A little over a year ago, the Subway franchisor entity, Doctor’s Associates Inc. was finally able to get itself sold to ROARK, the huge private equity group. With one of the longest M&A cycles—9 months– known in the restaurant space, and with over 70 investors signing and looking at the Book either not being interested or bidding too low, a floor purchase price of $8.995 billion plus another $600 million in terms of earnout was finalized There was a valuation gap between seller and buyer, hence the earnout, based on future cash flow performance. The EBITDA multiple was not announced, but the best belief is that it was in the 11-12X range.

The problem is that US Subway conditions are not getting any better. While sales/per unit (AUV) were said to be up in 2023, recently the SSS was confirmed to be down 10-15%, depending on region. While a whole new sandwich platform in the US was developed in 2023, Subway discounted the new items immediately. Currently, every sandwich is discounted via a $6.99 LTO national app offer.

While discounting is common in US QSR operations, Subway has always been a heavy discounter. The current offer discounts the whole menu at one time, which is very unusual. To counter franchisee angst, we understand that Subway Corporate is noting there is no variable labor or OPEX associated with discounted sales, to justify the low selling price. [That notion is incorrect]. See the New York Post report.

In addition to the impact of more franchisees closing [Subway lost 7000 units over 2015-2023; a 25 unit franchisees closed in August in Oregon due to very low sales and unit EBITDA], the Subway entity must service principal and interest outlays on the $8.995 acquisition. We can assume ROARK won’t want to inject more cash into the deal if Subway runs short.

Subway’s current foundational problems were decades in the making. Common sense Restaurant Management 101/301 level practices can help them to dig out.

Exclusive | Subway soda war forces owners to choose Pepsi over Coke or risk losing franchises (nypost.com)

Once hailed as a concept that cracked the code on offering healthy fast food at affordable prices, the Los Angeles-based chain has retrenched. What happened?

By Lisa Jennings on Aug. 23, 2024

Please click here to read the full article: https://www.restaurantbusinessonline.com/emerging-brands/everytable-resets-its-table

The restaurant industry, always dynamic, has gotten even more dynamic. A foggy logic seen in the past has now given way to an element of mania in it. The industry survived the Pandemic, but we are still rocking in its aftermath. Tension has spiked in the last 50 to 80 days; no wonder that most stocks are down. But of course, restaurants are always investable, there are things to do no matter the cycle, to get well positioned for the next.

There are so many meaningful issues and contrasts now, that we have to step back and ponder the overall situation. Context really matters in the analysis: the natural reaction of human principals to recite conclusions that support their position, and what is good for them personally. As such, opinions, management systems, data, and courses of action need special review. Not endless cycles of analysis as we are in an ever-changing consumer, but our systems need to be better grounded. Consider the following in real-time:

• How did Starbucks get the most expansive CEO succession to Howard Schultz so wrong in 2022-2023? Along the way, how did Starbucks over invest in the China market which is now jammed full of lower-priced coffee brands? And how did basic café operations deteriorate such that Starbucks US is known in some quarters as both slow and expensive?
• How did the industry pricing machine so overprice over the years even before the effect of commodity and labor inflation really began? To the extent now that we have virtually a worldwide guest obsession with price, on our hands? The industry took routine pricing actions of 3% annually for decades—until about 2019. All of the readers of this newsletter are well-versed in cost recovery and reading sales, traffic, check, and mix.
• Why is it that the industry hasn’t found a solution even yet to the reality of producing and opening twice as many restaurants per capita versus that of US population growth? We know why it is occurring but no one can address it.
• Back to the Starbucks/Chipotle shuffle this week, it was reinforced that we as an industry are not producing the grounding for great CEOs. Bian Niccol’s entire supportive background should be studied to see how he learned and developed. In our universal quest to reduce G&A costs, we have to remember resources must be left for people, to build and maintain a great team.
• And despite our well-developed restaurant reporting, consensus data, and earnings cycle emphasis, the stock market can get away from us, on certain brands. Consider Dominos (DPZ) which had stellar results but was punished by the market in July.

