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

The good news in June sales…. The Bank of America credit/debit report shows improved restaurant sales trends in June vs. May in all but one restaurant segment and in all consumer income cohorts. Versus a year ago, chains were up 5.1% in June vs. 3.1% in May. QSR less pizza was down slightly 7.3 %v 7.4%. Interestingly all of the other segments were positive, with a large positive movement to casual dining (-1.3% to 5.3%). Typically, North American restaurant seasonality peaks in June so we will check to see what happens in July.

The results by the brand continue to back up the “restaurants as splurge option”. In their June 2023 Consumer Update, McKinsey survey data from December 2022 noted restaurants as the top planned “splurge” event.

Tipping everywhere….The  US Census Department July food at home/food away from home numbers will be released soon. US restaurants are still taking price increases, now at a greater rate than grocery stores. That continues to be an item of great price/value concern for restaurants. This matter has become more complex because of the addition of tipping software. See Square. [1]Most common in some QSR and fast casual concepts, guests have the option to add on tips. The tips are starting to add up according to conversations I’ve had, to $3 to $4/hour. The tips are of course the property of the employees and are paid out. The issues are (1) guests have even more price messaging when we have taken so much and (2) for the US Census reporting, there may well be pollution in the so-called “restaurant pricing number” reported.

CAVA-momentum startles the IPO markets…. So we all knew it would happen and it did. The CAVA IPO was the international financial markets talk for about 2 weeks straight. As noted earlier, it is a good brand with great demographics already, strong AUVs, and company restaurant margins tracking north of 20% in 2023 to date. It does need more units of course, with only app. 260 now, to improve its current too-high G&A cost ratio. Analysts are just now offering up opinions, the first CAVA analysts call is still some time off.[2]

Throughout the roadshow period and IPO, the informal chit-chat comparisons were endless: this is the next Chipotle. The fact is, only the Chipotle of 2006 was the IPO version and the Chipotle of 2023 isn’t the IPO candidate. CAVA was built differently.

In its S-1 it forecasted a US unit potential of 1000. That was very reasonable. Since its stock price zoomed up to close at $54 in its high close to date, some security analysts will push the company to commit to even more units to make their price/earnings models work. However, US restaurant brands committing to thousands of new units in the post-pandemic era, either company owned or franchised, face tremendously difficult odds to do so. For one, many of the good sites are occupied by tier-one players now. Secondly, the industry, especially the largest, strongest brands is expanding now. It is still hard to find good staff, although CAVA will produce staff promotions from a great operations system. In this going forward, this is exactly where Chair Ron Shaich, who has been through the Wall Street pressure cooker for a decade earlier, can be very helpful and provide guidance to CAVA.

Subway Auction Update: “Continuing Drawnout”. Josh Kosman the M&A reporter from the NY Post confirmed[3] last Friday that the current auction cycle closing dates were…pushed back as Subway now thought they had one or two new prospects that may result in a more favorable bid amount than what all of the earlier months of rounds had resulted in. Time will tell if true.

This cycle of saying no to a final offer and going back to the drawing board is somewhat remarkable. Restaurant M&A theory is “time kills all deals” as often stated at the Restaurant Finance Monitor’s annual conference.  This process has been underway for 6 months to date. It is difficult for bookrunner JPM to keep market momentum for so long.

At least half of the net proceeds after expenses seem to be going to Dr. Buck’s designated will directive, a nature foundation in Maine. That won’t benefit the corporation. We can reasonably assume that servicing the debt on a 15% or so interest rate will be a terrible burden for the brand itself going forward, much like many other LBOs over the years. That raises the question: why fight so much for the highest possible sell price?

More Restaurant Developments, Both Surprises and Not:

McDonald’s and Grimace’s Birthday:  targeting one of their core markets, the Grimace LTO seems to have driven traffic nicely in June. According to Placier AI, a surge of traffic hit. The only question now is what happened to the ticket. There were 2 associated meals.

Another IPO following CAVA…  Gen Restaurant Group, symbol GENK, opened in June at $18. It raised $43M, more than expected. The second Korean BBQ concept is now public that really can be called action-oriented and “experiential.”

