Nation’s Restaurant News – Is The Pizza Industry In Trouble Or Normalizing After A Long Pandemic?

Papa-John_s-Shaq-a-Roni-Pizza.jpegPapa Johns
OPERATIONS
Both Papa Johns and Domino’s are struggling with sales and traffic, though Pizza Hut’s traffic has spiked recently: is anyone really winning the pizza wars?

Joanna Fantozzi | Mar 17, 2023

Pizza — the unofficial food of the COVID-19 pandemic — experienced an explosion of sales growth in 2020 and 2021 as the go-to delivery food of choice. But what goes up, must come down and by 2023, two of the pizza industry giants — Domino’s and Papa Johns — are now struggling with faltering traffic and sales.

At the end of 2022, both Papa John’s and Domino’s reported just-barely-positive same-store sales (around 1% each), with negative traffic boosted mainly by increased menu prices. With tales of food inflation woes, delivery driver shortages, and lack of demand as people head back to dine-in restaurants, the pizza high has come back down to Earth. But does this spell trouble for the pizza industry in the long-run, or is it just a normalization after a period of unusual activity?

Related: How Papa Johns used menu innovation to fight against inflationary pressures

“The big pizza players got a lot of same-store sales growth in 2020 and 2021 and they’re trying to hang on to it as much as they can,” Peter Saleh, restaurant analyst at BTIG (which works directly with Domino’s Pizza) said. “As the economy normalizes and consumers get back to their regular routines and start going out to eat more [things will change]. I think that’s what we’re dealing with rather than a function of ‘something is wrong in the pizza space.’ They had really strong gains for two years and maintaining that is challenging.”

Looking at the big picture, the major pizza players have all seen major growth since the start of the pandemic: Papa Johns saw the most change at 30% same-store sales growth over the past three years, Domino’s was up over 14% since the start of the pandemic, and Pizza Hut’s sales grew more modestly at approximately 8% on a three-year basis, despite the brand’s comparatively strong fourth quarter in 2022.

Related: Domino’s slows growth outlook as pizza delivery loses market share to sit-down restaurants

Though it’s likely too early to tell, it’s not out of the question that Domino’s status as top dog could eventually slip, especially since Pizza Hut had relinquished its market share as top pizza chain to Domino’s only six years prior. The process of Pizza Hut slowly losing market share to Domino’s digital omnichannel capabilities occurred over the course of nearly a decade.

Over the past several quarters, Domino’s former CEO Ritch Allison and new CEO Russell Weiner have pointed toward delivery driver shortages as one of the top concerns for the company. Domino’s has historically differentiated its brand from competitors by resisting the urge to partner with third-party aggregators: a decision that has resulted in slower delivery times, overworked stores, and a renewed company focus on carryout (like the early 2022 deal that offered customers $3 back on their next visit if they picked up their pizza rather than option for delivery).

But now, Domino’s is not just blaming the staffing shortages: During the company’s fourth quarter earnings call last month, Russell Weiner pointed to softened delivery demand, and rolled back the company’s earnings and growth expectations for the rest of the year, which analysts did not take a good sign of the company’s near-future.

“It was incredible and somewhat surprising when I saw that Domino’s had pulled back its earnings and new unit growth projections,” John Gordon, founder of Pacific Management Consulting Group said. “[…]It was a very large shift, but in some ways a logical conclusion, looking at some of their trends over time.”

If Domino’s delivery woes continue in future quarters, could they bite the bullet and start partnering with aggregators? The jury is still out on that and analysts appear to be split on the issue.

“Domino’s made a strategic decision not to partner with aggregators but I think they remain open to changing their minds,” Sara Senatore, securities analyst with Bank of America (which has worked with all three pizza chains) said. “[…] There can be no question that aggregators have been one of the best solutions for operators. It’s a model that works so well.”

Both Papa Johns and Pizza Hut have touted their third-party delivery partnerships as a boon to their financial performance. Quarter after quarter, Papa Johns CEO Rob Lynch has credit third-party aggregators with helping to boost some of the post-pandemic staffing shortages and helping them to keep up with delivery demand. However, just like Domino’s, Papa Johns traffic has been struggling recently, even as sales are bolstered by menu price increases. This could simply be a case of Papa Johns settling into a new normal after successfully climbing out of the John Schnatter-sized hole in 2018 and 2019.

In fact, Sara Senatore thinks that right now, Papa Johns might be “winning” the pizza wars, even though all three brands are in it for the long-haul.

“Papa Johns has done a great job of partnering with aggregators,” Senatore said. “Cumulatively, they seem to be the one with the most assets and are staying abreast of where the consumer is. […] The momentum of Papa Johns has faded a little bit now as the third year-removed from their comeback story.”

But what about Pizza Hut? Although Yum Brands’ U.S. performance is typically bolstered by the strong Taco Bell, Pizza Hut’s Q4 same-store sales were up 4%. The boost in sales and traffic for the third-place brand could be tied at least indirectly to Pizza Hut’s expansion of its third-party delivery partnerships and delivery promotions through aggregators in Q2 and Q3, which gave Pizza Hut a much-needed boost.

“Aggregators serve two purposes: they are helpful in getting operators to meet demand, especially when the labor market is tight, but it’s also a marketing platform,” Senatore said. “The customer ordering on aggregators is different than the customer going straight to the mobile app or website. The aggregators bring in new customers.”

However, one successful quarter is not long enough to tell if Pizza Hut is taking back share from Domino’s. In fact, it is too early to tell what the long-term successes or failures of all three brands will be, especially given the current macroeconomic uncertainty. If the U.S. heads into a recession, as predicted, we could be right where we started with pizza reigning as king. Instead of people staying home because of a pandemic, they might be staying home and ordering pizza delivery to save money by dining on (relatively) cheap comfort food.

If Domino’s wants to keep their crown as number one pizza in the U.S. moving forward, they probably should focus on two things: value and menu innovation. Last year, Domino’s raised the price of its iconic $5.99 Mix and Match deal to $6.99 and changed its $7.99 carryout deal from 10 wings to eight and made it online-only.

“That’s not a very attractive price point, and the carryout $3 tip deal is great advertising for their carryout business, but the $3 is only given to you on your next visit,” John Gordon said. “For a deal like that, the customer should have gratification immediately.”

The other crucial aspect of keeping consumers’ interests alive is both menu and tech innovation, the latter of which had been Domino’s differentiator for a long time. According to Sara Senatore, Domino’s has been pretty candid about not investing in menu innovation as much as they could, while their competitors have been thriving with new pizza categories like Papa Johns Papadias and Papa Bowls, and Pizza Hut’s launch of Melts last fall—a new menu category meant to lure younger customers and compete with Papa Johns. Though, that could be changing with Domino’s new loaded tater tots (similar to “totchos”), which just launched this quarter and have already been popular with customers.