Sales, Traffic, Mix, and Profit Trends  

Despite fairly strong job growth, usually, our number one sales catalyst, weak consumer sentiment is the talk of almost every restaurant, retailer, and consumer company. While the restaurant standout brands are doing very well, getting sales and traffic gains, covering inflation, and picking up restaurant margins through positive leverage, many are not. A trend seen in Q2 was that sales shortfalls were covered by G&A cost savings. Of course, in a soft market, variable compensation trends like stock payouts and bonuses are expected to be down, aiding the G&A reduction. However, some company-owned and franchise organization structures have been ”hollowed out” for years. This is not good to produce more Brian Niccol(s) over time.

In July, restaurant demand fell off. Spending growth slowed across all income cohorts. The QSR and Pizza sectors registered more declines. The QSR spending declines were despite a price war that is underway throughout the segment. Despite worldwide attention, McDonald’s $5/$6 price combination (varied) seemed to generate very modest traffic gains, 2-3% for a time, that could not be enough to offset the discounting. McDonald’s will talk about the traffic gain as a huge win. Despite new products, discounting, and unbelievable amounts of TV and digital, one very large, nonpublic QSR brand is tracking down 7-9% in SSS and double-digit traffic losses. Fast casual remained positive but down sequentially; recent casual dining trends had a strong decline, to negative month to month.  Store-based spending turned into negative territory; online spending remained positive but sequentially lower. [Source and Hat Tip: Bank of America and the Sara Senatore team].

Costs are said to be “deflationary” but in reality, the rate of increase is down from the late 2022-2023 disaster. Listening to earnings calls, food/commodities are up 2-3, while labor rates are plus 5-6%. So P&L efficiencies are required, along with extremely low price changes. So then restaurant-level margins could be up or down, depending on sales leverage, mix, and efficiencies.

Capital spending (CAPEX) for new units and remodels cost remains much higher than 2019; permitting problems remain. To brick-and-mortar CAPEX, companies including franchisors must fund IT/digital/loyalty OPEX and CAPEX. As a result, buildings have to be more cost-efficient. Many industry operators know this and have made progress, larger legacy units will be a drag.

There is always money to be made in the restaurant business, but we need profitable sales and non-price-driven P&L efficiencies.

Franchise M&A conditions are much slower. 

I always listen to the quarterly Unbridled discussion forums. Rick Ormsby and team are among the best and have a dramatic QSR practice. They reported recently that while they have some transactions, 2024 is very slow and many franchisees are not selling. Many are hoping for the 2021 level of sales/margins and multiples to return.  Never say never, but we have to accept that the 2021 period is not to be seen again. They noted some unit EBITDA percentages are very low and need to be in the 15% or higher range. That number has been confirmed many times. They noted that EBITDA multiple turns are a full 1.5 turns (150 basis points) lower than in 2021.

The top-tier brands are still doing well, and a 5X multiple is a good number. One recommendation: before a sale transaction, attempt to weed out the very unprofitable units. I’ve found in my engagements there is more review of clusters and individual underperforming units.      

Bankruptcy Notes

We all know that restaurant Chapter 11s have risen dramatically and that there are several core reasons. Larger debt amounts and leverage, sales, and unit margin percentage and dollar deterioration, failed acquisitions, and static company guest mix trends to the most unprofitable type are driving reasons. Franchise over-expansion and cannibalization are the reasons also. Franchisors need more brand disclosure metrics so that unit counts are not the only metric seen.

The impact of private equity companies taking loans or dividends recapitalizations, that stress debt levels are seen. These issues were present in both Red Lobster (selling real estate and a corresponding new rent burden) and Rubio’s (sponsor took a loan). Not all private equity firms do this of course.

There are more to come. For an engagement recently, I identified one public brand that is shaky, one brand holding company, three major franchise brands, and four non-public brands as very risky.  Overall, we need more attention to balance sheets, which are always less visible.

Starbucks and Chipotle: What to do?

