Wray Executive Search – Restaurants: Be On Alert For June Developments

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

A look at the big picture…we are half way through Q1 earnings and the results have been good. The best QSR global brand indicators, McDonald’s (MCD) YUM and Starbucks (SBUX) posted very good US and international sales and earnings, but MCD warned of a Q2 recession while SBUX guided conservatively mentioning potential guest falloff in 2H.

On the full-service side, Darden (DRI) had a strong report of sales and earnings and increased full-year 2023 guidance. Their internal guest value metrics were strong.

McDonald’s forever has been concerned if an imbalance between food at home and food away from home inflation occurs. And sure enough now that has happened, as discussed here the last two months.  The US BLS survey says restaurants are taking price increases like a machine.

The industry’s analysts and observers, influenced by the lag effect of the FEDs actions raising interest rates, increased personal borrowing on credit cards, and consumer surveys indicating that guests would slow up the frequency of visitation, have mostly built in a mild 2H recession probability.  This weakness really has not shown up in the reported public numbers yet.  Strong brands remain strong, weaker weak.  Some QSR brands indicate that their portion of $75K plus consumers are up, but that doesn’t necessarily mean they are cannibalizing fine dining.

But a new problem is coming at us more quickly.

News reports from DC indicate that the US Government’s borrowing limit—an authorization number that must be passed by both the House and Senate was technically breached on January 19, and Treasury has been operating accounting actions to preserve usable cash[1]  It seems that June 1 might be the first day in a range where government “usable “ cash falls to zero.  If this happens, the US may default on some of its debt, and payments to individuals. [2]  This is very political, but there is time to resolve it.

If it did happen, we can reasonably speculate there would be another financial market panic, along with a negative consumer reaction as payments are delayed and interest rates shoot up. While politicians always wait until the last minute to resolve disputes, I’d recommend restaurant operators of all sizes ensure they have adequate liquidity coming up so as not to be caught short like some chains during the onset of the Pandemic [3] You can never have too much cash.

Ruth’s Chris acquisition by Darden is an indication that strategic restaurant M&A is alive and well in 2023.

Darden’s interest in another brand was reported earlier first by Austin Fuller of the Orlando Sentinel and then was confirmed on earnings calls in 2022. The earnings multiple paid, 9.4X was healthy. RUTH is one of the few US fine dining brands ever to be able to operate franchise units, with 80 company units and 74 franchisees. Of note, 23 of the franchisee units are international, including Singapore, Hong Kong, and Tokyo.

As I was quoted in the Orlando Sentinel[4], Darden now gets Ruth’s international platform to leverage in Asia. In my view, that is a sorely needed platform for many US brands. As reported by many observers and most recently by Black Box, the negative traffic syndrome in the US is in part caused by too much new unit growth.

Must Look Under Every Rock Update:

Last month here, I introduced the idea that because the restaurant sector’s 2-year price advantage in terms of our inflation versus food-at-home inflation had ended,  this is why we can’t revert to taking price first and must look under every rock to find non-price revenue, cost, and CAPEX efficiencies.  The May 10 chart in Restaurant Business Online shows this.[5]  

A few practical examples:

Utilities: with summer virtually upon us and record gas and electric commodity inflation underway earlier, restaurants are burning way too many BTUs, especially fast casuals and QSRs for their size. It makes no sense for freezing dining rooms on cool days or at night. Starbucks (SBUX) and Chipotle (CMG), this includes you. Yes, this may entail dual makeup air units on the roof, but these investments have a payback. Bad HVAC turns off guests too.

Repetitive devices misworking: At a McDonald’s (MCD) franchisee I visit, there is an electric door opener that opens and closes about every 20 seconds whether a guest is in the doorway or not. Using electricity, grinding out gears, and perhaps a guest accident at some point will result.

Waste in new unit construction/CAPEX: the Quiznos franchisor attempting a turnaround of its 20-year record of store operational failure, developed a “Quiznos Grill” new store prototype where the buildout apparently was $2 million. The short story: it talked a franchisee in, sales were less than $400K per year and the franchisee failed. There will be more to this story, but the sheer waste of financial and human resources is breathtaking.