Checkers Drive-In Restaurants reached a deal with its lenders to give up majority ownership from its PE owner, Oak Hill Capital Partners. Checker’s debt will be cut by $225M and will receive $25M in new debt financing. IMO, Oak Hill’s prior investment level was mistimed and proves once again that owning franchised restaurant brands IS NOT NECESSARILY a goldmine.

Restaurant Staffing Stats:  Per WSJ, QSR employees now operating with 10% fewer employees per unit versus 2019, while full-service locations are down 7% over the same period.[4] In my opinion, I am not surprised by the QSR number but the full service number shows the industry still has work to do in recruiting and retention.  The Wall Street Journal piece was filled with a discussion of difficult restaurant service.

Future M&A Noted:  Listening to both Darden and YUM earnings calls recently, both mentioned that they would keep their eye out for future potential acquisitions that may enhance their portfolios. This is what good holding companies should do. Darden is just now integrating its Ruth acquisition, so its interest no doubt will be much further in the future.

About the author:  John A. Gordon MAFF is a long-time restaurant analyst and management consultant. He works on complex restaurant operations, organizational/brand assessment, and earnings topics for clients.   He has 20 years of corporate staff experience and 20 years via his founded consultancy, Pacific Management Consulting Group. He can be reached anytime at 858 874-6626, jgordon@pacificmanagementconultinggroup.com.

[1]   See: Squareup, https://www.squareup.com

[2]   https://seekingaplha.com/news3986553-cava-rising-analysts-space-for-growth

[3]   https://nypost.com//2023/07/13/subway-fails-to-get-10b-bid-for-chain-extends-deadline/

[4]   Wall Street Journal, June 27 2023, data by Market Intelligence by GuestXM.

What has been learned through the end of Q1 earnings:

Although surveys of consumer tightening of restaurant spending are everywhere (traffic oriented ), sales have generally kept pace, very strong at some concepts.  Looking at reported restaurant results in Q1, one sees only a handful of real problems, pizza for one.

What most concerns me is the reports from analysts that have an international credit card in their company that they can tap into (for example, Sara Senatore, Bank of America) that show May spending has continued weak in QSR pizza, casual dining has just turned weak. QSR x pizza is up slightly month over month and fast casual is slowing down.[1]

So, Q1 brand reported sales have kept up because of average ticket growth continuing.  Food at-home inflation (8.6% in April with a May report coming soon) is substantial and is powering sales, and beating out somewhat moderating cost inflation at the same time.   That helped margins. One interesting matter to keep a watch on is the tip function now added in so many places to POS units may be distorting the consumer food away from home CPI measure higher. As we all know, restaurants do not keep tips but customers may remember what they pay.

My working thesis remains that while there will be some brands that will suffer from mismanagement, lack of new product new news, and deteriorating demographics, those will be finite. We will not see the industry-wide declines ala the 2008-2009 recession this time.

Another important development is that the IPO window has finally reopened. As discussed here many times, there were several latent IPOs ready to go, waiting for optimum market conditions. The very important VIX rate, the CBOT measure of daily stock trading volatility, finally settled down and was close to ideal levels in late May. CAVA, the fast-casual, 253-unit bowl concept was the first to file its S-1, and its roadshow began last week. CAVA will debut this week on Thursday in a $19 to 20 range, upgraded once. Panera’s confidential filing was next noted, and FAT Brands’ signal to launch an IPO of Twin Peaks was noted last week. CAVA has strong demographics, SSS trends, and restaurant margins (20%) but operates at a prior-year loss that will disappear with debt payoff. The funds raised for all these IPOs will be used for general purposes, including paying down debt. There will be more, Fogo de Chao and others.

Restaurant Op-Tempo Conditions:  Among the company-owned concepts, there was more mention of concern of new unit ROI with rising construction costs, and more modest store development targets. On the franchise development front, development activity should be closely watched for those brands with listless marketing and new product activity.

Subway/Doctor’s Associates Auction Goes On…and On…

In February we learned that JP Morgan became the exclusive listing agent for Subway/DAI, the franchisor. Founders Fred DeLucia and Dr. Peter Buck kicked off Subway with a single sub sandwich unit in 1965 and had grown to some 43,000 by 2022. While an amazing American restaurant growth story, Subway picked up immense difficulties during its years that now hobble its franchisees, current management, and potential buyers. JP Morgan hoped for a $10 billion price, or about a 12.5X multiple of $800M adjusted EBITDA.