“The pizza game in the United States has always been a zero-sum game,” Gordon said. “You’re essentially just trading market share from one player to another.”

Whether the pizza industry is normalizing or real change is afoot, it might soon be time for Domino’s to swallow their pride and make the call to DoorDash.

Contact Joanna at joanna.fantozzi@informa.com

Bloomberg – McDonald’s Faces Franchisees Decrying ‘Destructive Path’

2023-03-16 21:01:17.880 GMT
By Leslie Patton

(Bloomberg) — McDonald’s Corp. is facing rising unrest
among certain US franchisees — a potential stumbling block as
the burger chain plots aggressive expansion.

Please click the link to see the full article:

https://www.bloomberg.com/news/articles/2023-03-16/mcdonald-s-mcd-faces-fed-up-franchisees-decrying-destructive-path#xj4y7vzkg

Restaurant Business – A Deep Dive Into Subway’s Recovery And Sale

A Deeper Dive: Restaurant consultant John Gordon joins the podcast this week to discuss changes at Subway, its potential sale and who will buy the fast-food sandwich chain.

By Jonathan Maze on Mar. 08, 2023

Who is going to buy Subway?

In case you haven’t heard, the fast-food sandwich chain is on the market. In this week’s episode of the Restaurant Business podcast A Deeper Dive, I speak with John Gordon, a restaurant consultant out of San Diego, to discuss the chain.

Subway has hired JP Morgan to help find a buyer. Reports suggest a host of large private equity firms, including Goldman Sachs and Bain Capital, are looking at it, with a price tag of $8 billion or more. John and I discuss that sale and the price tag. We also talk about the numerous changes Subway has made over the past two-plus years and how they are influencing the company and the sale process.

I also give my thoughts on Bojangles, Wendy’s and Sardar Biglari.

Check it out.

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CNN – Why Pizza Hut’s Red Roofs and McDonald’s Play Places Have Disappeared

By Nathaniel Meyersohn, CNN

Updated 1:41 PM ET, Sat February 18, 2023

See Burger King's new three-lane (yes, 3!) drive-thru design

New York (CNN Business)For decades, bright, playful and oddly-shaped fast-food restaurants dotted the roadside along America’s highways.

You’d drive by Howard Johnson’s with its orange roofs and then pass Pizza Hut’s red-topped huts. A few more miles and there was the roadside White Castle with its turrets. Arby’s roof was shaped like a wagon and Denny’s resembled a boomerang. And then McDonald’s, with its neon golden arches towering above its restaurants.
These quirky designs were an early form of brand advertising, gimmicks meant to grab drivers’ attention and get them to stop in.
As fast-food chains spread across the US after World War II, new roadside restaurant brands needed to stand out. Television was new media not yet beamed into every single home, newspapers were still ascendant and social media unimaginable.
So restaurant chains turned to architecture as a key tool to promote their brand and help create their corporate identity.

Pizza Hut's red-roof restaurants have come down, replaced by sleek new designs.

Pizza Hut’s red-roof restaurants have come down, replaced by sleek new designs.
But the fast-food architecture of today has lost its quirky charm and distinctive features. Shifts in the restaurant industry, advertising and technology have made fast-food exteriors bland and spiritless, critics say.
Goodbye bright colors and unusual shapes. Today, the design is minimal and sleek. Most fast-food restaurants are built to maximize efficiency, not catch motorists’ attention. Many are shaped like boxes, decorated with fake wooden paneling, imitation stone or brick exteriors, and flat roofs. One critic has called this trend “faux five-star restaurants” intended to make customers forget they are eating greasy fries and burgers.
The chains now sport nearly identical looks. Call it the gentrification of fast-food design.
“They’re soulless little boxes,” said Glen Coben, an architect who has designed boutique hotels, restaurants and stores. “They’re like Monopoly homes.”

Googie architecture

Fast-food restaurants developed and expanded in the mid-twentieth century with the explosion of car culture and the development of interstate highways.
Large companies came to dominate highway restaurants through a strategy known as “place-product-packaging” — the coordination of building design, decor, menu, service and pricing, according to John Jakle, the author of “Fast Food: Roadside Restaurants in the Automobile Age.”
Fast-food chains’ buildings were designed to catch the eye of potential customers driving by at high speeds and get them to slow down.
“The buildings had to be visually strong and bold,” said Alan Hess, an architecture critic and historian. “That included neon signs and the shape of the building.”
A leading example: McDonald’s design, with its two golden arches sloping over the roof of its restaurant, a style known as Googie.

A historic 1950's McDonald's restaurant in Downey, California, shown in 2015. It's the oldest McDonald's still in existence.

A historic 1950’s McDonald’s restaurant in Downey, California, shown in 2015. It’s the oldest McDonald’s still in existence.
Introduced in California in 1953, McDonald’s design was influenced by ultra-modern coffee shops and roadside stands of Southern California, then the heart of budding fast-food chains.
The two 25-foot bright yellow sheet-metal arches that rose through the McDonald’s buildings were tall enough to attract drivers amid the clutter of other roadside buildings, their neon trim gleaming day and night. McDonald’s design set off a wave of similar Googie-style architecture at fast-food chains nationwide.
Well into the 1970s, the designs were a prominent fixture of the American roadside, “imprinting the image of fast-food drive-in architecture in the popular consciousness,” Hess wrote in a journal article.

‘Visual pollution’

But there was a backlash to this aesthetic. As the environmental movement developed in the 1960s, opposition to the conspicuous Googie style grew. Critics called it “visual pollution.”
“Critics hated this populist, roadside commercial California architecture,” Hess said. Googie style fell out of fashion in the 1970s as fast-food style favored dark colors, brick and mansard roofs.
McDonald’s new prototype became a low-profile mansard roof and brick design with shingle texture. Its arches moved from atop the building to signposts and became McDonald’s corporate logo.

Opposition grew to garish structures like this Jack in the Box in 1970.

Opposition grew to garish structures like this Jack in the Box in 1970.
“McDonald’s and Jack in the Box unfurled their neon and Day Glo banners and architectural containers against the endless sky,” the New York Times said in 1978. They have been “toned down with the changing taste of the 60’s and 70’s.” And with the growth of mass communications advertising campaigns, brands no longer relied on architectural features to stand out –they could simply flood the television airwaves.

Fast-food goes upscale

In the 1980s and 1990s, companies began introducing children’s play areas and party rooms to draw families — additions to existing “brown” structures, Hess said.
The rise of mobile ordering and cost concerns since then altered modern fast-food design.
With fewer people sitting down for full meals at fast-food restaurants, companies didn’t need elaborate dining areas. So today they’re expanding drive-thru lanes, increasing the number of pickup windows and adding digital kiosks in stores.

