Orlando Sentinel – Lazy Dog Sniffs Out More Orlando Restaurants As First Opens Near Disney

The newly-opened Lazy Dog restaurant in Kissimmee is pictured on Tuesday, July 25, 2023. Chris Simms is CEO of the restaurant chain. (Stephen M. Dowell/Orlando Sentinel)
The newly-opened Lazy Dog restaurant in Kissimmee is pictured on Tuesday, July 25, 2023. Chris Simms is CEO of the restaurant chain. (Stephen M. Dowell/Orlando Sentinel)

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KISSIMMEE  — The first Lazy Dog restaurant in Central Florida has opened near Walt Disney World and the Margaritaville Resort Orlando, but the California-based chain is looking to continue growing in Orlando.

Lazy Dog could “safely” end up having four restaurants in the Orlando market, CEO and founder Chris Simms told the Orlando Sentinel in an interview at an opening event for the eatery. The chain is now looking for locations on International Drive and in Winter Park.

“I think this is a fantastic place to introduce our brand to more of the country,” Simms said. “I think Orlando has the opportunity to be able to both have restaurants in those areas that do have more tourists coming to them, and then at the same time, going to the suburbs and catering to the Orlando residents as well.”

When going into a new market such as Orlando, the goal is normally to get two to three restaurants open in two years, Simms said.

The Lazy Dog on Irlo Bronson Memorial Highway officially opened Wednesday after a soft opening event Tuesday. It has a full bar and a menu that includes chicken pot pie, barbecue bison meatloaf, burgers, Korean ribeye bibimbap and Thai noodles.

The barbecue bison meatloaf is pictured at the newly-opened Lazy Dog restaurant in Kissimmee on Tuesday, July 25, 2023. (Stephen M. Dowell/Orlando Sentinel)
The barbecue bison meatloaf is pictured at the newly-opened Lazy Dog restaurant in Kissimmee on Tuesday, July 25, 2023. (Stephen M. Dowell/Orlando Sentinel)

Simms said the menu draws in customers with its classic comfort food, but then guests venture out to more unique items like the bibimbap.

“The menu is this beautiful combination of these craveable classics, and then this approachable innovation that really kind of gets people excited,” Simms said.

The look of the restaurant is inspired by Jackson Hole, Wyoming, where Simms’ family has a home. The location also helped spark the chain’s name, when Simms saw his mother’s dog resting by the fire there.

“What a perfect way to kind of describe what I want people to feel like when they come into our restaurants,” Simms said. “I want them to be able to just sit back, relax and just spend great time with friends and family.”

The newly-opened Lazy Dog restaurant in Kissimmee is pictured on Tuesday, July 25, 2023. (Stephen M. Dowell/Orlando Sentinel)
The newly-opened Lazy Dog restaurant in Kissimmee is pictured on Tuesday, July 25, 2023. (Stephen M. Dowell/Orlando Sentinel)

The chain also sells frozen “TV Dinners” for $10 that customers can then heat up at home. One of those offerings is salisbury steak with mixed vegetables and a peanut butter cup brownie dessert.

“You can’t find this quality if you go to the supermarket and you try to buy one of the TV dinners in the frozen aisle,” Simms said. “The things that are supposed to be crispy, are crispy. The little dessert like cooks up perfectly.”

Jenna Orme, 39, of Clermont, ate dinner at Lazy Dog with her husband and four sons, ages 2 through 11, during the soft opening Tuesday night. After driving by as the restaurant was built, Orme had the chili crunch ahi tuna “Roadtrip Bowl” for dinner. She said the restaurant was kid friendly and the family would be back.

“It was delicious. It was filling, satisfying,” Orme said of her meal. “Nice and refreshing.”

Lazy Dog started in 2003 and has expanded across the country to 48 restaurants, with about half of them in California.

Following the height of the coronavirus pandemic, Lazy Dog opened four restaurants in 2022 and is slated to have five new restaurants in 2023. It came to Florida in 2021, with its one opening taking place in Boca Raton.

San Diego-based restaurant analyst John Gordon was impressed by Lazy Dog’s expansion given the pandemic and difficulty restaurants have faced staffing up during what has been called the Great Resignation.