The movement of Brian to SBUX and the stock declines at Chipotle speak to the key leader factor. SBUX stock gained the most ever on August 13, CEO announcement day, when Brian’s move was announced. Starbucks requires much more customer segmentation studies than what we have heard. During Laxman’s administration, the quality of earnings call disclosure deteriorated. In the US, the essential tension is between “maintaining the coffee focus” versus new products. In my opinion, since the addressable market, particularly in some age cohorts has changed, new product and concept development is critical. The Starbucks slow and expensive can be fixed.  I know how.

The China question is a key issue for Brian, the Board, and the China division leadership. One reality is that the China market is flooded by lower-cost and expanding brands like Luckin. A coffee price war is underway, per Asia experts.  Should new unit expansion be curtailed? Would it pencil out to refranchise China to a great master franchisee? I can imagine the numbers but no one outside of SBUX has the real numbers and potential. What Starbucks has said recently has little backup and seems dated. This is where context matters.

About the author:

John A. Gordon is a restaurant analyst and management consultant, with long experience in operations, corporate staff (20 years), and via his consulting firm (21 years), Pacific Management Consulting Group. He works in investor advisory, earnings and economics, M&A review, brand organization reviews, and of course, franchising engagements. Call him to talk about your issues, he will have useful and actionable input. He is at (858) 256-0794, email jgordon@pacificmanagementconsultinggroup.com.

The Paul Singer-led insurgent fund is engaging with the coffee chain, which joined our Watch List of possible activist targets after it cut earnings and revenue forecasts.

By Ronald Orol

July 22, 2024 11:42 AM

Elliott Management Corp. has accumulated a large stake in Starbucks Corp. (SBUX) and is agitating to improve the coffee chain’s stock price, The Deal has confirmed.

Consequently, Starbucks becomes a Direct Hit and comes off The Deal’s Watch List of possible activist targets.

The chain joined the list July 12 after it cut fiscal 2024 earnings and revenue forecasts and reported that store traffic slipped 7% during the quarter ended March 31.

Starbucks shares jumped 6% following a Wall Street Journal report issued Friday, July 19, suggesting that Elliott has been engaging with the company. The chain and activist fund could reach an agreement privately soon, the report added.

Even with the spike, however, Starbucks shares are down 23% and 20% over the past 12 months and five years, respectively. Shares dropped significantly after the chain issued its dismal April 30 quarterly report.

It’s unclear whether Elliott, which declined to comment, may seek to shake up Starbucks’ board. The two sides could be negotiating over directorships.

Board Refreshments

There are several red flags associated with Starbucks’ directors.

No director on Starbucks’ 11-person board has direct coffee industry experience and only one, Richard E. Allison Jr., a former Domino’s Pizza Inc. (DPZ) CEO, has direct experience in quick-service restaurants, according to relationship mapping service BoardEx Inc.

Allison joined the board nearly five years ago, making him a newbie relative to board chair Mellody Hobson, who’s been a director for more than 19 years and could be considered overtenured. Hobson, a rare African American board chairman, has served as chair since 2021, and she has been co-CEO of Ariel Investment LLC, an investment management firm, since 2019.

Starbucks’ board could be vulnerable because it doesn’t contain anyone with multi-unit coffee chain or small-box retail experience, explained John Gordon, principal at Pacific Management Consulting Group.

“That isn’t right,” he said. He added that Allison is a positive board member, as he has QSR experience, including supply chain expertise, which is important.

However, Gordon noted that Domino’s and Starbucks are very different. “Domino’s has a supply chain in it, but they are talking about pizza and dough. Coffee is very different,” he said.

Gordon added that Starbucks should be able to find top-level former executives at other key coffee chains, such as Tim Hortons, Costa Coffee or Luckin Coffee Inc., which competes with Starbucks in China. “From a cultural standpoint, it is essential to have someone from China on the board because Starbucks has major competition from Luckin,” Gordon said, noting that China is Starbucks’ largest market outside the U.S.

