Compared to years and decades ago, restaurant managers at all levels have so much more information. When I started in 1978, it was about French fry yields, meat variances, and labor hours versus chart.  Those key performance indicators (KPIs) are still important but now there are real time guest ratings and guest flow indicators to manage.

I’m working a corporate transformation project for an international multibrand franchisee with several US brands. They are very sophisticated and invested greatly in management systems. One of the findings we realized is the data itself seen every month needed to be examined from a 30,000 foot view; one month of results was not a call to action but interesting, rather best seen as a part of the puzzle to be seen from above.  The lesson: take your time but not too much time to see the trend.

A Promising View From Above

We are amid Quarter One restaurant earnings and the results have been spectacular when viewed against 2020. Of course, 2020 is the worst base in the world to compare to as that was the Pandemic year.  Most but not all companies and analysts have shifted their focus to discussion against 2019 as the base. Facteus, the consumer spending reporter based on credit card sampling, shows healthy weekly full service and quick service spending gains versus 2019 through May 4 via their FIRST system.  To be sure, the full-service segment did not hit positive until March when the Biden stimulus funds began to flow.  On Friday, May 7, the number of US passengers clearing TSA gates was 1.7 million, a post Pandemic record, but still, a way to go from the 2.4 million average pre March 2020 and in 2019. [1] Coresight Research reported that via their sampling, more consumers dined at restaurants in late April to May and are resuming general social activities.[2]

Every time that cash has been injected into the economy, restaurant sales have taken off. So it is logical to assume that there will wear off as the funds are spent down. The good news is the stimulus raised restaurant demand into our historical peak months of May-August. While vaccine progress continues, it is slower than we might hope.  I am watching movie and sports events attendance as well as summer travel as factors to offset the wear off of the stimulus effect. We also need resumption of meetings and conventions, which there are promising signs this fall.   Watch this space for future developments.

IPOs, and SPACs in the Restaurant Space: Do Your Due Diligence

Very good signs point to new IPOs coming: Torchy’s and Dutch Bros. are making all the right signs and moves. Torchy’s Taco’s lead by veteran CEO G.J. Hart presented at the 2019 ICR Exchange and its momentum (and good food) then was clear. Dutch Bros. is a small box coffee DT chain in Oregon and Northern CA featuring specialty coffee and is a real draw here. What was more surprising was that Krispy Kreme announced that it had filed private documents with the SEC to go public. It was surprising to me only that JAB Holding, the Luxemburg family holding fund had such strong results with Krispy, especially international results, since 2015.[3]  One very strong motivation: the stock market has soared in most sectors for all kinds of reasons. Investors and prospective companies seek returns.

There is also a literal boatload of restaurant SPACS present, 8 by the count of Jonathan Maze in March.[4]    A SPAC is a specialty purpose acquisition company, which raises money and has two years to make an acquisition. Often, restaurant insiders are part of the board and serve as “rainmakers”. SPACS have been used for years, they offer quicker access to the stock market listing. Burger King was a SPAC listing in 2012. However, due diligence on smaller companies is recommended. For example, the highly promoted better burger BurgerFi went through its SPAC process but then was unable to publish its first annual audited financial statements. As a result, it recently received the routine warning from NASDAQ that it was out of compliance with the Exchange’s rules and that it must comply.[5]

For that matter, most investors prefer the traditional IPO process, with a S-1 disclosure document, roadshows, and known investment banks. I can’t stress the importance of reviewing baseline financial statements (income statement, balance sheet, and sources and uses of cash) and outyear projections critically, comparing to as many different scenarios as possible.

Chicken Sandwich Product Development Note:  New News Please

Early in my corporate staff career (finance), I got the opportunity to work with both supply chain and concept and product development routinely.  As the chicken sandwich wars have covered the globe, imagine my amazement that every chicken sandwich is essentially the same with the same flavor profile. This is just beyond belief. I would have thought there would have been some variability, some chain claiming some unique flavor profile. Apparently not. Of course, I understand the need for QSR simplicity and uniformity coming from that segment initially. Hopefully, some QSR brand can pull off a marketing and product development coup by adding sauces/flavors/seasonings.