“For Lazy Dog to have made the jump and to expand into these other markets relatively recently is a testament,” Gordon said.

Simms said privately-owned Lazy Dog was able to return to being fully staffed quicker than other restaurants, which has helped drive their growth.

“Because we were able to staff, we were able to open up full hours,” Simms said. “We were able to capture a bunch of market share. We were able to really grow the business even within the existing restaurants, which then enabled us and gave us confidence, to then continue to grow across the country.”

Lazy Dog has about 6,300 total restaurant employees with about 200 in Orlando, according to spokeswoman Sara Swiger.

“We make all of our decisions with people in mind,” Simms said.

Simms attributes the company’s staffing success to leadership training and creating a roadmap for hourly restaurant employees to move up into management.

“The No. 1 reason why people leave a job is because of their boss,” Simms said. “Therefore, we’re creating better bosses so that our teammates feel appreciated and are motivated.”

While fears over a potential economic recession have loomed over the last year, Simms was optimistic at his Orlando restaurant’s opening when asked about challenges for his industry.

“I’m feeling really good about the future of casual dining,” Simms said.

Wray Executive Search – Restaurants: Ever Changing Dynamics

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.

Orlando Sentinel – Red Lobster Will Now Provide The ‘Endless Shrimp’ Offer Every Day

By Austin Fuller Orlando Sentinel

Red Lobster revealed Monday its “Ultimate Endless Shrimp” promotion is now “here to stay,” following earlier comments from a major shareholder that the seafood chain needed to create a new menu with more value for customers.

For $20, customers can start with two shrimp dishes and then order more. Options include coconut shrimp, garlic grilled shrimp skewers, garlic shrimp scampi, and others. The meal comes with the customer’s choice of a side as well as Cheddar Bay Biscuits.

Orlando-based Red Lobster recently offered the deal in September, when restaurants were in one of the slowest parts of the year in the weeks after Labor Day, but now the promotion is “available all day, every day,” a news release said.

Red Lobster shareholder Thai Union reported in May it had a “share of profit from operations” for Red Lobster in the first quarter of this year, a turnaround from a loss in the same period last year.

But Thai Union group CFO Ludovic Garnier said on an earnings call there was still a lot of work to be done and Red Lobster needed to make sure it offered good value between big promotions like Ultimate Endless Shrimp because 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 8.3% more in May than it did a year earlier, with full-service meals up 6.8%, according to measures by the federal government.

San Diego-based restaurant analyst John Gordon said there are risks with moving the promotion to the everyday menu, including that Red Lobster loses the deal as a marketing opportunity.

“It is new news for a while, but after a while, it’s no longer new news,” Gordon said. “What is paramount in the restaurant business is to provide new product, [and] new news.”

While Gordon noted seafood supplier Thai Union’s expertise in sourcing products, he said another risk is Red Lobster could be put in a difficult position with the promotion’s price if there is a spike in shrimp costs.

The positive, Gordon said, is adding the promotion to the menu will attract a certain kind of customer and bring in sales.

But “after a while, the impact of that will wear off,” Gordon said. “I have seen this over my 45 years [in the restaurant industry].”

Thai Union said in its earnings presentation it had no plans to sell Red Lobster in the short term. The seafood supplier, 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.But there have been some public signs of instability at Red Lobster, with CEO Kelli Valade resigning after just eight months on the job in 2022. A new CEO has not yet been announced.

“Ultimate Endless Shrimp” has been around for more than 18 years.

“Knowing how much our guests love and look forward to the return of Ultimate Endless Shrimp each year, we decided it’s time to make this guest favorite available all day, every day,” said Red Lobster chief marketing officer Patty Trevino, in the release. “And this is just the beginning — we’ll be ‘dropping’ more Ultimate Endless Shrimp excitement later this year.”

Wray Executive Search – Restaurants: A Simple Reason for why Restaurants Have Been Posting Negative Traffic; And Other Lessons Learned Recently

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

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)

Crain’s Chicago Business – McDonald’s Franchisees’ Unprecedented Push For More Power

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.