A Wendy's in 2020, an example of the modernization of fast-food design.

A Wendy’s in 2020, an example of the modernization of fast-food design.
“We have a lot of red-roof restaurants” that “clearly need to go away,” a Pizza Hut executive said in 2018 of its classic design. The company’s new prototype, “Hut Lanes,” helps to speed up wait times at drive-thru locations.
The new fast-food box designs with their flat roofs are more efficient to heat and cool than older structures, said John Gordon, a restaurant consultant. Kitchens have been reconfigured to speed up food preparation. They’re also cheaper to build, maintain and staff a smaller store.
But in the effort to modernize, some say fast-food design has became homogenized and lost its creative purpose.
“I don’t know if you’d be able to identify what they were if they had a different name on the front,” said Addison Del Mastro, an urbanist writer who documents the history of commercial landscapes. “There’s nothing to engage the wandering imagination.”

Wray Executive Search – Restaurants: Pondering Earnings

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

Q4 Earnings to date…

We are in the middle of the Q4 earnings cycle and have had Darden, McDonald’s, YUM, Chili’s, Starbuck’s and Chipotle so far. The bulk of the casual diners and more QSRs and a few fast casuals will be this week and next.

As usual, one must work to see if the macro sector trends and results are brand specific. The one surprise to date is Chipotle SSS was weaker but still positive, with both negative mix and traffic. This is “a turn” as we analysts call it and CMG management said they didn’t see price resistance and that value scores were still very high.  More on this later. Food and labor costs are still inflationary and restaurants (especially casual diners, per the BLS) are taking substantial price increases. McDonald’s store margins will be lower and Chipotle is under the gun to get store margins up to 27%.

Interpreting Consumers is Difficult

There is an industry narrative underway in some parts that can’t be confirmed yet. That is that higher income guests frequenting casual dining, and fine dining are trading down to fast food. This narrative is driven by: (1) it happened before (2) the QSR operators are saying they are seeing an uptick in higher income guests (3) some casual diners like Chili’s and now Chipotle lost traffic. [1]

There is no evidence to date that the company-owned polished casual dining or fine dining concepts are in trouble at all.

I don’t buy this concept trade-down issue, at least not yet. For one, I know from 20 years of corporate staff and 20 years of my consulting firm experience, that restaurant brands and their vendors don’t have the budget or methodology to track guest migration from one brand to another over short periods. Over the longer term, this is possible, but costly. The mistake is assuming a higher mix of higher-income guests must be from casual or fine diners. It could just come from a higher frequency/mix. Time will tell and the numbers will lead the way to the truth.

Restaurant Analysis and M&A Calculations: What is the right base? 

Soon we will have 2023 Q1 financial results and the SEC P/L format dictates that 2022 is the year-ago base. On earnings calls, S-1s, and management analysis, companies can have further disclosure. The Pandemic certainly has made some prior year displays difficult. As a result, that has been a negative factor affecting franchise and nonfranchise restaurant market sales in 2022.  M&A professionals report that there is relatively nothing for sale right now.[2] Simply, the 2022 numbers look bad compared to 2021 due to the margin erosion seen everywhere.

Of course, this will change eventually; the restaurant business is cyclical. This business is always investable; there is always something to do to get ready for the inevitable future. Some latent IPOs are coming.

My suggestion in the management data display area: always show 2019 data and operating stats and then pick up the P/L with 2021, and forward. A discussion strand in the franchise M&A world is that a workable true EBITDA base is somewhere between 2019 on the low side and 2021 on the high side. [3]

McDonald’s US Franchise Relations: Hatfields v. McCoy’s Battle Conditions Persist

There is no doubt that McDonald’s (MCD) is a global restaurant powerhouse with worldwide brand recognition and strength and power. In the US, one of the most difficult markets now, AUVs have soared, marketing is right on point (IMO) and analysts believe franchisees are around $500K in store EBITDA, a good number, albeit down from the prior year.

The problem is that there has been a decade of documented bad relations between US franchisees and the US corporate staff. Somehow in my files, I wound up with some Mcdonald’s 2013 franchisee notes and I reread them. The tone of the conflicts is the same. The year-to-year catalysts change: in 2020-2021, US franchisee communication ceased for over 6 months with corporate over disputes about invoice billings, now the issue is the new contract McD is switching to and the new PACE inspection system.   The franchisees point to the inadequacy of the PACE system, and its additional costs and stress on employees. And that their store EBITDA was down $100K in 2022. MCD corporate responded that the PACE system provided benefits in European markets where it was first rolled out. [4]

What is immediately notable is the bad McDonald’s franchisor/franchisee culture, the Hatfields (Corporate) v. McCoys (Franchisees) battle is still present and not getting any better. Fixing this is a core responsibility of the franchisor in my view. McDonald’s operates only 3% of its US units. Going through a contracting effort and not being sure of your workforce is a terrible thing. I was on the restaurant corporate staff for 20 years, and after a while, without the proper cultural and people planning in place, one begins thinking about “us and them”. That is not right and it constricts the proper use of the franchise model.  A corporate staff invention is required.

The franchisees should recognize that everyone is down in EBITDA and most every brand would love to have $500K to cover CAPEX, taxes, new units, and the like. Also, in terms of inspections, I have seen some awful, embarrassing customer service in franchisee locations where no inspections have picked up. They should fight for useful inspections that focus on real QSC metrics.

Heard in the street… on the Subway/DAI sale, we read via Forbes that Dr. Buck’s will allocating his 50.01% of Subway/DAI proceeds to his charity could have unintended consequences in the DAI sale process which is just in its infancy. Does this mean that the Buck Charity director will get a vote on Subway/DAI restaurant matters?  Not good if so. We will see.

More on Subway operations… in late January, Subway network TV and digital began advertising a BOGO buy one-foot long sandwich, get one free. An underdetermined (but significant) number of franchisees don’t accept walk-in, paper, or digital Subway coupons, period. The reason they can’t afford it as the discount is too steep and they don’t get a sales bump. With DAI just reporting Subway US AUVs up 9% in 2022, why the need right now for such expensive discounting? A very reasoned guess could be they are looking to show good sales numbers for the investor’s book. The problem is the franchisees are paying personally for those sales gains.

 

About the author: John A. Gordon is a long-term restaurant industry veteran and founding principal of Pacific Management Consulting Group. He works on complex restaurant operations, financial management, and strategy engagements for clients. He has 20 years of restaurant corporate staff experience, and 20 years via his consulting firm. Reach him at jgordon@pacificmanagementconsultinggroup.com, office 858 874 6626, mobile, 819 379 5561.

[1]   See Nations Restaurant News, Restaurant Tradedown, February 10, 2023.