Finally, and most essentially, restaurants should take the long game and protect and get their most important delivery product mix AWAY FROM the third-party delivery agents (3PD).

As Joe Guszkowski from Restaurant Business Online reported [6]Friday, the 3PD folks are after us to lower our delivery markups, designed to cover our variable costs! IMO, this is bold on their part because their own P&Ls generally operate at a loss!

On LinkedIn on Friday, May 15, I noted several executable ideas, such as: (1) deliver your big orders and leave 3pD or others for the much smaller orders  (2) Get to understand OLO and call founder Noah Glass. Understand his vision and how developing your website with as much traffic as possible is very important. (3) Keep phone numbers, and use a service. (5) Maintain and enhance your restaurants’ website, with easy ordering portals (6) In smaller urban/dense suburban areas, chain unit clusters and indies can form a delivery co-op. It’s been done before. Where you have some geographic scale and keep it simple, ROI is possible. This will produce nonprice revenue efficiencies.

 

About the author:

John A. Gordon is a long-time restaurant industry veteran with 20 plus years of experience in restaurant corporate staff financial planning and analysis roles and the last 20 years via his founded firm, Pacific Management Consulting Group. He performs complex analysis, advisory and investigative engagements for restaurant operators, investors, attorneys, and security analysts. He is always contactable at 858 874 6626, jgordon@pacificmanagementconsultinggroup.com.

 

[1]   The Government actually has real cash flow but it might not be usable.

[2]    https://www.nytimes.com/2023/05/09/us/politics/us-debt-celing-x-date.html

[3]    See for example, Cheesecake Factory, 10Ks, 2020, 2021, SEC Edgar.

[4]  https:// www.orlandosentinel.com/2023/05/04/ruths-chris-deal-could-bring-darden-expansion-to-asia/

[5]   https://restaurantbusinessonline.com/financing/inflation-fast-food-restaurants-show=no-sign-of-slowing

[6]  https://www.restaurantbusinessonline.com/technology/doordash-restaurants-odds-over-price-markups

Orlando Sentinel – Red Lobster is Making Money Again, Key Investor Says

Red Lobster in Leesburg is pictured on Monday, May 15, 2023. (Stephen M. Dowell/Orlando Sentinel)
Red Lobster in Leesburg is pictured on Monday, May 15, 2023. (Stephen M. Dowell/Orlando Sentinel)

By  | afuller@orlandosentinel.com | Orlando Sentinel
PUBLISHED:  | UPDATED: 

Red Lobster shareholder Thai Union says the Orlando-based seafood chain turned a profit again in the first quarter of this year, and the company doesn’t plan to sell the brand even as challenges remain.

The Thailand-based seafood supplier reported it had a “share of profit from operations” for Red Lobster in the first quarter of this year, improved from a loss in the same period last year.

“I want to manage your expectation,” said Thai Union group CFO Ludovic Garnier on a May 3 earnings call. “We still have a lot of work to be done.”

Thai Union is still projecting a loss for the full year from its share in Red Lobster, Garnier said. The chain is also still without a CEO after Kelli Valade resigned more than a year ago after just eight months on the job.

But the company said in its earnings presentation it has no plans to sell Red Lobster in the short term. Thai Union, whose brands include Chicken of the Sea, became a Red Lobster stakeholder in 2016 before teaming up with a group of investors in 2020 to acquire the rest of the company from San Francisco’s Golden Gate Capital.

San Diego-based restaurant analyst John Gordon said it was notable that Thai Union doesn’t have plans to sell the seafood chain.

“It’s important to the brand and the employees of the brand,” Gordon said. “With the fact that they don’t have a CEO right now, some need of safety and continuity is vitally important to the people.”

Thai Union also said last year it was providing “financial assistance” by guaranteeing part of Red Lobster’s credit, no more than $65 million, or about 25% of the outstanding balance.