Orlando Sentinel – Olive Garden Server Builds Loyalty: ‘If Chris is not here, I don’t come in’

Olive Garden server Christopher Johnson, on Tuesday, May 16, 2023.
(Ricardo Ramirez Buxeda/ Orlando Sentinel)
Olive Garden server Christopher Johnson, on Tuesday, May 16, 2023. (Ricardo Ramirez Buxeda/ Orlando Sentinel)

PUBLISHED:  | UPDATED: 

Christopher Johnson keeps a photo album of many of the Olive Garden customers he has served over the decades.

There are pictures of Walt and Caroline, who knew Johnson from his first stint with the Orlando-based chain that began in the 1990s. They were there his first day back when he returned to work for Olive Garden a second time in 2003.

They would always get the tiramisu, Johnson remembers, and while he said Caroline has since passed away, Walt, now in his 90s, still dines at the restaurant with his son.

“He still has the same soup and salad, Zuppa Toscana,” Johnson said. “He doesn’t do his dessert anymore, but he always tells me, ‘Make sure you give me a good scoop [of soup].’ But that’s my friend.”

Olive Garden server Christopher Johnson shows his album of photos of his regular customers, on Tuesday, May 16, 2023.(Ricardo Ramirez Buxeda/ Orlando Sentinel)
Olive Garden server Christopher Johnson shows his album of photos of his regular customers, on Tuesday, May 16, 2023.(Ricardo Ramirez Buxeda/ Orlando Sentinel)

At a time when restaurants have struggled to keep and hire employees amid the “Great Resignation,” Johnson’s loyalty to Olive Garden, and his regulars’ loyalty to him, is paying off for the chain’s Orlando owner, Darden Restaurants.

Darden’s retention levels are higher than the industry average, spokeswoman Lauren Bowes said, but she could not provide specifics ahead of next month’s earnings call. She said it’s not unusual to walk into any one of their restaurants, where servers make an average hourly wage of $25.46, and find long-tenured staffers. Darden has 180,000 employees.

“If you can generate a team of people like [Johnson] … that just have that sparkle, that connect with and engage with their guests, and create that deeply satisfying human experience when you dine out, that drives demand,” said Geoff Luebkemann, senior vice president of the Florida Restaurant & Lodging Association.

Johnson, 50, of Orlando, first started with the chain in Winter Haven in 1994 while he attended community college. He transferred to the Orlando Fashion Square mall restaurant in 1997 while he was at the University of Central Florida.

After getting a television production job with a station that aligned with his radio and television communications degree, Johnson left Olive Garden in 2000. He returned to the restaurant in April 2003 and moved across the parking lot when a new location opened there in 2019.

His photo album started about a decade ago.

“I was like, ‘My 10-year anniversary is coming, and I want to have something that if I ever leave, I will have something to remember all the folks because they’ve been good to me over the years,’” Johnson said.

His memory is one of the talents Johnson’s guests love about him.

He knows to bring peach tea drinks to-go for regular Joyce Jackson, 70, and her granddaughter Imani Finney, 17, at the end of their meal.

“He knows what you want,” said Jackson, of Orlando. “He knows how you like it.”

The grandmother and granddaughter dine together at the Fashion Square Olive Garden two or three times a month, but they have a rule.

“If Chris is not here, I don’t come in,” Jackson said.

Olive Garden server Christopher Johnson takes care of his regular customers, Joyce Jackson and her granddaughter, Imani Finney, on Tuesday, May 16, 2023.(Ricardo Ramirez Buxeda/ Orlando Sentinel)
Olive Garden server Christopher Johnson takes care of his regular customers, Joyce Jackson and her granddaughter, Imani Finney, on Tuesday, May 16, 2023.(Ricardo Ramirez Buxeda/ Orlando Sentinel)

‘Olive Garden has always been good to me’

Johnson said he returned to Olive Garden after his TV station cut hours and downsized.

“At the time, I had the same general manager and there were a lot of the same coworkers [at Olive Garden],” Johnson said. “We had a really good rapport with working together. So it was no problem for me to come back.”

He worked lunch Monday through Friday, a schedule that allowed him to do freelance videography work when he came back. His exact hours vary based on how busy the restaurant gets, but he is generally at the restaurant from 11 a.m. to 3 p.m. or 4 p.m.

