, the data show. Only Denny’s Corp. (DENN) is cheaper at 4.5 times.

Doughnut Calories

“It’s not dirt cheap, but it’s an improving picture that we think will continue to get better,” Bradshaw said. “There’s not a lot you can do if someone comes in and offers $15 a share for the company, but we think if they continue to grow, it could be worth a lot more than that a couple of years out.”

Krispy Kreme shares rose almost 11 percent to $11.15 on Jan. 4, giving the company a market value of $727 million, after Alton Stump, an analyst at Longbow Research, initiated coverage with a buy rating and $15 stock price estimate.

Still, the iconic doughnut’s nutritional drawbacks may give a possible buyer pause, said Jason Moser, an Alexandria, Virginia-based analyst at the Motley Fool. A glazed doughnut with creme filling has 350 calories, according to the company’s website. That’s why Krispy Kreme has recently introduced oatmeal and fruit juice to its menu.

While Nick Setyan, a Los Angeles-based analyst at Wedbush Inc., says strategic buyers may be lacking for Krispy Kreme, he also said the company is a potential buyout candidate for a private-equity firm at as much as $13 a share. That would be a 17 percent premium.

“You can capture the future growth at this point,” Setyan said. “A lot of the sort of bad news is behind them now.”

Wall Street Journal: Franchisees Bulking Up

Weaker sales following the recession are prompting many big fast-food chains to adopt leaner business models by unloading company-owned outlets to franchisees.
The latest example is Burger King Holdings Inc., which is in the midst of a turnaround and counting on a bigger appetite for restaurant ownership among people like Vince Eupierre of Corona, Calif.
Burger King restaurants, such as this one in Miami, have revamped their menu as part of the company’s turnaround effort. The chain is unloading many company-owned outlets to
franchisees.
Mr. Eupierre, a 71-year-old immigrant from Cuba, bought his first Burger King franchise in the late 1970s, after working nights as a Burger King assistant store manager. Today, he owns 34 Burger King franchises in Southern California employing 2,500 workers, including part-timers.
His sales are down by about 25% from three years ago, and he recently spent $1.3 million to comply with the chain’s revamped menu, on items like smoothie stations and new freezers.
“If you ask me, ‘Will you buy another store today?’ I’d say, let’s wait a little bit and see what happens in the next 60 to 90 days,” he says.
In the industry, it is known as refranchising, and the strategy is based on the idea that franchisees will tend to run a tighter ship than a company-owned operation.
Since 2007, McDonald’s has reduced its share of company-run restaurants to 19% from 23%, today operating 6,435 of its 33,510 restaurants world-wide, according to company data.
“It’s making the company more profitable,” says Richard Adams, a former McDonald’s Corp. MCD -0.92% executive who runs a San Diego-based consulting company for McDonald’s franchisees.
“The franchisee has more skin in the game,” says William Ackman, a hedge-fund founder who is soon to be one of Burger King’s newest investors through his fund’s interest in Justice Holdings Ltd., a U.K.-listed investment vehicle. “He’s going to put his heart and soul into it.”
But Robert Zarco, a Miami-based franchise attorney, says unloading most or all company owned locations to franchisees could signal that the franchiser lacks “confidence in its own brand.”
Roughly 92% of Burger King’s units already are franchised, a figure that takes into account one large refranchising deal completed last month. The Miami-based fast-food company slipped to third place last year in U.S. sales among burger giants, behind No. 1 McDonald’s and second-place Wendy’s Co. WEN +1.84%
Now, Burger King plans to have almost all of its 7,200 units in the U.S., and more than 12,500 units globally, franchised by early 2013.
“Refranchising has been a highly successful strategy for us,” says Virginia Ferguson, a
spokeswoman for Yum! Brands Inc., YUM +0.61% Louisville, Ky., which currently operates less than a quarter of all its restaurants world-wide. The parent to more than 37,000 Pizza Hut, KFC and Taco Bell restaurants last year sold 404 of its company-operated locations in the U.S., including 264 KFC, 74 Taco Bell and 66 Pizza Hut outlets, company data show.
In doing so, it reduced its ownership of U.S. restaurants to 13% from 15% in 2010. It plans to further shed its ownership of KFC and Pizza Hut outlets to just 5% by the end of the year, and Taco Bell to 16% within two years, she said.
Between 2009 and 2011, Jamba Inc., JMBA +1.87% owner of Jamba Juice Co., sold 174 stores to existing or new Jamba franchisees. About 40% of its 769 stores are company owned today, down from 70% before the refranchising.
“We wanted to expand the brand presence quicker and de-risk the business model,” says Karen Luey, chief financial officer of the Emeryville, Calif.-based beverage chain. “We wouldn’t be able to do that with company-owned stores because it’s a capital-intensive process.”
Jack in the Box Inc., JACK +0.70% a San Diego company that owns Qdoba and Jack in the Box brands, is actively looking for franchisees to buy 17 corporate-run stores in Indianapolis, Kansas City, Oklahoma City and Tulsa, according to company spokesman Brian Luscomb.
All the locations are relatively new, he adds, and are part of the company’s broader strategy of testing markets with company-owned restaurants and then selling to franchisees.
Today, 72% of the company’s 2,221 locations are franchised, up from only 22% of its 2,006 restaurants in 2004. It hopes to sell another 80 to 120 by the end of this year, he adds.
“Wall Street security analysts think dollar-to-dollar royalty cash flows are more valuable than restaurant operating cash flows,” says Kevin T. Burke, managing director of Trinity Capital LLC in Los Angeles.
Burger King was taken private in 2010 by 3G Capital, a New York-based investment firm, and will soon become publicly traded through a merger with a shell company.
John Gordon, a restaurant analyst in San Diego, believes that the company-owned Burger King restaurants expected to go on sale in the coming months are likely to be poor investments.
“The problem is that the unit economics are so bad,” he says. “Because of bad store management over the past 40 or 50 years, you got all these beat-up stores.”
Mr. Ackman, the hedge-fund founder, disagrees with that assessment. “Yes, there are stores that need to be upgraded. But it’s a good investment,” he says.
Last month, Burger King announced that Carrols Restaurant Group Inc. TAST +1.90% of
Syracuse, N.Y., will acquire 278 of its company-owned restaurants for approximately $15.8 million, or about $56,800 per unit. The deal—which will make Carrols the system’s largest
franchisee world-wide with a total of 575 locations—includes a commitment by Carrols to renovate 450 of the stores over the next 3½ years. Burger King agreed to purchase a 28.9% equity stake in Carrols.
Steve Wiborg, president for Burger King’s North America operations, says the Carrols deal isn’t representative of the typical transaction. He declined to comment on prices for the remaining company-owned Burger King restaurants up for sale.
According to Mr. Gordon, the cost of a single Burger King restaurant generally ranges from
$600,000 to $800,000.
Mr. Wiborg said forthcoming sales of company-owned Burger King restaurants will likely include transactions involving just two or three units and that some may require remodeling. He added that the cost of remodeling a Burger King restaurant to current standards ranges from $275,000 to $375,000, depending on the size.