Several developments in Subway’s past have proven to be difficult over time. The first was the mindless overdevelopment and self-cannibalization in the US fostered by its development agent structure and endless expansion in the US. Yes, there really does become a point of too much. That and then coupled with a 15-year period of discounting and a listless new product and new concept period, both before and after DeLucia’s death equals a store-level economics disaster. Of course, Subway reveals no Item 19 numbers in the FDD, but the last external research I saw was an EBITDAR (not EBITDA) of 10.5% in 2019. The franchisees closed 6000 units in the US since 2015. The rate of net closings has declined but 2023 is still expected to be a net negative. [2]

John Chidsey of Burger King fame was hired as Subway CEO In late 2019. His chief accomplishments to date have been the “Subway Series”, a series of preset Subway sandwiches that they are advertising via expensive sports personalities. They have boasted that same-store sales are up and have recovered in absolute terms to that of 2012 (no typo). In addition, Subway signed an impressive 13 international master franchise agreements, including a large China agreement last week.

The problem with 2012 is that a whole decade of inflation coverage in the AUV is missing. On June 8, 2023, Jonathan Maze published Technomic numbers showing that Subway was dead last, number 500 of 500 in AUV loss in 2022 (estimated) versus a 2012 base with inflation included. [3]

Back to the auction: The auction began in February and attracted interest from private equity funds. Strategic purchasers, such as YUM Brands or RBI, had taken a look years earlier and passed; today much higher interest rates may be a show-stopper for them. According to press reports, Advent Capital, Roark Capital, and Sycamore Capital are still looking. JP Morgan offered up a $5B floor loan to get things started, with a 15% interest rate. The process was to have concluded by June 1, now it is later per press reports.

Key auction considerations issues going forward are: (1) can the PE firms fund this deal profitably with possibly a 15% interest rate or higher?  (2) Subway just announced a big China development agreement. What is the potential brand strength in China and elsewhere X-US? (3) How will the PEs exit their investment?  Does Subway have the potential to be a publicly traded company in 6 years? The PEs would desire to buy in at say, 8 times adjusted EBITDA and then exit at 13 times via an IPO. That would be a win/win. But is that even possible? No one just gives money away for nothing. For more comments on the issues of a potential Subway IPO, see Jonathan Maze, “Would Subway be better off going public?”[4]

My opinion: I can see how some kind of deal gets cobbled together at some interest rate, but the risk is stress on the brand, the CEO, the franchisees, the employees, suppliers, and the corporate infrastructure would be immense, with debt service potentially gobbling much cash flow. We have seen this movie before.

The lessons from Subway? Don’t overexpand in the US mindlessly; don’t let your concept and product development fall asleep;  start your international development sooner; put a lot of attention to your franchisee store-level economics.

Roundup of Restaurant Vitals Observed:

The US Economy dodged a huge bullet…with the debt deal that passed the House and Senate in time and was signed by the President. No matter your political outlook, this serious crisis was never about the US Government cash flow (we had it)..but about government Obligation Authority. OA is the permission to use the funds we have. It is solved for two years. The consequences of failure to us, who rely on consumer confidence and debt, would have been disastrous.

Food Commodities: Foodstuffs except beef moving in a favorable trend. Beef will be a problem. Some manufacturing, transport, and distribution costs are in better shape. Hat Hip: David Maloni

New concept unit growth patterns are seen everywhere: coffee, chicken, and taco themes. Source: NRN, Technomic Top 500, indies in the field per field trips.

AND FINALLY……

One of the reasons for negative restaurant traffic is…. US unit saturation. Too many restaurants, both chains, and indies. We see the units open number every month/quarter and year. By and large, that number is stable or up 1-2% per year in store count. A few brands are shrinking, like Subway, Hardees, and Burger King. Some of the casual diners earlier. We can pretty well predict which brands will shrink. We did have shrinkage in 2020 but that was swallowed into the chaos of the 2020/2021 base. But it was not enough. Unit count growth has exceeded US population growth for years.