In addition, a conflict may be emerging between CEO Laxman Narasimhan, who was installed in the top position in March 2023, and the Starbucks founder he replaced, Howard Schultz. A 1.9% holder, Schultz has held the title of chairman emeritus since September, though he noted recently that he doesn’t receive internal financial information about the chain.

The Starbucks founder has made some comments suggesting he could start agitating. Speaking on a June 3 episode of the podcast Acquired, Schultz said he can’t ignore a situation where the “company is doing a drift towards mediocrity,” and if that occurs, he would “hold leadership and the board accountable.” He added that “the company hasn’t executed the way that I think it should have,” though he added that he has no desire to return as Starbucks’ CEO.

Gordon said it’s essential to get Schultz back on the board. He added that perhaps Starbucks could install Schultz in a nonvoting but participatory capacity “where he could have a lot of influence but not overly dominate the board.”

Elliott hasn’t followed through on a director battle at a U.S. corporation since its 2017 contest at Arconic Inc. As a result, one adviser in the activism category said Elliott is “very aware” that it needs to do another serious campaign to keep its “fear factor.” The director nomination deadline for Starbucks’ annual meeting expected in May is Nov. 13. Even so, a contest at Starbucks would be a major undertaking for Elliott, as the chain has a $90 billion market capitalization.

In addition, Elliott hasn’t filed an activist 13D filing, and it’s likely the activist investor has accumulated a large cash-settled equity swaps position, rather than common shares, to back its campaign.

Nevertheless, it’s possible Elliott could be seeking to partner with Schultz to launch a campaign seeking to install the coffee chain’s founder in a full-time director role. Insiders, other than Schultz’s near 2% stake, hold very few shares and Starbucks’ three largest holders are Vanguard Group Inc., BlackRock Inc. (BLK) and State Street Corp. (STT), with a collective 18% stake.

Activists often push retailers to franchise locations, as a means of raising capital for debt reduction or share buybacks. For Starbucks, however, franchising isn’t seen as a viable solution. “There is no question that it would not pencil out,” Gordon said. “[In the U.S.], you cannot take a Starbucks company store now, which is averaging a 20% contribution margin, and make it work with a 5% royalty — which would essentially be the franchise contribution — coming in.”

Elliott Pivots Towards Operational Activism

It’s likely Elliott has privately launched an operationally focused activism campaign at Starbucks, even though the activist fund often encourages M&A as part of its efforts. Elliott appears to have partly pivoted toward operationally focused activism campaigns, as the M&A market has slowed, Barclays plc global head of shareholder activism Jim Rossman said.

“Look at Elliott Management, a bellwether of where activism is heading. Their campaigns in the first half of 2024 are focused on governance, operational and management changes,” Rossman said.

Paul Singer’s activist fund produced 11 campaigns in the U.S. and globally in the first half of 2024. Three of Elliott’s biggest campaigns of 2024 — at Southwest Airlines Co. (LUV), Texas Instruments Inc. (TXN) and SoftBank Group Corp. — have all steered clear of M&A demands.

In June, Elliott launched a campaign urging Southwest to reconstitute its board and bring in new leadership from outside the airline to address share price performance.

At Texas Instruments, Elliott expressed concern that the chipmaker risks building more semiconductor production capacity than it needs if it continues to press ahead with a capital spending plan it announced in 2022. Also in June, Elliott initiated a campaign at SoftBank urging it to authorize a $15 billion share buyback.

Nevertheless, Elliott has kept M&A as part of its agenda in some situations.

Goodyear Tire & Rubber Co. (GT), for instance, on Monday said it will sell its off-the-road tire business to Yokohama Rubber Co. Ltd. for $905 million. The sale comes after Goodyear in January named a new CEO after it launched a strategic review for some noncore assets including the OTR tire business. Two activist portfolio managers at Elliott greeted the M&A review, launched in November, as a “significant step towards a stronger and more profitable” company.

Starbucks declined to comment.