[2]    Restaurant Finance M&A Panel, November 15 2022; and  Rick Ormbsy, Unbridled Capital, February 2023 EWebinar. https://unbridedcapital.com/resources/season-5-episode -5- the=2023-state-franchise=ma-/

[3]   Hat Tip: Rick Ormbsy,  2023, Season 5, Episode 5 Webinar.

[4]   Restaurant Business Online, “ Franchisee Fear, Anger, Mount as McDonald’s Intensifies Inspections”, Jonathan Maze, February 7 2023.

Wray Executive Search – Restaurants:  The 2023 New Year’s Look

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

Personnel and M&A Moves Now Abound

So, with the New Year upon us, some personnel and M&A moves are now upon us. Both McDonald’s and Wendy’s signaled people changes and new corporate reorganization charts, targeted at reducing the number of reporting pillars. It looks like the US  and International pillars will be targeted, at least at headquarters.  The CEOs indicate it will increase efficiency and improve time to market. As always the devil is in the details and we will see.

In M&A news, the earlier reported news about Darden (hat tip: Austin Fuller, Orlando Sentinel) came true: CEO Ric Cardenas noted at their ICR appearance that they were looking for a new brand acquisition. Darden itself is in fine shape, they seem to be looking for a brand to position the portfolio to changes in the consumer marketplace. So they will be looking for the best and this won’t be a rushed process.

Further, Andy Weiderhorn and FAT Brands confirmed the desire for a properly priced casual dining brand: multiples of 10X are too high.

As noted last month, there are several latent IPOs, waiting for the right market conditions.  One of the very first will be Fogo de Chao. They have desired a reentry ever since 2020 and have been waiting for market conditions. They are a strong company.

ICR 2023 Observations

I was delighted to get back to my 17th face-to-face conference attendance a the  ICR Conference, the midmarket investor, and M&A-themed gathering in Orlando. 24 publicly traded restaurants attended, with 19 pre-IPO or smaller restaurant companies presented briefly. Fitch, a ratings agency attended also. They are keen to monitor sales, free cash flow, and debt, but did not seem to have obvious restaurant sector worries.

Ric Cardenas of Darden was the obvious CEO star, who has a masterful command of the facts and the breakout room. And, GJ Hart is back and CEO at Red Robin and presented in dramatic style what went wrong there and his plan to fix it.

Operational themes noted: numerous operators are making equipment upgrades in 2023, all intended to boost BOH efficiency. Many of the smaller growth brands that presented had burger or taco themes. Third-party delivery has finally turned margin neutral, thanks to operator price increases. While dine-in sales generally are improving, fast casual companies like Café Rio and Shake Shack are working in drive-thrus where they can. [1]

What is hanging heavy over 2023 prospects is the impact of the real or supposed recession. That there has been inflation across the US consumer space is unquestioned; it’s just that it matters more to certain population groups than others. Restaurant full-service price inflation continued to be plus 9% in December’s report, while QSR was about 7%. Grocery store (food at home) pricing was still higher. [2] Via my research, I expect moderate and varied revenue results by brand and continued but deaccelerating cost pressures in 2023.  But there is more.

Interest cost  and new unit buildout cost increases are a concern to 2023 new unit development:  what to do about it

Beyond the P&L, there are other cash costs associated with new unit development and remodeling that the restaurant community needs to be concerned about. First, the supply chain has not been fixed in terms of providing new restaurant equipment. When senior McDonald’s franchisees are routinely speaking of it over time, you know there is a problem. Significantly, as confirmed at ICR and the recent Restaurant Finance and Development Conference, the cost of new unit builds is up some 10 to 15%.  And the absolute kick in the pants is that given general economic uncertainty is that the cost of funds is up nationally by 300 to 400 basis points.   This puts a strain on both company and franchisees trying to develop new units. The margin optics are poor if one compares to 2021 as a base, which had much better store results. Restaurant percentage margins are down app. 300 basis points in 2022 (versus 2021) because of the food and labor inflation that just could not be covered by more pricing or more sales.

What can franchisors do to encourage development?  

Franchisors will be challenged by this one-two punch to maintain development targets. However, there are proactive things that can be done. As Alicia Miller, Partner at Catalyst Insight Group and a true expert in franchise management optimization told me recently,

“Incentives to get a better enterprise valuation in 2024-2025 via IPOs or PE acquisitions require investments now. Franchisees need reasons to believe. Franchisors need to offer incentives to offset this additional development cost.  Otherwise, franchisees will delay, pursue lower-cost concepts, or possibly retire as options. Franchisee thirst for development is not a bottomless well.”

Some proactive moves have been untaken, such as smaller and variable-sized units (Wendy’s example), dedicated loan pools (Burger King example), and vigorous cost reduction task forces working (Jack in Box).  But I sense more will be needed to get through the 2023 squeeze.

All economic conditions change, and if the Fed and macro economy cooperates, I sense 2024 will be better.

 

About the author: John A Gordon is a long time (45 plus years) restaurant industry veteran. His management consulting firm, Pacific Management Consulting Group was founded in 2003 to work complex restaurant operations, managerial finance and strategy engagements. See more about him on his website, www.pacificmanagementconsultinggroup.com, call him at 619 379-5561 anytime.

 

[1]   Restaurant Business, 10 Takeaways from ICR, January 11, 2023.

[2]   https://www.bls.gov/news-release/pdf/cpi.pdf

Wray Executive Search – Restaurants: We Should be Looking Ahead, to 2024

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

Merry Christmas and Happy Holidays forthcoming!

So I am back from the Restaurant Finance and Development Conference. 3300 people attended, the most ever. There were two other major restaurant events in the world that week.  I had the high honor to moderate the M&A Panel: What Are Conditions Now and How to Close More Deals in 2023. The Four-panel members were outstanding and laid out that and more. Panel member Susan Miller laid out the highly anticipated current M&A multiple ranges for business types by maturity. [1]

Current View of the Business for 2023

To be clear, the restaurant business is dynamic and optimistic. It does go through cycles. A down cycle at one point in time is not permanent, history shows it will reverse soon!  Do not despair at a down point. There is always something to do, plan, strategize and improve current operations in the restaurant business.

2023 v 2024 business recovery was the question du jour throughout the conference.  My takeaway:  While there is latent deal activity (including IPOs) waiting for better conditions, 2022 M&A activity died off because of poor multiples and higher interest rates. And, QSR consumer activity weakened throughout the second half of 2022, while higher-end casual dining and above-sit-down segment consumer activity was more positive. 2024 will be better than a mixed 2023.

The overall view is that food and labor inflation will continue in 2023, albeit at lower levels. Interest rates and cost of new buildings will be a problem, and most of my consumer research friends feel sales demand won’t fully recover until 2024.