Black Box Intel recapped this observation on May 18, urging brands to differentiate themselves a much as possible in terms of guest and employee experience.  Seems logical. This is why I support that low-yielding marketing and advertising spending come out to make room for the new.

ABOUT THE AUTHOR:

John A. Gordon is a veteran restaurant industry analyst and management consultant. He has 6 years of field operations, 20 years of corporate staff financial planning and analysis roles, and the last 20 years at his founded restaurant analysis consultancy, Pacific Management Consulting Group. He works on complex analysis projects for restaurant operators of all types, investors, attorneys, and others who need answers about restaurants. Call him at 858 874-6626, or email jgordon@pacificmanagementconsultinggroup.com for an initial discussion.

[1]   Bank of America Restaurants Spending Note, June 12, 2023

[2]    Per CEO interview at Restauant Leadership Conference , 2023.

[3]   Restauant Business Online, Jonathan Maze, june 8 2023 (paywall).

[4]  Id, June 12, 2023 (paywall)

By Ally Marotti

McDonald’s franchisees are making an unprecedented bid to alter the balance of power in their relationship with the Chicago-based hamburger giant.

Leading the push is the National Owners Association, an independent franchisee advocacy group that launched about five years ago and represents roughly 1,000 of McDonald’s 2,000 franchisees. Advised by a well-known franchise lawyer, NOA is backing state legislation that gives franchisees more protection and is working to get the Federal Trade Commission to rewrite franchise rules in their favor.

McDonald’s and its franchisees have always had their ups and downs, but experts say the latest faceoff goes deeper than familiar debates over new product offerings and store upgrades. This time, franchisees are trying to gain more control in a partnership long dominated by the company.

“It’s not just a menu or restaurant format topic,” said RJ Hottovy, head of analytical research at location analytics company Placer.ai. “This is a little bit more personal.”

In a sign of how divisive the battle has become, the Wall Street Journal reported last month that McDonald’s U.S. president, Joe Erlinger, said in a call with franchisees that those supporting legislation were dividing the company. “You see attacks happening, and those attacks are coming from within,” the Journal quotes Erlinger as saying.

Franchisees feel threatened by corporate moves to tighten franchise terms and get tough on renewals. They also resent edicts requiring them to spend more money as inflation squeezes their margins. The fortunes of McDonald’s and its operators have diverged recently — franchisees say their cash flow has shrunk while same-store sales increases boost corporate profits and McDonald’s stock price.

Tensions are rising as McDonald’s looks to accelerate growth by stepping up new-store openings, an initiative that needs support from franchisees, who operate about 95% of McDonald’s 13,400 U.S. restaurants. Experts warn that a rift between McDonalds and its restaurant operators could alter or slow the chain’s growth plans.

“It’s usually not a good business practice to piss off your core stakeholders,” said Sean Dunlop, an analyst at Morningstar.

The NOA has given some franchisees the courage to push back on McDonald’s in ways they haven’t before, said Robert Zarco, a franchise lawyer the group hired as counsel earlier this year.

“In the past, they were very concerned about retaliation, intimidation and threats,” said Zarco, speaking on behalf of NOA. “Now, because there is strength in unity, they feel more protected by each other.”

Last summer, McDonald’s raised the bar for renewal of franchisee agreements and implemented a stricter performance review process for restaurant owners. It also changed criteria for franchisees to pass their businesses to spouses or children, saying it would evaluate all potential new franchisees the same way.

Erlinger said at the time that the changes to the renewal process were “in keeping with the principle that receiving a new franchise term is earned, not given.” As for next-generation owners, Erlinger said that adopting a uniform approach to evaluating new franchisees “regardless of the pathway” would provide “a consistent process.”

A new law in Arkansas touches on both topics. The National Owners Association supported the bill, which Gov. Sarah Huckabee Sanders signed into law in April.

The law says a franchisor’s approval is not required to transfer ownership to a spouse, child or heir. Another change in the law bars franchisors from terminating franchisees without cause “as determined under objective standards.”