About the author:  John A. Gordon is a long time restaurant analyst and management consultant. He specializes in operations, financial management and strategic assessments and reviews for clients, including investor due diligence and litigation support. He is a master analyst of financial forensics (MAFF) and can be reached at jgordon@pacificmanagementconsultinggroup.com, office 858 874-6626.

[1]   See https://www.tsa.gov/coronavirus/passenger-throughput

[2]    Coresight Research, May 10, 2021.

[3]   Restaurant Business Online, The Bottom Line, May 5 2021

[4]   Restaurant Business Online, Here Are All the Restaurant SPACS Right Now, March 17 2021.

[5]   Nation’s Restaurant News,  NASDAQ warns BurgerFi…, April 20, 2021.

By Lisa Fickenscher

April 20, 2021 | 6:40pm | Updated

Enlarge Image

A McDonald’s in Tampa, Fla., recently advertised plans to pay $50 per job interview.AP

The restaurant industry is starved for workers –and some operators are going to desperate lengths to reel in prospective hires.

James Meadowcraft, a McDonald’s manager in Tampa, Fla., recently advertised plans to pay $50 per job interview on the sign outside his location that sits along a busy thoroughfare.

“I tried to make a little splash,” Meadowcraft said of the sign, which signaled that interviews would be conducted Mondays through Fridays at 2 p.m.

But the enterprising restaurateur removed the sign after just two weeks because it failed to lure a single candidate. “No one responded,” Meadowcraft told The Post. “I didn’t even get anyone trying to scam us.”

Experts say it’s a sign of just how difficult it could be for restaurants — from fast-food joints to five-star venues run by celebrity chefs — to ramp up staff as the economy tries to bounce back from its pandemic lows. As The Post has previously reported, low-wage workers are in short supply as generous government benefits stand to pay some people as much as they would if they were working a full-time job.

“The industry is very desperate,” John Gordon of Pacific Management Consulting Group told The Post. “Cash bonuses are not the norm in the restaurant industry.”

Full-service eateries and bars like The Galley and Mary Margaret’s Olde Irish Tavern in St. Petersburg, Fla., have taken to handing out $200 checks to all new hires as of March 25, managing partner Pete Boland told The Post. New employees also stand to snag “a potential raise after a 90-day performance review,” Boland said of the perks he’s advertised in a local trade publication.

So far, however, the offer has failed to lure any prospects, Boland told The Post. “It’s been a month and no one has responded to the ad,” he said.

Even celebrity restaurateurs like Stephen Starr, who operates eateries across the country including Buddakan, Pastis and Morimoto has taken to dangling $300 signing bonuses at some of his restaurants, he told The Post’s Steve Cuozzo.

Starr didn’t return a request for comment about whether the bonuses are working, but Jimmy Haber, owner of swanky chophouse operator BLT Restaurants, says the job market is so bad right now he doesn’t know if he should even bother rolling out his new bonus plan.

Haber, whose company runs BLT Steak and BLT Prime restaurants in the Big Apple, Miami and other locations around the world, “has strongly considered sign-on bonuses” to help with the job crunch, he told The Post. The plan would be to pay bonuses ranging from $500 to $2,000, depending on the position, between 30 to 90 days after hiring.

“But we can’t find any suitable candidates to offer the bonuses to,” Haber complained.

Of course, the failed efforts are unlikely to deter other restaurateurs from trying their luck as the industry scrambles to meet soaring consumer demand fueled by a growing vaccination effort and government stimulus checks.

Another McDonald’s franchisee, who asked not to be identified, said he recently started offering $200 bonuses to new hires who stay with the company for 90 days.

“A lot of operators” are offering $100 signing bonuses, he said, adding that it’s too early to tell whether either payment plan will help lure workers.

“Our staffing levels have not really changed from a few months ago, but the demand (from customers) has gone up dramatically,” the operator said. “Stimulus + tax refunds + pent up demand + extended unemployment has given the food industry and enormous boost all at once.”

Our industry depends on people having money and moving around

Economic conditions are moving along nicely right now. After many downs and some ups in the COVID year, both QSR and the sit-down space are moving along—not perfectly in the casual dining/fine dining space, but better. Several things are happening now that are finally showing a broad-based sales lift—not versus 2020 which we know now is a very flawed base, but 2019, which is more realistic. Consider:

• Economic stimulus payments flowing into the economy.
• Better weather and “spring fever”.
• Vaccinations clearly on the rise, reaching critical mass soon.
• Documented improved consumer confidence in dining out.
• Tourism and non-business related travel up.