Restaurant Research LLC: Think Piece – Brand Strength

“Restaurant Theory” always has held that eating out propensity was a function of convenience (consumers stretched for time), flavor profile, price, along with growth in disposable income, urbanization, travel and mobility. Restaurant success then supposedly followed these broad macroeconomic waves. But an important addition to the theory now apparent is that brand matters.
While macroeconomics is important, it doesn’t explain the following:
McDonald’s: a 64 year old concept that just recently delivered an 8th year of strong worldwide sales, unit growth and profitability performance has managed to build AUV, customers and unit locations almost every year, despite the macroeconomic waves.
Subway, which now outnumbers even McDonald’s store counts world-wide, was able to post double digit same store sales gains in 2008/2009, realized in the utter depths of the Great Recession.
• How some restaurant institutions (think: Howard Johnson’s, Burger Chef, Bill Knapp’s, Steak N Ale/Bennigan’s) have totally or almost totally disappeared despite rising incomes, and the rising food away from home consumption? Even some current fast casual names (like Pat and Oscar’s and Daphne’s Greek Café) have struggled despite all their press buzz.
• How Chipotle, a phenomenon in its own right, has gone from an AUV of $652,000 in 2000 to almost $2 million today, despite a vastly oversaturated domestic restaurant market and lingering economic weakness marked by high unemployment and underemployment in its core customer ranks.
The DNA and composition of the brand, which transcends macroeconomics, is responsible. Beginning in 2005, and especially since 2008, we see much less that individual company trends move in lock step with the macroeconomics. There are more outliers, more bifurcation. Strength of brand DNA shows up with consumer interest, loyalty and frequency. It shows in the M&A world, affecting EV/EBITDA multiples. It
shows up in the stock market via PE multiples. And it shows up in credit risk and interest rates.
To be sure, same store sales, return on capital invested, unit growth – the classical three drivers of restaurant company value – is important. So too is store level economics, and new product news.
However, restaurant success is not just about “new wave” companies, management strengths, company culture, board governance, amount of leverage and debt, privately held v. public or private equity motivations, marketing budget size and efficiency, number of media GRP points, coupons, pretty restaurants, geographical development zone,
stock valuation, CAPEX and remodeling, company owned v. franchising and management skills. Nor is it only about taste quality, service value and other differentiators.
Rather it seems that a holistic sum of all these influences is needed for success – it’s not just what the consumer sees or believes, but literally a stew of these factors that drives brand value. For investors, it is complicated. But restaurants are the sum of thousands of moving pieces.
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Our special thanks for this insightful Think Piece to author John A. Gordon who is an independent chain restaurant analyst, and his firm, Pacific Management Consulting Group 100% focuses on chain restaurant analysis and advisory engagements. John can be contacted at