Johnson now also drives for Lyft in his free time, a way to earn extra money he picked up when dining room traffic was slower because of the coronavirus pandemic.

Olive Garden server Christopher Johnson adds cheese to Becky Hartwig, one of his regular customers, on Tuesday, May 16, 2023.(Ricardo Ramirez Buxeda/ Orlando Sentinel)
Olive Garden server Christopher Johnson adds cheese to Becky Hartwig, one of his regular customers, on Tuesday, May 16, 2023. (Ricardo Ramirez Buxeda/ Orlando Sentinel)

The reason he gives for staying in the same job for decades is succinct: “Olive Garden has always been good to me,” Johnson said.

He said he was only out of work for a week when the coronavirus pandemic shuttered restaurants across the country. Even that was covered by Darden’s coronavirus emergency pay for furloughed workers.

“They were really committed to me,” Johnson said. “I was stir-crazy because there was nothing to do but go to the grocery stores, and I did not want to go to another grocery store.”

He returned to Olive Garden after that week and delivered meals from the restaurant and helped fill takeout orders in the parking lot.

“Many restaurants just simply regarded employees as a useless commodity and threw them over the side once the revenue disappeared. The hourly employees who were working at that time didn’t forget it,” said San Diego-based restaurant analyst John Gordon. “Darden and other best practice full-service restaurant providers noted that, and they didn’t want to be caught in that paradigm. … They knew it would be more difficult to get employees back from the pandemic.”

It wasn’t until around this past Thanksgiving that many of Johnson’s Olive Garden regulars returned after staying home during the pandemic.

“I want to say maybe half of my regulars are over 75,” Johnson said. “Just to keep them safe, they just did not come, and it took a little while for them to kind of get comfortable.”

Olive Garden server Christopher Johnson, on Tuesday, May 16, 2023.(Ricardo Ramirez Buxeda/ Orlando Sentinel)
Olive Garden server Christopher Johnson, on Tuesday, May 16, 2023. (Ricardo Ramirez Buxeda/ Orlando Sentinel)

Having the option of sick leave

Johnson has also benefited from another change at Darden that started in 2020.

Darden rolled out a paid sick leave policy in March of that year, around the start of the pandemic, where hourly workers accrue one hour of paid sick leave for every 30 hours worked. They can use up to 40 hours per year and can carry time over with a maximum balance of 60 hours.

The company also offers two weeks of paid family medical leave over a rolling 12 months that can be used to care for one’s self, a spouse, child or parent, Bowes said.

The sick leave, which many service workers at other restaurants and grocery stores across the country still don’t get, was a lifesaver for Johnson last year when he developed gout that affected his ankle.

“That really kind of slowed me up from serving because you have to constantly walk, walk, be on your feet. I couldn’t do it, so that sick pay really came in handy,” he said. “When you’re a tipped employee, and the majority of your money comes through tips, and if you’re not working, you’re not making money, and so it was like, ‘OK, what am I going to do?’ … At that point, I had accumulated enough sick time hours to where I was able to benefit.”

Johnson said he has three or four coworkers who have been with Olive Garden as long, or longer, than him.

“To have a handful of people at each restaurant that’s been there since opening day is normal,” said Kat Baron, Olive Garden director of operations in Orlando, Osceola County and some of Polk County.

Darden’s CEO, Rick Cardenas, started as a busser in 1984 and has spent most of his career with the company, leaving the business in 1998 and working for management consulting firms until his return in 2001.

“Darden changes lives,” Cardenas told the Orlando Sentinel last year. “We can give people opportunity to grow and progress.”

Gordon noted Darden’s career ladder for hourly workers and managers as one of the reasons for its better retention.

Take Baron, who has been with Olive Garden for 15 years after starting as a server. She worked as a general manager for six years and then about two years ago she got promoted to director.

“They’ve always believed in me and made me believe in myself and given me nothing but opportunity that’s provided a great life for my family,” Baron said.

Johnson and his Olive Garden colleagues are far from the norm in the restaurant industry.

Luebkemann cited data from career website Zippia.com, which shows 34% of servers stay in their job for one or two years and 30% of restaurant servers stay in a job for less than a year.