McDonald’s $5 meal deal drove a “notable” bump in diner traffic and is helping to capture customers from rivals, according to a company memo to franchisees.

Please click here to read the full article: https://www.bloomberg.com/news/articles/2024-07-31/mcdonald-s-says-5-meal-is-starting-to-reverse-traffic-slump?srnd=undefined

The years-long investigation into FAT Brands chairman Andy Wiederhorn and his company continues, though the situation doesn’t appear to be impacting franchisees and it’s unclear if it will affect a potential Twin Peaks public offering.

The U.S. Securities and Exchange Commission and the U.S. Department of Justice charged FAT Brand’s former CEO in May, claiming Wiederhorn misappropriated company money for personal expenses. Wiederhorn, who remains company chairman, and others were criminally indicted in Los Angeles by a federal grand jury for tax evasion, wire fraud and other counts.

From what I’m told, these charges aren’t bothering franchisees or impacting their sales. It’s important to note FAT Brands provided me with these franchisee comments. None of the 10-plus franchisees I contacted agreed to an interview.

“Sales at our locations remain strong as the general consumer is focused on the food itself and the experience—not outside noise,” Fatburger franchisee Spike Garcha wrote. “We look forward to continuing our long, fruitful relationship with the FAT Brands team.” Garcha signed a 14-unit development deal in 2022 in Florida.

“I have seen it all—the beginning of the acquisition activity, the formation of FAT Brands, FAT Brands going public, and so on,” wrote Frank Di Benedetto, CEO of FDF Restaurant Brandz, which started in 2005. “I respect what FAT Brands has built under Andy’s leadership and I am proud to be a Fatburger franchisee.”

Funding a ‘lavish lifestyle’

The gist of the parallel investigations is Wiederhorn received $47 million in distributions that were recorded as shareholder loans and subsequently forgiven, in order to evade personal income taxes. Former FAT Brands CFO Rebecca Hershinger and Wiederhorn’s tax adviser, William Amon of Andersen, were also criminally charged.

In 1998, Wiederhorn founded Fog Cutter Capital Group. He started subsidiary FAT Brands in 2017. Fog Cutter owned 80 percent of FAT’s shares and the two entities merged in 2020.

FAT Brands issued a $30 million promissory note to Fog Cutter after Fog Cutter transferred ownership of Fatburger and Buffalo’s Cafe (FAT’s only two brands at the time) following the 2017 IPO. The $30 million was paid off by September 2018, according to court documents, but Wiederhorn allegedly continued transferring “millions of dollars” to Fog Cutter. The SEC alleges FAT Brands loaned Fog Cutter $28.3 million between July 2018 and December 2020, about $20 million of which was used to fund personal cash transfers to Wiederhorn.

“These transfers included payments for private jets, first class airfare, luxury vacations, Wiederhorn’s mortgage and rent payments, and nearly $700,000 in shopping and jewelry,” the government alleges

Wiederhorn, the subject of a Franchise Times cover story in 2018, pleaded guilty in 2004 to federal tax charges involving another company he ran, Wilshire Credit Corp., and spent 14 months in prison.

Wiederhorn’s attorney, Doug Fuchs, said his client had a “legitimate shareholder loan agreement with Fog” since 2010. In 2018, “Fog entered into a new shareholder loan agreement with Mr. Wiederhorn on the same terms. FAT was not a party to and was not otherwise involved in these shareholder loan agreements,” which were disclosed to investors, Fuchs said over email.

Fuchs says the promissory note was “extinguished at the demand of a third-party lender” in 2018. Fog Cutter apparently agreed to trade the outstanding balance for FAT stock so FAT could purchase Hurricane Grill & Wings. From 2018 to the 2020 merger, FAT loaned money to Fog Cutter, Fuchs said. “The intercompany loan proceeds were used to help pay Fog’s debts and fund the shareholder loan between Mr. Wiederhorn and Fog,” he wrote.

FAT Brands declined to comment on the charges.