Red Lobster in Leesburg is pictured on Monday, May 15, 2023. (Stephen M. Dowell/Orlando Sentinel)User Upload Caption:
Red Lobster shareholder Thai Union says the Orlando-based seafood chain is turning a profit again but challenges remain. Red Lobster in Leesburg is pictured on Monday, May 15, 2023. (Stephen M. Dowell/Orlando Sentinel)

Thai Union’s share of profit in the first quarter of this year from Red Lobster converts from Thai currency to about $3.5 million. Their loss in the first quarter of 2022 converts to about $7.2 million today.

“There’s no question that this is a pretty dramatic turnaround in quarter one,” Gordon said. “Tactical marketing promotions and store-level operational excellence will be highly important for Red Lobster’s stability going forward.”

Garnier attributed the first quarter profitability to Valentine’s Day as well as the “Lobsterfest” limited-time event that started in January with menu items such as lobster and shrimp tacos and lobster and shrimp topped sirloin. Prices at the restaurant chain have also gone up, Garnier said.

He said Red Lobster needs to make sure it has good value between big promotions like its Lobsterfest and Ultimate Endless Shrimp as consumers in the United States are sensitive to price.

“We need to reinvent. We need to be a bit more creative,” Garnier said. “… The team right now is working on how to propose [a] new menu, new meal, very attractive from a value proposition.”

Eating out cost 8.6% more in April than it did a year earlier, with full-service meals up 7.2%, according to the federal Consumer Price Index.

Red Lobster spokeswoman Lori Cherry did not immediately answer questions from the Orlando Sentinel about profitability or any turnaround plan, but she said there are no updates on the search for a new CEO.

With Valade’s departure last April, Red Lobster revealed that Paul Kenny, former CEO of Asia’s Minor Food, would be a “liaison” between Red Lobster’s leadership and the board. Kenny is a key shareholder in the investor group called Seafood Alliance, which acquired the chain with Thai Union.

A vacancy in this kind of position for more than a year is rare, said Kevin Stockslager, executive vice president and partner at St. Petersburg-based Wray Executive Search. His firm specializes in restaurant leadership searches but is not involved in Red Lobster’s hunt.

“It certainly could be an indication that they did not find the right candidate for the CEO position, but I also think it could be an indication that they’re happy with some of the other current C-level leaders on their team and the leadership they’ve been provided by their board,” Stockslager said.

Gordon stressed the importance of finding a new leader.

“For Red Lobster to execute a true revolutionary plan, they need a world-class CEO,” he said.

afuller@orlandosentinel.com

Restaurant Business – An Activist Investor Apparently Sets Its Sights on Shake Shack

The Bottom Line: Engaged Capital, the same activist that took on Del Frisco’s and Jamba, is now targeting the fast-casual burger chain. But what would it do differently?

By Jonathan Maze on May 15, 2023

Please click the link to see the full article:

https://www.restaurantbusinessonline.com/financing/activist-investor-apparently-sites-its-sights-shake-shack

Orlando Sentinel – Darden Restaurants buys Ruth’s Chris steak houses

Ruth's Chris Steak House at the Winter Park Village, on Wednesday, May 3, 2023. Darden, the Orlando owner of Olive Garden and other chain restaurants, is buying Winter Park-based Ruth’s Hospitality Group for about $715 million. (Ricardo Ramirez Buxeda/ Orlando Sentinel)
Ruth’s Chris Steak House at the Winter Park Village, on Wednesday, May 3, 2023. Darden, the Orlando owner of Olive Garden and other chain restaurants, is buying Winter Park-based Ruth’s Hospitality Group for about $715 million. (Ricardo Ramirez Buxeda/ Orlando Sentinel)
By  | afuller@orlandosentinel.com | Orlando Sentinel
PUBLISHED:  | UPDATED: 

The Orlando owner of Olive Garden and other chain restaurants is buying Winter Park-based Ruth’s Hospitality Group for about $715 million.

Darden Restaurants revealed the all-cash deal Wednesday, saying it is paying $21.50 per share. Ruth’s stock price was at $16.03 per share Tuesday at market closing. The deal is expected to close in June. It has been unanimously approved by the boards of directors for both companies.

Ruth’s has 80 company-owned or operated Ruth’s Chris Steak House restaurants and 74 franchised locations worldwide.