Looking ahead, I’ll be watching for any sales fall off after the $1400 stimulus is spent out, and the typical May-July US restaurant seasonal appear. Also, movie, special event and sporting event attendance, business conventions, and business travel are essential drivers to the wellness of the rest of the industry.

Labor Shortages, Capital Spending, Store Economics: Everything Relates to Everything Else 

With the surge of business underway, operational conditions in many units have gotten difficult. Difficulties have been building for some time, but staffing levels have fallen to be critically short since early this year. Employees leaving such a up and down industry as ours, parents not letting their kids work in restaurants, better unemployment terms than working, and difficult work conditions manning a restaurant shift with so few employees (read that as really hard work) are all taking a toll. Even the New York Times has taken note.[1]

What is vital right now is that restaurant brands and especially franchisors double down on efforts to customize remodel and new unit location specifications to the actual conditions and economic realities that now exist. I note especially “especially franchisors” because the primary company-operated brands can change their capital spending mix more quickly, “on a dime”;  while changing franchisee capital spending plans takes longer.

With this labor shortage and the likelihood of more wage rate driven action because of market or governmental actions, many restaurant brands have taken action to simplify menus and operations within the four walls. At the same time, there is a need for more outside and less inside restaurant space. Sound crazy? Yes, but that is reality. In many markets, guests want to eat outside but the 1970s-1980s footprints didn’t allow for that. This is exactly the time to do the double drive-thrus with reduced seating if you are a QSR; it holds down the CAPEX and staffing at the same time. Yet an international franchisor recently told a client of mine that the program was not available to him for some reason. Petty bureaucratic mess-up?  Perhaps.

Capital efficiency measurements such as sales to investment ratios are critical in our business. Others like simple payback, cash on cash return, and NPV analysis likewise so. More investment monies are lost on missing these metrics than missing several points on food or labor costs. Once the building is built     ( burden 1) and the debt service is locked in (burden 2) it is the most fixed of expenses and really adds up.  Anything to reduce the burden is welcome. In my opinion, a 1 to 1 sales to investment ratio is not good enough anymore with higher construction costs and operating costs, I’d think 1.5X is necessary now.  This is the time to fix store footprints throughout the industry.

Forward Looking

My friends at Restaurant Research noted in their TrafficCast that consumer plans to dine out increased 28.5% year over year [we expected a strong number] over the next 4 weeks, one of the strongest absolute results ever. Hat tip: @RRupdates. However, food at home CPI (basic food inflation) is on an upward march throughout the balance of FY-21, due to proteins. A close watcher of cable TV noted that Burger King earlier banging on a $1.00 menu for some reason, has now reverted to buy one sandwich and get a second for $1.00. The astute restaurant observer @McD_Truth noted BK was the only national brand blasting at such low price points at such a surge in business.

About the author:

John A. Gordon is a long time restaurant veteran with 45 years experience in restaurant operations, financial management corporate staff roles, and management consulting roles. His consultancy, Pacific Management Consulting Group, was founded in 2003 and works complex operations and financial analysis engagements for clients.  He can be reached at 858 874-6626, email jgordon@pacificmanagementconsultinggroup.com.

[1]   As Diners Return, Restaurants Face a New Hurdle: Finding Workers, New York Times, April 8 https://www/nytimes.com/2021/04/08/dining/restaurant-worker-shortage.html?smid=tw-share

by John Gordon

On March 11, the industry began lapping the most extraordinary event ever to hit the industry since World War 2. Looking ahead, it is exciting to be in a country with multiple vaccines developed already and being implemented.

But COVID’s long slowdown was painful and will impact us for years to come.

Is Pent Up Demand Real?

In the consumer discretionary sector of the economy of which restaurants are categorized, every industry except airlines is talking about “Pent Up Demand” as the rationale for 2021 and 2022 sales and profit recovery. It is a consistent theme on restaurant earnings calls and commentary by analysts, economists, the business press, and many others. Recently, the UCLA Anderson School 2021 Economic forecast highlighted pent-up demand and forecasted robust growth for the US and California in 2021.[1]  Jonathan Maze noted the restaurant CEOs have been talking up pent-up demand also, in his opinion post on March 9^th. [2]

My research shows that there is documented restaurant pent-up demand, but it has been historically been present. Prior NRA surveys point to this historical pent-up demand. It makes sense that more people would dine out if they had the time or money. This condition was present before COVID, however.