Potential overhang

Twin Peaks, one of FAT’s 16 brands, is exploring an IPO. The impact of FAT’s and Wiederhorn’s legal mess on the valuation is unclear.

“The overhang because of Andy might be best defined as the unknown, in terms of if Andy is found guilty, what happens to FAT Brands’ capital structure,” said John Gordon, a restaurant analyst at Pacific Management Consulting Group. “There’s a complicated capital structure of loans that has fueled the growth of FAT brands, really starting during the pandemic.”

Twin Peaks CEO Joe Hummel told Franchise Times in June the brand is “unaffected” by the legal issues. “We are very siloed and pretty much stand on our own as a company without shared services,” Hummel said. “Because of that we have been able to operate successfully with the platform above us but really on our own.”

Prior to the charges, Gordon said he was unaware of “all of this internal money being shifted back and forth to Fog Cutter.” He continued, “What I could gather is that there’s a lot of debt supported by the EBITDA. So the goal of this IPO is to sell it and then to take the proceeds, or at least most of the proceeds, and then to pay down debt. And that’s a very solid financial strategy.”

Brand leaders often do a “road show” prior to an initial public offering “to display the wares of this new IPO,” Gordon said. “Is Andy really going to feel comfortable going out on a big road show given his current status? That’s what I see the issue to be, but most of the attention will be on the quality of the earnings to date.”

Wiederhorn did present June 27 during a virtual equity conference hosted by investment bank Noble Capital Markets. The company, he said, is on track to do about $2.5 billion in systemwide sales across all its brands this year, and “we hope to see Twin Peaks as a public company at the end of the summer.”

FAT Brands’ stock price fell from $7.58 May 9, the day before charges were made public, to $5.42 May 10—a 28 percent decrease. Share price varied through mid-July, but stayed below the May 9 high.

What comes next? Federal prosecutions aren’t known for their speed. Wiederhorn noted in his Noble presentation he doesn’t expect a resolution with the SEC until 2025 or 2026. That’s a sizeable shadow being cast over Twin Peaks’ potential valuation and FAT Brands as a whole.

Emilee Wentland is managing editor of Franchise Times, and writes the Continental Franchise Review® column in each issue. Send interesting legal and public policy cases to ewentland@franchisetimes.com.

Starbucks is the world’s largest coffee house with over 20,000 stores.

By Jean Haggerty

July 12, 2024 09:24 AM

Please click here to read the full article: https://pipeline.thedeal.com/article/00000190-a1a4-d933-adf3-b3ede6890000/deal-news/features-and-commentary/activist-target-tarbucks-may-need-an-extra-shot-of-activism

The downfall of Red Lobster suggests consumers are parched for value.

Please click here to read the full article: https://www.nytimes.com/2024/05/24/opinion/red-lobster-bankruptcy-economy.html

Red Lobster has filed for Chapter 11 bankruptcy and leaders plan to seek a buyer for the financially troubled seafood chain based in Orlando.

Please click here to read the full article: https://www.orlandosentinel.com/2024/05/20/orlando-based-red-lobster-bankruptcy/

The $220 million all-stock deal would get Fridays’ owner TriArtisan out of its decade-long investment and give the struggling chain a like-minded partner in franchisee Hostmore, experts say.

By Joe Guszkowski on Apr. 19, 2024

Please click here to read the full article: https://www.restaurantbusinessonline.com/financing/proposed-tgi-fridays-sale-no-home-run-has-promise-both-sides

by John Gordon, Principal and Founder, Pacific Management Consulting Group

Negative consumer and earnings conditions in January-February:  Sorry to say, but February chain SSS results were the weakest since 2021, same month per Black Box. That was bad enough. The factors: all the usual problems at this time of year, including bad weather, negative traffic, and secular weakness at virtually all casual dining and fine dining operators. And a few factors: average check rate declines. The industry has [mostly] slowed up price increases, so much so that ticket increases are not covering traffic declines as before. However, our pricing, lower as it may be, in March was 4.5%[1]  versus 1.0% food at home. [2]  So we are still in a poor position versus grocery stores. The February Black Box index was -.6% SSS and -2.3% traffic.  [January SSS was -4.5%]

Fast casual and QSR brands were marginally positive while, casual dining and fine dining were quite negative.   Even casual dining powerhouse Darden had marginally negative SSS in all reporting groups except LongHorn last quarter.