While QSR same-store sales were up around 5% in late 2022, that is nowhere near enough to cover the increasing food and labor costs. As a result, restaurant margins and profits have remained below their 2019 and 2021 thresholds. Managing pricing will be one of the company operator and franchisee’s biggest challenges. 2024 will be better once the mild recession ebbs.

After surveying 300 finance executives – including 60 consumer and retail leaders – accounting giant KPMG released its 2022 inflation report, which shows that retailers and consumer brands are taking a proactive approach to combat inflation.

“After months of passing on rising costs to resilient consumers, consumer and retail companies are looking to strike the right balance between pricing strategies and profit margins,” the report says. “To achieve cost efficiencies and optimize space, [consumer and retail] companies plan to evaluate their physical, office, and retail locations, seeking to reduce or restructure their real estate footprint. From a technology or digital transformation perspective, respondents expect investments in those initiatives to stay on track as they seek to extract actionable, data-driven insights.”

Company-owned fast casuals, meanwhile, are gobbling up available real estate to build or expand drive-thrus, even with volatility around customer traffic, and food and labor inflation. He notes that 2022 QSR traffic was modestly negative verses 2021 and 2019, and should remain so in 2023. Most of all sales gain, in roughly the 5-6% range, will come from price and mix. Many QSR guests are rather price-sensitive now, so adjustments must be made strategically. Creative marketing, new news, and digital expansion are essential. McDonald’s notably has made headway.

On the QSR margin side, many raw foodstuffs are now falling, with chicken completely lower. Experts say some food and paper items will remain inflationary in 2023, but less so than in 2022.  On the labor front, the average wage rate of a new employee hired increased from 5 to 10%. Depending on sales, check and inflation, the store EBITDA margin could drift 1 to 1.5 full points lower in 2023, he adds, but far less than the dramatic falloff in 2022.

While franchisors will continue to push for more store development, franchisees may feel emboldened to push back based on costs and ROI. Some franchisors have done an excellent job in putting new store prototypes out in circulation which will help. Loan underwriting will be tighter in 2023.

Labor Outlook Improving 

On a more positive note, the labor outlook for restaurants is improving. A late 2022 survey by Bank of America restaurant analyst Sara Senatore found that restaurants are in a better position to find employees, emphasizing “more staff means better service for customers and less of a need to raise wages, which in turn helps the bottom line.”

A December Restaurant Business Online article echoed that optimism. Highlighting data from the Bureau of Labor Statistics, which shows an upward trend in hiring among restaurants and bars, the article reported that 62,000 jobs were added in November versus 36,300 in October, “which itself was an upward revision from previous estimates,” the publication wrote.

Factors Muting 2023

Many attendees at this year’s Restaurant Finance and Development Conference were focused on how the industry will fare in 2023 and 2024, examining key aspects of doing business such as operating profits, sales outlook, cost of construction, cost of equipment, frequency of traffic, and average ticket targets. Virtually all analysts are convinced the average ticket will continue to be higher, and that customer traffic will be negative in 2023. Every tracking report shows some effect of a real or perceived slowdown or mild recession now hitting US consumers.

Positive signs for the future will be clear once food costs, commodity pressures, and labor pressures as we’ve seen in 2022 begin to reverse themselves, With the current inflationary pressures, our best guess is that consumer demand will be muted until later in 2023 and recover more fully in 2024.

Management Notes: How to Take Advantage of the Ex-CEO

Reading in detail lately about the drama of the short-lived CEO tenure of Bob Chapek, the hand-picked CEO successor of Bob Iger at Disney there was one interesting background point: Iger after his retirement as CEO was NOT on the Disney (DIS) Board of Directors. The same circumstance was true in Howard Schultz’s most recent retirement before coming back to work at Starbucks (SBUX) for the third time in 2022. Odd board rotation practices leaving David Brandon still on the Dominos (DPZ) board after so many years were also seen in 2022.

The job of a CEO certainly isn’t easy these days. For any restaurant company, the flame out of a CEO has enormous significance. I discussed how firms might better utilize outgoing CEOs, with our own Bob Gershberg, CEO of Wray Search, who works restaurant board search and consulting engagements. “ No doubt, the skills, and knowledge of the former CEO are valuable”, said Gershberg. “A desirable outcome might be to name the Ex-CEO as Executive Board Chair, for a finite period.”

This could process the ex-CEO’s wisdom and opinions efficiently. Interestingly, one situation where this scenario did not work, perhaps because the ex-CEO was not named Executive Chairman, was McDonald’s. Jim Skinner, then CEO, retired to a regular board seat in 2014, only to have the next two CEOs, Don Thompson, rotated out after a few years and Steve Easterbrook terminated in a spectacular scandal.

Heard and Seen:

Through the end of Q3 earnings, I am seeing little evidence of the long-anticipated “trade down” of fine dining and casual dining guests to fast food in the numbers. We do hear discussion of less frequency and trade down of mix within the $75K income cohort within a brand, which is two different things. In fact, the “the sit-down space” has gradually strengthened the last few months per the data I’ve seen.

Jack in the Box (JACK) posted very difficult earnings in November, for both  Jack in Box and Del Taco, with margin pressures. I traced back through the original documents that JACK actually paid 15X EBITDA for Del Taco versus their “7.6X synergy adjusted EBITDA number”. So they goofed. Worse, the Del Taco synergies won’t arrive mostly until 2024. Now they have to refranchise quickly. Is there franchisee demand? CNBC said it: “Jack in the Box is indeed in a Box”[2]

McDonald’s Franchisees in the Know point out continuing equipment acquisition and quality problems, including buying fryers and grills, and failures of compressors. (Hat Tip: McFranchisee (McDTruth). The long effect of supply chain problems continue.

Interesting to see only Starbucks (SBUX), and YUM (YUM) on the WSJ/Drucker Institute Management 2022 Top 250, published on December 12. Drucker has a whole series of weighting factors, including customer satisfaction, employee engagement, innovation, social responsibility, and financial strength. The cutoff value was 55.5 points. There was one restaurant holding company that should have been close in my opinion, Darden (DRI).             

 

About the author: John A. Gordon is a long-time restaurant industry veteran, with experience in financial planning and analysis corporate staff roles (20 years, QSR and steakhouse chain ) and 20 years via his own niche consulting firm, Pacific Management Consulting Group. He does complex operations, financial assessment and feasibility and strategy engagements for clients. His website is www.pacificmanagementconsultinggroup.com, office 858 874-6626.

[1]   Email us for the numbers !  jgordon@pacificmanagementconsultinggroup.com and smiller@morgankingston.com

[2]   JACK Earnings Day CNBC Video, November 22 2022

Restaurant Business – JACK IN THE BOX’S DEL TACO DEAL WAS MORE EXPENSIVE THAN IT SEEMS

The Bottom Line: Executives argued that “synergies” made the deal more palatable. But it’s taking a while for those cost savings to take hold. Investors have responded accordingly.