FY-20 is a terrible basis of comparison

From a comp sales and earnings calendar basis, all restaurant brands are now entering a period where large positive variances versus prior year are inevitable. That is the result of the improvement in sales from that depressed period. Whether “pent up demand” is involved is another question. A better base of comparison is FY-19 itself. Even a stacked 2-year comps measure is not good.  2020 is just awful in every way. Unfortunately, the publicly traded restaurants are stuck with the prior year as per the SEC formats. We’ll see what do they with the narrative. If they overplay the gains, then they will have to own it next year, too.

Likely 2021 Sales Drivers

For all this pent-up demand, I believe there has to be a catalyst to release it. Vaccine distribution will help but so too will economic stimulus. I’m very optimistic that the just passed $1400 stimulus cash injections[3]. There is a very solid history back to 2012 that shows when cash is released into the economy, restaurant sales, especially, casual dining sales jump. The January-February 2021 sales jump from the $600 stimulus show that FSR got the better end of the bump. [4]  The checks will take time to be released to bank accounts.

The other factor I think about in assessing future restaurant sales in 2021 is business travel and reopening of sporting events and mass entertainment venues. Our business has always been about being where people are. At this point, central business district occupancy seems consigned for much later recovery and domestic tourism is slowly recovering. We need domestic business travel and reopening of sporting events to power casual diner and fine diners. I’m optimistic about the latter but not about the former. The airline, hotel, and other analysts are not forecasting international recovery until 2024 or later. US room demand versus 2019 remains soft. [5]

Restaurant Profit Extraction: Flowthrough 

We financial types have for years have spoken to the concept of restaurant flowthrough, that is, the restaurant variable profit ratio. Years ago, it was called the PV, profit to volume ratio, and it was always documented to be around 50%. If a dollar of incremental revenue hit the top line, the variable profit line (the store EBITDA line) should go up 50 cents. Over the years, the QSR brands PV ratio has largely remained around that 50% value but casual dining has had a tougher time, with labor costs rising. But it largely depended on the alcohol sales mix (less labor-intense) and other product mix issues.

In February, three publicly traded restaurant brands, including Darden (DRI) and Starbucks (SBUX) noted on their earnings calls that their flowthrough ratios had improved to at or above 50%, from pre-COVID.  This is the legacy of higher average tickets and less dining room business and more drive thru and take out. One question will be how will this mix shift going to shake out going forward.

Greg Flynn Takeaways

One interesting interview heard last month was John Hamburger’s interview of Greg Flynn, CEO of Flynn Restaurant Group, now the largest US franchisee. He related that he had no restaurant experience after business school and created a brand called World Wrap in 1994, which was unknown to landlords, guests, employees, and guests, getting to 14 units. It was very difficult, and 100% debt-financed. Then they got the idea to do Applebee’s. Flynn is still a fan of using the franchised brand platform, and would not create a new brand from scratch again. He is not sold on virtual brands yet. They prefer to buy sites with real estate attached but might not keep it forever. He is definitely not a fan of debt financing.  The interview is interesting and can be accessed at https://register.gotowebinar.com/recording/34055447227706

About the author:  John A. Gordon is a long-time restaurant analyst and management consultant, with 45 years in restaurant operations, corporate staff roles, and management consulting positions, including via founding principal of his niche restaurant analysis and advisory firm, Pacific Management Consulting Group. He works complex operations and financial analysis engagements for clients. He can be reached at office (858) 874-6626, and email, jgordon@pacificmanagementconsultinggroup.com.  ­

[1]   https://newsroom.ucla.edu/releases/anderson-forecast-anticipates-robust-growth-march-2021#

[2]   https://restaurantbusinessonline.com/financing/restaurant/executives-put-their-hopes-pent=demand

[3]   https://www.cnbc.com/2021/03/12/1400-stimulus-checks-are-on-thw-way-heres-who-qualifies.html

[4]   See www.facteus.com, First Reports, January-March 2021.