So, with some 45 years in corporate staff and management consulting FP&A roles and engagements, I have always been known as a pricing and margin recovery guy. But with the magnitude of pricing we have taken, and the inability of the consumer to deal with the cumulative price increases taken, we are in real trouble.

Michael Halen /Bloomberg View: K Shaped Is the Word

I asked my good friend, Michael Halen, the senior restaurant analyst at Bloomberg, to provide his perspective on consumers and restaurant sales trends.  Michael noted: “ A K-shaped economic recovery [upper track, lower track] and three years of aggressive industry price hikes may fuel a greater divergence between low and higher income consumers; and quick service and full-service restaurant sales.

Year-over-year comparisons will get easier in March and should give results a lift through year-end, but cross currents will affect chains to varying degrees. Weaker low and middle-income consumers, hurt by high credit card balances and delinquencies, could pressure casual dining chains more than quick service due to higher guest checks. Fine dining sales may pick up as the segment laps over weak 2023 results and high-income spending is buoyed by rising stock, home, and crypto values.”  Thank you mhalen1@bloomberg.net

Fast Food Pricing War Redux?

McDonald’s has led the way for the last two quarters warning of the weakness of guest traffic of the $45K and under income cohort. It can be the most powerful QSR marketer in the world, and its reference power across worldwide industry is immense. It is not reacting particularly creatively to the $45K cohort problem [big discounting across the menu under $3.99 has been announced], and the risk is another fast food pricing war could be set off. It seems to me that publicly traded franchisors get paid off the top line [and comps], although it is very true to note that MCD has very difficult compares in 2024 due to a very successful 2023. A pricing war, which sets back the industry, can be averted by true leadership and creativity at MCD.

How? The industry has used variations of a HI/LO offer strategy forever. The NOA franchisee association pointed out that MCD created lower-priced wrap products and others in the past exactly at the same time of need, but MCD has ignored that input.  With all the progress the industry has made in digital and targeted marketing tactics, a fast food war would be a very disappointing outcome in 2024, in my view.

Dispatches from the California Mess 

On April 1, California AB1228 went into effect that among other things, jumped fast food restaurants minimum wage [with more than 60 national locations] to $20, a $4 immediate jump. In my experience opinion, this jump will cause compressional wage increases throughout the QSR store crews and will affect other non-QSR restaurants as well.  The implications of AB1228 have been extremely well covered by local and national press.   Publicly traded restaurant brands with a concentration of units in California noted they would employ a mix of pricing and other tactical efforts to offset the negative margin effects.

Now, we have some early data in. Our friend Lauren Silberman at Deutsch Bank published a note on April 2 (DB, California Pricin) that reported on some brand’s CA pricing actions around 4/1. For example, Chipotle increased on average by 7-8%, Starbucks increased by high single digits on average, Mcdonald’s was largely unchanged,  Shake Shack was unchanged in April [but prices taken in March], Taco Bell took 3-4% price. JACK store pricing was mixed.  No price increases at Papa John’s. Only one of five Dominos units tracked took price. Sonic (Inspire) raised prices 3.5-4.5%. Other than one menu item adjustment at Olive Garden, the casual diners did not increase prices.  No CA price increases at Sweetgreen [earlier system price of 3% on 2/21], Cava or Wingstop [yet].

And more California analysis: my friend Lisa W. Miller is tracking California consumer conditions via her proprietary research systems. She has recent data just reported. Through Q1,   66% of California consumers have pulled back on dining out due to high prices, versus, 63% of the nation as a whole. And now, diners in California have proportionally pulled back in support of higher wages versus lower dining costs (39% in CA versus 43% in total US). 65% of CA consumers are concerned that laws that force higher pay for restaurant workers will drive menu prices higher. [3]

So, we will watch California carefully, but unfortunately, the stage is set for a sales and earnings drag there. Special visibility will need to be worked for the franchise brands, as most public brands do a poor job of reporting franchise store economics.