By Jonathan Maze on Nov. 29, 2022

Link to article below:

https://www.restaurantbusinessonline.com/financing/jack-boxs-del-taco-deal-was-more-expensive-it-seems

 

Restaurant Business – WHY BARBELL PRICING IS THE STRATEGY DU JOUR ON RESTAURANT MENUS

The two-pronged approach has been gaining steam amid an economy of haves and have-nots.

By Joe Guszkowski on Nov. 22, 2022

Barbell pricing

Barbell pricing allows restaurants to appeal to two types of consumers. / Photo illustration: Nico Heins/Shutterstock

As inflation continues to cast a shadow over the economy, restaurants are turning to an age-old marketing tactic to keep customers coming in the door.

Barbell pricing—the practice of simultaneously promoting both high- and low-priced menu items—has made a comeback this year as operators look to appeal to two sets of customers: those who are hurting from inflation and those who aren’t.

“It’s a way of being able to talk out of both sides of one’s mouth,” said John Gordon, restaurant analyst with Pacific Management Consulting Group.

Mentions of “barbell” have spiked on earnings calls this year. Executives of at least eight publicly traded chains uttered the term during the most recent round of quarterly updates, according to data from financial services site Sentio. Between 2018 and the start of this year, “barbell” had surfaced just a handful of times, a sign that the strategy is gaining steam.

Barbell buzz

Sentieo chartRestaurant executives have been talking about barbells quite a bit this year. Source: Sentieo transcripts of 14 publicly traded restaurant chains

It comes as restaurants try to strike a difficult balance between generating traffic and protecting margins. By offering traffic-driving deals alongside pricier items, restaurants hope to capture customers on both ends of the spending spectrum while also encouraging trade-up.

Red Robin, for instance, is currently offering a $10 Gourmet Meal Deal while also pushing a limited-time Cheese Lovers menu featuring a pair of cheesy burgers for $15.99. The chain said the barbell arrangement gives customers more choice.

“How do they want to spend whatever discretionary income they have?” former CEO Paul Murphy said in June.

The two-pronged approach mirrors the tale of two consumers that has emerged this year. Lower-income Americans have been most impacted by inflation, while higher earners are behaving normally or even spending more: New data from OpenTable found that sales of restaurant meals over $50 are up 8% this year compared to 2019.

In that environment, more traditional discounting can be counterproductive.

“You don’t want to surrender the average check,” Gordon said. “If you only talk about discounts, then ultimately you’re going to have a big mix shift down, and you’re going to take it in the shorts on average ticket, and that would be disastrous.”

Papa John’s echoed that philosophy on its recent earnings call while noting that inflation has been weighing on demand. In response, the chain rolled out a $6.99 mix-and-match deal geared toward price-sensitive guests.

“While we saw competitors undertake aggressive discounting, we continue to take a balanced approach, providing the right promotions to our value-oriented customers without risking the erosion of our brand or pricing integrity on our more premium offerings,” CEO Rob Lynch told analysts earlier this month, according to a transcript on Sentieo.

The same dynamic has been on display at Chili’s, which has actually cut back on discounts recently to help build sales. And while it continues to promote a 3 for Me value menu starting at $10.99, it has tightened it up to entice guests to jump into higher tiers (like a $15.99 sirloin steak) or onto the full-price menu.

CFO Joe Taylor admitted that the approach has hurt traffic, but it has added profitable sales.

“We think that’s worth the tradeoff,” he said.

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Wray Executive Search – RESTAURANTS: THE NEED FOR THE INDUSTRY TO “WALK BETWEEN THE RAINDROPS”

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

An evening or two of watching cable television ads gives you some sense of what is happening and will be affecting consumers going forward. You see endless QSR 2 for $5 or 2 for $3 themes returning, along with ads for vacations, cruises, and exotic vacations. The 40/60 economy seems clear:    Consumers with household income over $100K seem to be OK but under that are varying degrees of price and frequency struggle. Cutting back on restaurant visits is that old standby; but I’d bet with all the time and waste of shopping and cooking factored in, cooking on every occasion is more costly in the long run. But it has hard to dislodge conventional wisdom. Going into the fall, the conventional wisdom was that the 40%–the better-off component of the consumer base was relatively unaffected. Turns out that may be wishful thinking.

Inflation’s rising toll

Listening to the publicly traded chain restaurant earnings calls, one develops a sixth sense about what the CEO or CFO is trying to politely say honestly, without being too dramatic. Early this year, there was discussion of no impact or little impact via menu mix trade down by lower income guests challenged by gasoline or other forms of inflation that were starting up. Some brands, like Chipotle, said they had no lower-income consumers.

Non-aligned consumer research company reports are now reporting that inflation sensitivity is spreading. On October 25, Morning Consult reported “ higher-income adults are also now facing budgetary tradeoffs, which are coinciding with a period of rising core inflation and dwindling real incomes. Looking ahead, Morning Consult’s Purchasing Power Barometer “points to the likelihood that real consumer spending growth is going to slow further. Consumers at all income levels reigned in spending in September.”[1]    

On the positive side, the price change in restaurant meals—menu board price changes, or food away from home has been less than grocery store inflation by a wide margin every month as we have pointed out. We just wish there was more creative agency marketing to enhance this message.

Implications of rapid changes to planning and profit execution: What Walking between the raindrops means at the concept level

“Walking between the raindrops” is a corollary to Mayor Mike Bloomberg’s post-2000 business planning philosophy: be flexible and lean. Be thoughtful about potential outcomes beforehand and ready to move out of issues quickly. Have one backup plan.  Don’t get caught in red tape.

Looking ahead, for us, none of these restaurant challenges or outcomes are all that shocking, frankly. We are always going to be challenged by food and labor cost increases and how to pass on our costs effectively so as not to shock guests.  We will always struggle to some degree to attract and retain staff. We will have competitors to beat and too expensive buildings and investments to amortize. We know or should know our base customers, our aspirational guests, and with whom we’d like to increase frequency.  We are always going to struggle to make money.

If we don’t know the proforma profitability between dine-in, delivery, and take-out channels, that is a quick must-do fix. If we don’t know how much our digital guests over-index in frequency or ticket versus other guests, that must be documented to make the marketing plan more effective.  [I’m mentioning this because I just discovered one of my most analytical clients still did not have these metrics in place].

Read the Chipotle, Mcdonald’s, Starbucks, and Darden earnings calls and investor day presentations and transcripts for a good sense of strategy.

And a standard marketing concept that hasn’t been discussed much for some time: “the high low concept”. The brand varies preplanned price media themes aligned for the time of year and the established average check tolerance. Working on loyalty, digital, and delivery programs of course.