Some McDonald’s restaurant owners also supported an Arizona bill that protects franchisees. The bill failed to pass during the most recent legislative session, but the sponsor, state Rep. Stacey Travers, D, said she plans to introduce it again next session.

Additionally, NOA is encouraging members to submit comments to the FTC, which is soliciting information about franchisee and franchisor relationships. Of the first 100 comments submitted, more than a dozen were from McDonald’s franchisees. They raised concerns about noncompete clauses, increasing costs and the changes the company made to its store inspections.

“Although I believe that McDonald’s has the right to insure (sic) their standards are met, I do not believe that the level of intrusions by this franchisor is reasonable,” wrote William Brown, a franchisee from Pennsylvania.

In a letter to members in February, NOA’s board said franchisee cash flow dropped by about $100,000 per restaurant in 2022 and was expected to fall again this year.

“The gap in operating revenue performance is not sustainable,” said the letter, which Kalinowski Equity Research published in a report. “We should not, and can no longer, be accepting the burden of the entire impact of inflation.”

Throwing new standards at franchisees while they’re dealing with inflationary pressures is a recipe for pushback, experts say.

“We’ve had two years of double-digit cost inflation . . . things are just tough, particularly in the quick-service restaurant world,” said John A. Gordon, principal at consulting firm Pacific Management Consulting Group. “Where there have been strained relationships for a long period of time, the relationships haven’t gotten any better.”

McDonald’s told Crain’s that it has made concessions for franchisees as it has rolled out recent changes. It adjusted the new performance review program based on franchisee feedback, and implemented it after a pilot period, so franchisees could get used to new standards before they took effect.

CEO Chris Kempczinski said during McDonald’s April earnings call that U.S. franchisees returned to positive cash flows in the first quarter. McDonald’s sales and profit exceeded Wall Street expectations, with quarterly net income rising 63% to $1.8 billion in the U.S. Sales at U.S. restaurants open at least a year— a key metric that tracks store-level growth — jumped 12.9%.

At about $285 on May 31, McDonald’s stock was up almost 8% year-to-date, compared with a more than 9% rise for the Standard & Poor’s 500 Index.

“We’re operating from a position of strength,” McDonald’s said in a statement to Crain’s. “We remain focused on driving momentum and making the right decisions for the future of the business.”

Not all McDonald’s franchisees are at odds with the company. McDonald’s provided a statement that a group of 10 franchisees put out last month that said, “We are disappointed that a small but vocal group is pushing this counterproductive agenda, which threatens our business model and the livelihoods of future generations of franchisees.”

Additionally, the chair of the National Franchisee Leadership Alliance, a company-backed franchisee group, said in a statement provided by McDonald’s that the group has had “several productive meetings” with company leadership this year and “we are clearly moving in the right direction.”

It will be hard for franchisees to wrestle control away from McDonald’s, said Mark Kalinowski, CEO of Kalinowski Equity Research, which has been publishing franchisee surveys for two decades. Unlike many other franchisors, McDonald’s also serves as a landlord to many of its franchisees.

“That gives McDonald’s a lot of leverage,” he said.

By Ally Marotti

Ally Marotti is a senior reporter for Crain’s Chicago Business covering consumer products, food, restaurants and retail. She joined Crain’s in 2020 from the Chicago Tribune.

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

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

The sandwich chain’s owners face the ultimate challenge: Revitalizing a brand after a decade-long freefall. They are trying almost everything to bring it back to life.

By Jonathan Maze on Sep. 08, 2022

Please click the link to see the full article:

https://www.restaurantbusinessonline.com/operations/quiznos-throws-hail-mary

Subway, which is exploring a potential $10 billion sale, further shrank last year in the United States as franchisees closed 2.7% of the brand’s sandwich shops, squeezing its royalties and fees.

Please click the link to see the full article:

https://www.reuters.com/business/retail-consumer/subway-shed-more-us-sandwich-shops-2022-document-2023-05-01/

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

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.

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

Fast-food restaurants are not advertising the type of mass discounts that marked past downturns. Instead, they’re flooding apps with deals. And franchisees have started to push back.

By Jonathan Maze on Mar. 10, 2023

Please click the link to see the full article:

https://www.restaurantbusinessonline.com/financing/where-are-all-discounts-look-app