Darden spokesman Rich Jeffers declined to answer questions from the Orlando Sentinel until after a company conference call scheduled for Thursday morning.

There will likely be some existing overlap between the two Central Florida companies, according to San Diego-based restaurant analyst John Gordon.

“In my opinion… there is no doubt that the Ruth’s Chris office in Winter Park will be eventually closed and it will be consolidated into the great Darden building,” Gordon said.

Ruth's Chris Steak House at the Winter Park Village, on Wednesday, May 3, 2023.Darden, the Orlando owner of Olive Garden and other chain restaurants, is buying Winter Park-based Ruth's Hospitality Group for about $715 million. (Ricardo Ramirez Buxeda/ Orlando Sentinel)
Ruth’s Chris Steak House at the Winter Park Village, on Wednesday, May 3, 2023.Darden, the Orlando owner of Olive Garden and other chain restaurants, is buying Winter Park-based Ruth’s Hospitality Group for about $715 million.(Ricardo Ramirez Buxeda/ Orlando Sentinel)

Darden has bought and consolidated other chains and has a template for how to do it properly, he added.

“Darden is smart enough and they know that they need Ruth’s Chris experienced people in the new organization,” Gordon said. “There will be some redundancies because, obviously, Darden has some of those same kinds of people.”

Examples of some departments that might have redundancies are finance, personnel and construction, Gordon said.

CEO Cheryl Henry is expected to stay on as president of Ruth’s Chris and report to Darden CEO Rick Cardenas.

“Ruth’s Chris is a strong and distinctive brand in the fine dining segment with an impressive history of delivering elevated dining experiences to their loyal guests,” Cardenas said in a news release. “ … Ruth’s Chris is a great complement to our portfolio of brands, and I’m pleased to welcome their nearly 5,000 team members to Darden.”

Darden already has 1,890 restaurants including Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, Eddie V’s and The Capital Burger.

The company last acquired Cheddar’s Scratch Kitchen in 2017 for $780 million. Cheddar’s had 165 restaurants at the time of the deal.

“They made the determination that the value end, with Olive Garden and with Cheddar’s, is enough right now and that they would rather go with Ruth’s Chris, which even more strengthens the steak house end,” Gordon said.

Another benefit for Darden in the deal is Ruth’s Asia restaurants, giving the company more access to international operations, Gordon said.

Cardenas has been hinting at acquiring a restaurant chain since shortly after he became CEO, telling the Orlando Sentinel last year he would want a full-service restaurant able to make a “meaningful difference” in Darden’s future.

Ruth’s Chris started in 1965 in New Orleans and moved to Central Florida in 2005 after Hurricane Katrina devastated that Louisiana city.

The company first moved to Lake Mary before revealing in 2011 it was relocating its headquarters to Winter Park Village. Seminole County had put up $60,000 in tax incentives to land Ruth’s as part of a $300,000 package that also included money from the state.

Ruth’s also recently opened a new restaurant at Winter Park Village, moving its old eatery across the parking lot as the open-air shopping center undergoes a $50 million redevelopment.

“Our strategy and operating philosophy aligns well with Darden, and we have a strong cultural fit that should ensure a smooth transition,” Henry said in the release. “This transaction will also provide more opportunities for our team members to develop in their careers as we continue to grow our 57-year-old iconic brand.”

Forbes – Subway’s Hidden Billions Revealed: How Its Founders Sliced Up A Fortune

As the sandwich chain eyes a sale upwards of $10 billion, a Forbes investigation reveals that late cofounders Peter Buck and Fred DeLuca had already salted away billions for their families and foundations. Meanwhile, some franchisees say they are left with crumbs.

Please click the link to see the full article:

https://www.forbes.com/sites/jemimamcevoy/2023/04/17/subways-hidden-billions-revealed-how-its-founders-sliced-up-a-fortune/?sh=66b5f65c648a

 

Wray Executive Search – Restaurants: The Need to Look Under Every Rock

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

Moving now into the seasonally higher sales Quarter 1 period, all things considered, the restaurant industry has recovered well. Consider that three years ago we were at a dead stop; only a few drive-thru concepts had any traffic; we were in the process of laying off the vast majority of our workforce; and some brands were almost out of money. Now, the industry is mostly solid, with some spot softness in pizza and some recovering brands.  However, a legacy of problems from the Pandemic follows us today and leaves us with imperatives for action.