Earnings notes…intelligence is that MCD US same-store sales are still rising, up mid-double digits in October. This is on the strength of Halloween premiums and the 2-for $3 platform, as well as adult toy premiums from early October. Placier AI indicated the Adult Happy Meal got a mid to high teens traffic uplift post rollout in mid-October.  Chili’s (EAT) company restaurant margin, unfortunately, hit a new low in its Q4 report, at a 6% EBITDA margin. Chili’s has been battered all year with food and labor cost problems.  While many are waiting for trade down guests from full-service restaurants to fast casual and QSR concepts, it does not appear to have happened yet.

2023 Forecasting….. I’m doing a worldwide benchmarking review for a client, and broadly speaking, peer companies sort out into several groupings: (a) good SSS momentum, moderate food, and labor cost inflation (b) flat sales, moderate food and labor cost inflation (c) negative sales, moderate inflation.  Some US brands and several Old Continent brands are in category C, with a harsher recession expected there. In the US. With a hat tip to my friend David Maloni, a longtime industry expert, foodstuffs themselves are coming down (as we have noted in these pages) but the problem is freight, diesel, wages, and other transportation and indirect costs are still inflationary. Therefore food will still be up in 2023, just less so. Labor wage rates will be up again, likely a bit less so (hat hit: Sara Senatore, B of A Restaurant Analyst, staffing model).

Looking forward to seeing you…. At Restaurant Finance and Development Conference, November 14-16, at the Wynn Hotel in Las Vegas. I’ll be moderating the M&A Panel on Tuesday at 130p. Please stop by!

 

About the author:  John A. Gordon is a long-time industry analyst and expert, with 45 plus years, in unit operations, 20 years in restaurant corporate staff roles (financial planning and analysis), and 20 years via his founded consulting firm, Pacific Management Consulting Group. He works with complex restaurant investors, operations and economics review, and litigation engagements among others for clients. He is always reachable at 858 874 6626, or jgordon@pacificmanagementconsultinggroup.com.

 

[1]   Morning Consult, October 25 2022, Measuring the Impact of Inflation on US Consumer Spending.

Wray Executive Search – RESTAURANTS: THE SEARCH FOR WHAT WE CAN CONTROL

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

So, being a restaurant operator, and allied industry member, such as employee, investor, vendors, analysts, consultants and others, it has been a wild ride since February 2020. Two black swans since then: the Pandemic itself in March 2020 and then the War in Ukraine in late 2021 have affected global society and business. These factors are still kicking us every day.

I’m afraid we will soon have another bad swan upon us, the FED, which is bound and determined to raise interest rates to lower an artificially constructed index that may not be correct. That may cause a recession. [1]Another thing we operators, investors, employees, suppliers and analysts can’t control.

THE INDUSTRY INFLUENCES AND PARTIALLY CONTROLS MANY BUSINESS FACTORS.

In preparing a recent project for a client, I looked at industry pricing and food cost percentage changes all the way back to the 1980s. There were a couple of irregular periods, but generally pricing as measured by both ticket and BLS survey rose about 3 to 3.5% from 1981 to 2019. Food cost percentage and BLS inflation—food away from home also typically rose around 3%. There were some tight spots, but restaurants acted liked a machine, spitting out price increases. In fact many chain restaurants, preferred not to price for labor, leaving that to volume efficiencies to cover. The problem was, labor costs in both QSR and full service rose in the 00s.

Doubts about the restaurant model

Lately several operators and investors have mentioned that in this current environment, little is actually controlled by the restaurant brand operator.  I disagree. In the post pandemic world all of the challenges can be reacted to. The challenges, while overwhelming are really nothing new other than the dual food and labor cost inflation we have seen in late 2021-2022. There are many business functions restaurant brands and operators still do control.  Here’s two:

Pricing actions in this new world are controlled by Restaurants

Restaurants now have to look through their total product mix and store mix creatively to cover all costs. Every restaurant brand controls its pricing. Franchisors provide reviews and recommendations to franchisees who set their own pricing, except for two QSR brands who insist on predetermined prices. [2]   But yet, we have reports from polling agencies  that consumers are blown away by high restaurant prices. Many analytical questions remain: what type of customers? On what type of offers? Where? There is growing evidence that there is a gap of retail and restaurant acceptability between upper income guests and lower income guests.[3] That will produce challenges for Marketing staff and agencies.  But this is what segmentation studies were invented for. Get them.

We will know progress is being made when we see reports of and implementation of unit by unit pricing variation. With 60 years of POS and management technology, we know a lot about our units.

Brands control CAPEX and remodeling/new unit design, too.  

We all know that store level operating profit dollars after tax and G&A; the CAPEX, the actual size of the investment buildout over time; and the interest rate charged by the lender are among the most important financial variables defining success of the restaurant investment. While we are struggling to control Pandemic problems, this CAPEX factor is under our control whether we are franchised or not.

Starbucks, Wendy’s, Outback, Darden, and many other brands have moved out smartly post pandemic with transformative store prototypes. Starbucks for example is still in the middle of a massive store base transformation.

Having watched ROI by remodel class and brand over the years, I can say that remodels and upgrades typically get a sales lift for some time thereafter. Usually, not always. The length of time varies, but year one and two are typically greatest. Once the entire market is done there is a uplift effect on brand ratings. Of course, QSR and full service units get different uplifts. It is interesting to note that exterior remodels scored  ROIs in both QSR and full service, supporting the notion that one value of the remodel is to advertise the value of the brand to the outside community via the look of the unit.

Franchisors are often going to have issues “selling” the value of the new unit or remodel to its franchisees quickly. That is what company units and good proformas are for.

Lately, its been difficult to get all the parts necessary for remodel completion. Hopefully, the external remodel portion can be completed first to get those benefits.

Heard and Seen in the Restaurant World

M&A and the Restaurant Finance Conference: I’m honored to be moderating the M&A Session at the RFDC in Las Vegas on November 15 at 130p at the Wynn Hotel. We will have 4 great industry experts to discuss trends and outlook. So there is latent M&A demand waiting for conditions to improve but conditions are depressed right now. Please attend to hear more for your 2023 planning.

The Starbucks ($1B plus) and Burger King ($500M) OPEX and CAPEX investments  were huge and will require multi year tracking to see the ROI. In the Burger King US case , the brand was behind its peers to say the least. For a client, I recently found that BK US and one other brand were the only two major US burger brands that had flat AUVs for 9 years, 2012-2020.

Food Commodities have peaked when looking at the very beginning of the US food supply chain. See BLS tracking However, the issue looking ahead is there are manufacturer issues, distributor issues etc. Driver wages, fuel, distributor outages and errors than drive up costs. Sysco just had a strike imposed. 2023 will be less inflationary than 2022 by half, many are estimating.