The customers that stick with Johnson and come in regularly benefit Olive Garden. The goal is to earn one more visit every year from loyal guests who already dine there once or twice a year, Baron said.

“I wish that I just had Chrises throughout my entire region that really created that sense of guest experience,” Baron said.

Or as Johnson’s 73-year-old regular Becky Hartwig, of Belle Isle, put it: “I like the food, but he makes the experience better.”

afuller@orlandosentinel.com

The San Diego Union Tribune – San Diego Restaurant Owners Charged With COVID-Relief Fraud, Money Laundering

Pedestrians walk through the Gaslamp Quarter at downtown in San Diego.
The restaurant owners of the now shuttered Suckerfree Southern Plate & Bar in the Gaslamp were charged with fraud and money laundering.
(Adriana Heldiz/The San Diego Union-Tribune)

The owners of StreetCar Merchants Chicken Bar and Suckerfree Southern Plate & Bar were charged with fraud by the U.S. Attorney. The restaurateurs allegedly stole money allocated for COVID-relief funds.

 

Two San Diego restaurant owners were charged with fraud and money laundering in connection with an alleged scheme to falsify applications for COVID-19 relief funds, according to an indictment returned by a federal grand jury.

The Justice Department announced this week that Leronce Suel, 46, and Ravae Smith, 45, the owners of Rockstar Dough LLC and Chicken Feed LLC, allegedly conspired to underreport more than $1.7 million on Rockstar Dough’s 2020 tax forms in order to qualify for the pandemic-era Paycheck Protection Program (PPP) and Restaurant Revitalization Fund.

Suel and Smith owned multiple San Diego restaurants including North Park’s StreetCar Merchants Chicken Bar, Shotcaller Street Soul Food in Lincoln Park and the shuttered Suckerfree Southern Plate & Bar in the Gaslamp Quarter.

According to the indictment, Suel and Smith also allegedly falsified on the loan applications how the money would be used.

The business owners also allegedly made substantial cash withdrawals from their business bank accounts to launder the fraudulently obtained funds. Additionally, Suel and Smith allegedly hid more than $2.4 million in cash at their residence.

“During an unprecedented public health emergency, the United States provided these loan programs to deliver economic relief to Americans,” said U.S. Attorney Randy Grossman in a press release. “This office will investigate and prosecute those who exploited the global pandemic to unjustly enrich themselves.”

John Gordon, principal of Pacific Management Consulting Group, a San Diego-based restaurant consulting firm, said that these COVID-19 relief programs were consequential for businesses early in the pandemic. He noted that many local restaurants continue to struggle financially as they deal with inflation and supply chain issues.

“Many restaurant independents have had a very difficult time,” he said. “However, that does not excuse restaurant operators from breaking the law and gobbling up the PPP funds that they are not entitled to and this is very wrong.”

Gordon said that overall he does not believe these individual cases will negatively affect future funding programs for restaurants as the government expected people may take advantage of the funds. He said that while there have been other instances of fraudulent uses of relief funds across the country, this news is evidence that the oversight is working.

Early in the pandemic, the U.S. Small Business Administration launched federally backed PPP loans to help businesses keep their workers employed and to cover expenses. Across two funding rounds, the government authorized more than $600 billion in forgivable loans to small businesses.

The Restaurant Revitalization Fund was intended to help local businesses stay open and the SBA offered restaurants “with funding equal to their pandemic-related revenue loss up to $10 million per business and no more than $5 million per physical location.” The funds did not need to be paid back as long as they were used for eligible expenses by the deadline.

Rockstar Dough received an $82,850 PPP loan that was forgiven and a $105,728 PPP loan in the second round of the program, according to a ProPublica database. The data also show that Chicken Feed received a $142,345 PPP loan that was forgiven and a $181,455 PPP loan.

According to data from the SBA, Chicken Feed received $734,867 and Rockstar Dough received $526,000 from the Restaurant Revitalization Fund.

Suel and Smith made their initial court appearance before U.S. Magistrate Judge William V. Gallo on May 23.

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)

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?

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)
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
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?

“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.

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.

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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Subscribe on Spotify.

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

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.

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.

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.

“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.

“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.”