[5]   See https://str.com/data-insights-blog/50-state-demand-state-level-recovery-lines

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

The Fog of War

All of our lives changed on March 12, 2020, when it became clear that COVID-19 had become a big problem, here and throughout the world. Of course, it would impact our business greatly, as our business is a people business, primarily fulfilling either kitchen replacement or socialization dining. Fortunately, many—smart– management teams adapted quickly where they could. Customer preference mix changes quickly, generally the QSR space recovered very quickly, lead by drive-thru concepts, chicken, and most pizza brands. Some fast-casual brands have recovered, think Chipotle (CMG) and others. Casual dining is still difficult overall but flagship portfolios like Darden (DRI) are at the peak of their game and will continue to lead the way post-COVID.

I’ve been working on a business transformation project for a medium-size restaurant operator that has several different restaurant brands. It has first-class corporate officers, operations, financial management, human resources, and information technology disciplines among others. It is working to improve others, and it does have some investment gaps, which it has recognized. One of the interesting observations was that while they were very analytical, the corporate staff departments were so analytical that they tried to find perfect information to justify taking action. Unfortunately, they were on the verge of, in the words, of an old boss of mine, making “perfect to be the enemy of  good.”  Making company-wide decisions was taking too long.

For any restaurant organization of any size, I recommend that the CEO put the functional heads (operations, marketing finance, supply chain, HR) into a working group where ideas and proposals are developed. While it is likely that it will take some time for the functional experts to iron out difficulties, well-reasoned plans are more likely to develop more quickly. And that is the key advantage in the post COVID era. Resolving corporate level questions quickly and utilizing all corporate resources to stay up with confusing and shifting consumer shifts.

Reading Financial Comparisons Against the Most Difficult Year Ever 

In a matter of days, the industry will be comping over early March 2020, when COVID hit us in the United States. Thereafter, the publicly traded restaurant companies will have to deal with Q1 2021 earnings comparisons versus that of Q1 2020, when the bottom fell out of March. The restaurant M&A market has been struggling for some considerable time with the 2020 problem and how to normalize 2021/2020 earnings and which base year is correct.

Clearly, 2020 is extraordinarily flawed in every way as a base: it shows the most odd event ever and then swings in sales and profit, with both routine and extraordinary expense way over expectations. However, on the other hand, 2019 was a lifetime ago, conditions have radically changed since. The publicly traded companies are stuck with that comparison via normal SEC reporting formats, but some will welcome putting up 12 months of positive numbers. Other brands with success in 2020 will have problems explaining the real but optical decline in sales and profits versus prior year. The imperative for operators and investors is to explain well and not get carried away.

One of the most creative attempts to solve the 2020 problem that I’ve seen was the creation of an internal “Restated 2020 No COVID” value that was based on January-February 2020 only and then rolled out March-December 2020 based on normal seasonality to complete the year. Granted, it was only 2/12^th of a year trend but the company found it useful for visual analysis.

Operations Imperatives for Franchisors

Top tier Franchisor executives understand that their brands need to be built around amazing consumer value, profitable sales, and capital-efficient platforms for great franchisees. Per my reviews of late, vital priority work is necessary for the following:

Food delivery is still lower margin (see Chipotle comments on recent earnings call) and third-party delivery (3PD) itself carries significant unfavorable guest ratings. This raises the usefulness of white label solutions like Olo. As 3PD companies continue to merge, the inevitable press for synergies has to result in higher commissions. To offset this risk,  there has to progress in direct-operated delivery (see Chick fil A, for example) or contractual/PMIX shifts to offset the difference.

Restaurant labor wage rates are rising virtually worldwide. Franchisors have done a good job in many brands in streamlining menus but more work is needed in leading the way to streamline kitchen and store footprints to offset rising wages. That is something only the franchisor controls via the franchise agreement. There is much engineering effort that has to be cranked into the franchise footprint and the economic model to make it all work since the franchisee is principally responsible to fund it.

About the Author:  John A. Gordon is a long time restaurant industry veteran with 45 years in chain restaurant operations, financial management corporate staff roles, and the last 20 years in his restaurant management consultancy, Pacific Management Consulting Group. He works complex operations and financial analysis and strategy assessment roles for investors, operators, attorneys, and others who need detailed restaurant perspective. This includes new business proforma, business transformation, litigation support, and other such complex projects. He can be reached at (858) 874-6626, email, jgordon@pacificmanagementconsultinggroup.com.