On the more positive side, casual dining staffing levels are returning to a somewhat more normalized pre-2000 level. Hopefully this will improve service levels and moderate wage growth. Hat hip: Sara Senatore, Bof A Restaurant Analyst.

MCD US sales momentum in October appears to be brisk due to premiums moved and marketing activity. Franchisee intelligence and in store visits point to the success.

 

About the author: John A. Gordon is a restaurant analyst with 46 years in the industry. He had early experience in restaurant operations, 20 years at restaurant corporate staff roles (Finance Planning and Analysis) and the last twenty years via his founded restaurant management consultancy,  Pacific Management Consulting Group. Pacific works complex analysis and investigative projects for operators, investors, franchisors, franchisees, litigation support engagements, attorneys and others. Call him with questions or business issues at 858 874 6626, or 619 379-5561, email, jgordon@pacificmanagementconsultingroup.com.

 

[1]   See https://www.cnbc.com/video/2022/2022/10/13/short-if-the-fed-waits-for-core-inflation-to-hit-2 percent-itll-drive-economy-into-depression-says-jeremy-siegel-htm

[2]   Neither of these two brands have had positive SSS results in the last four year. Source: their 10Ks.

[3]   The weakness in lower in guests has been discussed in the last Brinker and McDonld’s (EAT and MCD) earnings calls. In addition, Bank of America credit card data showed $125K as the critical toggle point where luxury sales increased 10% and fell 13% in Q3 2022.

Wray Executive Search – Restaurants: Always Challenges, But We Persevere…

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

The longer one spends in the restaurant space, veterans should be less shocked when adverse actions happen. After all, the restaurant industry is a versatile industry, surviving, World War II, desegregation, multiple gas shocks limitations and lines, 9-11, overbuilding, 23% interest rates, the Great Recession, and other periodic turns, and the effect of them, the Pandemic, which is still biting us years later. But this last week governmental actions took center stage.

The California AB257 Mess… Will cause confusion and trouble and likely will raise wages. Let’s face it,  politics in government regulatory matters a lot in the 50/50 Blue/ Red state America we are set in. While CA Governor Newsom greatly improved an awful original bill written solely by an SEIU lobbyist, he signed a recast bill called the FAST Act. New is a Committee composed of 10 unelected restaurant, union, franchisee, and franchisor reps, to review and recommend wages, wage theft, and needed work conditions improvements. This process subverts the will of franchisor companies and contract/budget requirements. Yes, the legislature can strike the Committee work later, and the Committee needs to be authorized by voter signatures.

And yes, in 2023 wages can be increased to a max of $22/hour. And 2024 higher on the 2023 base. Could happen. Not will happen. The current CA min wage maximum is $16, with surely some employers starting employees higher. The problem of course is restaurant margins have fallen off 300-400 bpts since 2020/2021. The CA politicians didn’t check for that. Several wickets have to fall before the wage increases, namely the committee work.

So, the discussion in CA is there will certainly be wage compression costs but in some urban markets starting wages at $20 anyway. There will be litigation (such as… I’m not a fast food operation). I think in terms of financial impact, a pretty good QSR operation might now be $3M AUV vs. $2.5M. More on this later.

New Federal Joint Employer Regulations Are Out.  The doomsday heralded by the IFA for years. But, did you know that…   Practically speaking, the Joint employer regs will change every time the party in power changes. The NLRB regs ARE NOT federal law, federal judges and the states are free and do ignore NLRB language all the time. The US Labor Code and FLSA can only be changed by Congress! State and Federal circuits have already taken pro and con joint employer positions over the years which are binding precedents in court decisions. NLRB rulings affect only a small percentage of total labor issues. So investors and employers, use common sense, but this is not the end of the world.

Restaurant M&A Sightings:  I am honored to moderate the M&A Panel: What Will It Take to get a Transaction Done in 2023 at the Restaurant Finance and Development Conference in Las Vegas on November 15, 2022, at 130p. You are invited via the Conference! So I am watching the M&A market very closely as usual. So M&A has really fallen off in 2022 what with general inflation, uncertainty with the FED, and lower restaurant margins. It is not dead, however. Last week, there was an 8-unit restaurant IPO, a ramen operator, Yoshiharu, YOSH, on NASDAQ.  In addition, Darden (DRI) seems to be slowly looking for a great acquisition, and another holding company is soon to announce a two-brand acquisition.   So M&A is not dead, and more to come.

Industry Notables: The announcement that RBI Burger King Corp. is putting $400 million of its own money to upgrade the Burger King brand in the US is a positive sign and testimony to new BK leadership. That BK is historically weak in the US goes back decades and scores of CEOs. It also indicates that nothing good happens in a brand unless store-level sales and cash flow (EBITDA less taxes and capital spending) is positive and growing…Private equity…in discussions with franchisees with brands that have been acquired by private equity funds, the number one complaint is that rolling CEO turnover exists—every 1.5 years or less destroys morale and momentum. On my part, I can see the difference in exit multiples with companies with higher CEO turnover.

Starbucks Investor Day:  Like everyone else, we look forward to seeing the grand plan for the future. From an investment standpoint, I wonder how much all these investments have added to the shop’s annual breakeven levels. Howard and Co. are convinced investing in partners equals improved sales and ROI. It should.    

Seen and Heard: While in Phoenix lately for a franchising conference, I toured a Portillo’s (PTLO) unit as well as a deep dive at a Dutch Bros (BROS) unit with an investor friend.  The Portillo’s unit is a big buildout (watch that) but the most amazing variety of food types under one restaurant roof. The realistic average ticket per person was $12-15. It has some beer and wine, and a drive-thru of course.  I had a burger and entrée salad, and both were high quality. The staff was beyond friendly and helpful. The investment question I have is how effective can digital and local store marketing be to drive awareness in those new markets so far from Chicago to drive sales and profits.

The Dutch Bros unit was in the heart of the ASU campus on the main road. It got tremendous walk-up and drive-thru traffic. The DT traffic drifting into the main road is a major problem of course. It is on a lot with parking, fortunately. The staff, about 5 on board at 6p, were friendly. They indicated they loved working there, with casual dress and atmosphere. Its pathway is solid and will compete with Starbucks, indies, and Dunkin to a lesser degree. Especially for sites and employees.  Their guests are young and price sensitive, but the drink profile is targeted.

 

About the author: John A. Gordon is a long-time restaurant industry veteran, with 46 plus years of experience in restaurant operations, corporate staff (Finance FP&A, 20 years), and 20 years via his restaurant analysis consultancy, Pacific Management Consulting Group. He works complex operational and financial analysis projects for operators, investors, attorneys, and others. Contact him at 619 379-5561 or jgordon@pacificmanagementconsultinggroup.com.