Clear Imperatives Looking Ahead: I’ve termed this as the need to “look under every rock” first, versus going to price first. This is not a foreign concept to some. Some examples follow:

Price/cost/consumer/food at home relationship:   We experienced [worldwide] restaurant margin dollar and percentage erosion from Q4 2021 on due to double food and labor rate inflation. This rate of cost increase is forecasted to moderate in 2H 2023. But our advantage versus grocery store inflation, solid since 2021, is quickly eroding. This means that we have to get more out of the P&L and CAPEX efficiencies quickly other than price.

Capital Inefficiencies are predominant now: With Interest costs up 500-600pts over the last year, construction and transportation labor costs up and shortage of raw materials for equipment have driven up costs of restaurant new builds and remodels. On its recent earnings call,  Darden noted restaurant construction costs, especially, FF&E, were up 25% vs. 2019.  That means that site and proforma planning must be spot on no one can be stuck with a bad site with high a high cost and a bad ROI.  This also has implications for franchisors trying to meet a pre-set development target with franchisees that may or may not have funds or financing.  Some leading franchisors have done work in developing alternative store prototypes and even dedicated, lower-cost backstopped loan pools.

More work in marketing messaging, testing, and product execution is needed: Unfortunately, there are many hidden costs with the marketing discipline, predominately that discounting is not a P&L line item and that marketing campaigns and strategies done badly are only broadly apparent over the long haul.  For example, a Tier 2 QSR operator spent vast sums from their marketing fund and franchisee OPEX gearing up for a heavily discounted chicken sandwich, that flopped for operational complexity and timing reasons. No one saw the immediate costs. These costs can be avoided, and it lowers P/L stress on both the franchisor and franchisee.

Rebuilding and Leveraging The Staffing Model  After the mass cuts of 2020, studies show we as an industry burnt relationships with a lot of our laid-off staff, both hourly personnel and junior staff management. Later polls showed they would not consider coming back to work for us. Some brands, notably, Darden, built relationships and continued benefits for both hourly and temporarily laid-off corporate associates. Darden flexed back to full staffing much more quickly.

We still have holes to dig out of. As Restaurant Business Online reminded us in Late March, many restaurant brands count the value of a stable, high-performing unit general manager as the number one factor that explains store profitability more than any other factor, including location. So, coaching, motivating, and designing new plans for GMs is vitally important. At the same time, keeping a promotion window for GMs and having a good quality learning work environment is important for retention. While all are important, some needs are more critical than others, and creative spillover benefits.

HEARD, AND SEEN:  Chapter -11s and Small Acquisitions both picked up in April. X Burger King Zees, 1 MCD, 1 PLK Zee. And Corner Bakery all file Chapter 11. Small acquisitions show some money is available: Main Squeeze Juice. Port of Subs acquired by PE. MCD’s huge HQ consolidation is not clear even today, but US field offices are now all virtual. The subway/DAI sale/auction is still underway. Note from an insider: interest and reaction to date has been less than hoped; families are willing to settle for a lower price than first hoped.  Total EV might be $7B or less, versus the $10B initial goal. The Subway US unit count declined again.  Darden’s strength in the casual dining segment sets the curve.

More: waste of marketing ads/GRPs seen in some hours on cable TV where 4-6 identical spots run in 30 minutes. That is the fault of ad-buying shops that can’t manage the spot inventory.

 

About the author: John A. Gordon is a long-time restaurant analyst and management analyst, with 45 years in the industry. He is a Master Analyst of Financial Forensics (MAFF) and works in complex operations, managerial finance, and brand strategy/investigation for clients. He routinely supports investors, restaurant operators, franchisees, Wall Street entities, and attorneys in many roles. Please call him at 858 874-6626, or jgordon@pacificmanagementconsultinggroup.com.

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.

Subscribe on Apple Podcasts.

Subscribe on Spotify.

Members help make our journalism possible. Become a Restaurant Business member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.

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