The Orange County Register: Chick-fil-A’s Controversy Fallout

Chick-fil-A Chief Operating Officer Dan Cathy’s recent reiteration of his long-time support of “the biblical definition of the family unit” in “The Biblical Recorder” caused a national controversy.
Gay marriage proponents called for boycotts and staged ’kiss-ins” at restaurants. Several politicians announced plans to block Chick-fil-A’s applications to open new restaurants in their jurisdictions. And company supporters turned out in record numbers for a Chick-fil-A
Appreciation Day Aug. 1.
Standing at ground zero of the controversy were more than 1,600 franchise owners of Chick-fil-A restaurants in 38 states plus the District of Columbia. Orange County has 14 units.
Chick-fil-A is the latest example of the intertwined relationship — for good or bad — between franchisors and their franchisees. Companies that have good relationships and communications with franchisees weather such storms, several experts said. Those that don’t, have bigger problems than the immediate dustup.
Consider Econo Lube N’ Tune, once based in Newport Beach. In 1999, the state Dept. of Consumer Affairs sued the company for stations doing shoddy and unnecessary work. The accused stations were company owned, but the franchisees suffered financially because of the bad publicity. The company eventually filed for bankruptcy.
By comparison, the impact on Chick-fil-A franchisees – the company calls them operators and the relationship is not traditional franchising – has been mild so far and may be positive.
The Torrance Chick-fil-A was hit by negative graffiti, and many opponents posted angry comments, articles and videos online. Brandindex, which tracks online perceptions of brands, said that as of Aug. 3, Chick-fil-A’s score has dropped 55 percent since the article quoting Dan Cathy was published.
However, privately held Chick-fil-A, which does not release financial data, said the Aug. 1 Appreciation Day “was a record-setting day” for sales.
John A. Gordon, principal at Pacific Management Consulting Group in San Diego, projects that the average Chick-fil-A had a 29.9 percent spike in sales to $10,320 and 367 more customers on Appreciation Day than on an average Wednesday.
He noted that when companies have a one-day promotion, it tends to take sales and traffic away from other days. But in Chick-fil-A’s case, the appreciation event was not created by the company’s marketing department. Supporters of the company and First Amendment free speech rights showed up and spent money without coupons or special discounts, although the long-term impact on franchisees’ business remains to be seen.
“CFA gained a lot of free publicity and energized its base customers, at least for now,” Gordon said. “It also did not discount (to attract business on Appreciation Day). Its hard for other (quick service restaurants) to get that kind of daily pop without a discount or giveaway of some sort.”
Chick-fil-A was already doing well financially. Pacific Management Consulting, whose reports on franchise performance are widely watched nationwide, has estimated that in 2010 Chick-fil-A had the industry’s highest average annual sales per unit of $2.7 million. By comparison, McDonald’s had $2.4 million and El Pollo Loco, $1.4 million.
Chick-fil-A does not use the standard franchising model of growing by using other people’s money, which includes initial fees in the tens of thousands of dollars and royalties plus franchisee ownership of real estate, said Don Sniegowski at Blue MauMau. A new Chick-fil-A operator pays $5,000 and the company finds and pays for the location and restaurant. The company gets 15 percent of sales, collects rent and splits remaining profit with the operator.
Chick-fii-A wants hands-on, single unit operators, not multi-unit franchisees as some other companies seek.
Sniegowski estimates that Chick-fil-A operators average $190,000 a year take-home profit and “some make substantially more,” based on franchise disclosure documents, which must be filed in some states, and other information. However, operators cannot sell their franchise or pass it on to heirs.
Still, that strong financial return “allows Chick-fil-A to be extremely choosy about who runs its restaurants,” he added. “Company officials say Chick-fil-A gets 10,000 to 25,000 applications for roughly 60 to 70 new (operators) each year.”
And none of the people who make it through the selection process to become an operator should be surprised about the owners’ Christian worldview. The company website states that the corporate purpose is ’to glorify God by being a faithful steward of all that is entrusted to us.” All restaurants are required to close on Sunday.
Still, some operators did not want to be embroiled in the Dan Cathy controversy. No local franchisees would comment for this story, but Mark and Heather Howery, operators of the Chick-Fil-A restaurant in Fullerton, posted on their Facebook page, “… The company COO shared his personal views on marriage and family when asked about it in an interview. He does not speak for us as independent owners just as your boss does not speak for you as individuals. As the business owners we do not take issue with any group of people including the gay community.”
Franchise consultant Ed Teixeira, president of FranchiseKnowhow, LLC, said few franchisees in any organization would criticize the company because it might impact the value of their own business. “Franchisees are principally concerned about their own finances… Among the 1,600 (Chick-fil-A) locations, some may not agree with the company but I haven’t read anything about that. That goes back to the strength of the company’s relationship with franchisees and (the controversy) didn’t hurt franchisees financially.”