What’s up with the rash of C-Level Turnover?

In the last two months, there has been a lot of turnover at the restaurant C-Level. Turnover has variable effects on restaurants. For some, the entire corporate focus and structure changes. It is high anxiety for staff. Of course, change is not always a bad thing per se, especially if it is a part of a new investment at the organizational renewal.  Other kinds of turnover are more telling, such as when Kelly Valade resigned after only 8 months at Red Lobster; they never were able to get another CEO again. Here is a sample of recent turnover:

• Swig CEO Rian McCartan departed on March 29.
• Dave Graves departed as president of Pizza Hut US, on March 22
• Papa John’s CEO Rob Lynch departs for Shake Shack CEO opening, on March 27
• Smashburger names Denise Nelsen, former SBUX Ops executive, as CEO
• Francis Allen is stepping down as Checkers&Rally’s CEO, on April 4

I have a behavioral momentum/wave view of some things and thought earlier when prior Wendy’s CEO Todd Penegor was shown the door after 8 years in January that would open the turnover doors. I asked my friend, Kevin Stockslager, Partner at Wray Search for his expert analysis. Stockslager noted:

“Turnover was expected to be high in 2024. Reasons include that the industry is still reacting to the massive changes from COVID. In addition, the sophistication in industry technology has caused firms to shift to leaders capable of enhancing this area of the business. While conditions have stabilized a bit, there is still some economic uncertainty which tends to result in leadership changes. Finally, C Suite leaders operate in an environment of many different stakeholders. Differences in short-term goals and philosophy versus long-term often result in leadership changes.’’

The effects of this C-level surge will be fascinating to watch. And the old adage from the business development wizards of the management consulting industry is to give a new CEO 180 days for break-in and familiarization before making marketing calls. The same might be true here.

Mysteries of Franchising Explained: Big Money in Franchising: Scaling Your Enterprise in the Era of Private Equity

Amazon Link: https://a.co/d/8YZFwDn

My friend Alicia Miller NACD.DC, CMAA, CFE is a true master of franchising: as a former multi-unit franchisee and founder/Managing Director of Emergent Growth Advisors, she has worked and seen franchising from every angle. She is an expert on how Private Equity has entered and maximized investments in various segments of franchising. The book discusses PE firm’s motivations and management, operating partner career tracks, valuation philosophies, and motivations of investing in a whole brand versus as a franchisee of a large brand.

The book will be an excellent reader for both investors and franchise operators as each has roles in mixing in the franchise/private equity universe. I strongly recommend it, and it is now available on Amazon (see link above) or on the Emergent Growth Advisors website,  https://www.emergentgrowthadvisors.com

M&A Funnel

At the beginning of April, two casual diners, were for sale or soon to be for sale: Bob Evans (from Golden Gate) and Red Lobster (Thai Union). Both brands are in a weak position. Benihana was sold in March for 5X to The One Group.  On April 6, the WSJ drug up last year’s prior musing of the Jersey Mike’s founder that HE MIGHT LIKE TO SELL. I hesitate to report this as new news. More later no doubt.//

About the author: John A. Gordon MAFF is a long-time restaurant analyst and management consultant with 47 years in the industry. He founded Pacific Management Consulting Group in 2003 after 20 years in restaurant staff operations and financial analysis, FP&A roles. Since then, he has specialized in complex brand, earnings, and organizational investigative engagements of all types. He is a certified Master Analyst of Financial Forensics.  He can be reached at 858 874 6626, or jgordon@pacificmanaggementconsultinggroup.com.

[1]   Blended LSR and FSR, per BLS Reports in February.

[2]   Id.

[3]   Nations Restaurant News, Californians Pull Back, Lisa W. Miller, April 1 2024.