The Washington Post – McDonald’s, Starbucks And Coca-Cola Suspend Business In Russia Amid Mounting Public Pressure

A McDonald’s restaurant in Des Moines on April 27. (Charlie Neibergall/AP)

Several major American food and beverage companies announced Tuesday that they would suspend their operations in Russia, a step that comes after days of mounting public pressure on the corporate world to sever ties with the country over the Kremlin’s invasion of Ukraine.

The group included McDonald’s, Starbucks, Coca-Cola and PepsiCo, some of which had operated in Russia for decades and had faced heightened scrutiny in recent days as other companies elected to halt their business dealings there. A veritable naughty-or-nice list, compiled by a Yale University professor, generated headlines by highlighting the companies maintaining normal operations.

McDonald’s chief executive Chris Kempczinski said the global fast food chain would temporarily close its 850 restaurants in the country.

“Our values mean we cannot ignore the needless human suffering unfolding in Ukraine,” he said.

The company said it will continue paying its 62,000 Russian employees while stores are closed.

The decision is a notable shift for a company that has usually shied away from inserting itself into polarizing topics, industry experts say, signifying changes in global culture where corporations are no longer choosing to be neutral on social issues but responsive and declarative about their stances.

McDonald’s, Coca-Cola and Starbucks suspend business in Russia
McDonald’s, Starbucks, Coca-Cola and PepsiCo halted their operations in Russia on March 8, amid mounting public pressure over the Kremlin’s invasion of Ukraine. (Reuters)

Shortly after the McDonald’s announcement, Starbucks, Coca-Cola and PepsiCo announced they would pause services in Russia.

Starbucks’s licensed partner, the Kuwait-based Alshaya Group, which owns and operates 130 stores in Russia, will temporarily shutter locations and “provide support” to its roughly 2,000 local employees, Starbucks CEO Kevin Johnson said in an open letter. The company will also halt all shipments of Starbucks products to the country.

“The invasion and humanitarian impact of this war are devastating and create a ripple effect that is felt throughout the world,” Johnson wrote in a letter last week, as more people demanded that companies take a stance.

Coca-Cola, in a brief statement Tuesday, made a similar announcement and suspended its business in Russia.

And PepsiCo, which has operated in Russia for more than six decades, halted its soda sales, including its eponymous cola and 7UP. But the company said it would continue to manufacture milk, baby formula and baby food, allowing it to keep tens of thousands of workers employed.

“Pepsi-Cola entered the market at the height of the Cold War and helped create common ground between the United States and the Soviet Union,” the company’s chief executive, Ramon Laguarta, wrote in an email to employees.

But after days of remaining in full operation, the company decided to partially pull out “given the horrific events occurring in Ukraine,” Laguarta said.

McDonald’s is in a unique category among businesses that have announced halts and freezes in service or products in Russia. Fast-food brands have largely continued operating because many of their restaurants are owned by franchisees, and corporate brands have limited abilities to control operations at local facilities.

McDonald’s owns more than 80 percent of its Russian locations compared with roughly 5 percent of restaurants that are owned in the United States.

The stores that are company-owned are mainly for testing products and other corporate goals, according to John A. Gordon, an independent restaurant chain expert and founder of Pacific Management Consulting Group.

Gordon said the company owns a lot more stores in Europe because the sales and profits are higher. The closing down of its stores in Russia combined with the decision to continue paying employees will come with a significant financial hit but not one that will bankrupt the company or cause markets to react in a volatile manner.

“We don’t know how long ‘temporarily’ means in terms of closures, but McDonald’s will report an operating loss,” he said. “What will happen now is the Wall Street security analysts will actually lower their earning forecast because of the Russia and Ukraine effect. McDonald’s stock price won’t be arbitrarily affected.”

McDonald’s announcement is also a sign that companies are moving away from antiquated business mentalities that center shareholder interests above all others, Gordon said.

“It’s really about the stakeholders, which is greater world of nations and people,” he said.

Other companies, such as Yum Brands, which owns Pizza Hut and KFC, might find it more difficult to replicate McDonald’s stance as many of the locations are owned by franchisees, who are likely Russians themselves, making it a bit more challenging to just close shop, Gordon said, who counts Yum Brands among his clients.

Yum Brands announced on Tuesday that it is suspending operations of KFC company-owned restaurants in Russia and finalizing an agreement to suspend all Pizza Hut restaurant operations in the country, in partnership with its master franchisee.

“This action builds on our decision to suspend all investment and restaurant development in Russia and redirect all profits from operations in Russia to humanitarian efforts,” the company said in a statement.

Yet McDonald’s expressing global solidarity with Ukraine is among the most bold and decisive moves taken by a restaurant chain of its magnitude, said Aaron Allen, a restaurant analyst and founder of Aaron Allen & Associates.

“This will absolutely be a watershed moment and will reflect a precedent, not just for war but for other causes or means of showing solidarity,” he said. “You’re pretty much closing off your revenue to make a statement. Agreeing to put purpose over profits is an indication that world’s largest restaurant chain taking a leadership stand.”

Jacob Bogage contributed to this report.

Wray Executive Search – Restaurants: The Need to Stay Flexible

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


Triple inflation currently

As an industry, we were hoping to be on the other side of the Pandemic mess by now, but its effects continue in several ways that we are too familiar with: sales variability, supply chain inflation affecting, food, paper, equipment, and building elements; and the labor availability/people effect, ultimately caused by the Pandemic in the first place. As a result, the industry has triple inflation now: COGS, labor, and CAPEX [1]all at the same time. And we have to learn and reorient to changing consumer behavior, and honestly, reeducate our guests, too to what we can do for them to meet their needs.

Added to this mix unfortunately is the current threat of a major land war in mid-Asia which could kick off at any moment as of writing this week. Most of Europe[2] and Central Asia are franchised, but disruptions like this will affect global US franchisors and local national franchisees. This gets us back to my comment last month: what chain restaurant operator would have been planning for a Central Asian War in late 2021? Of course, none. Planning post-Pandemic has to have a faster cycle time, risk-based module included as part of the function.

The necessity of pricing actions and building pricing power

Listening to the Q4 2021 earnings calls to date, the very clear forecasts of 2022 cost inflation are seen. McDonald’s for example noted a 2022 food and paper inflation forecast of 8%. It noted that 2021 store wage rates rose 10%. [3] We will have more earnings this week but casual diners seem to be forecasting food and labor in the mid-single-digit zone each. It’s clear now that supply disruption chain and COGS pressure[4] will continue through 2022 and that pricing actions to protect margins must occur.

The question then reverts to pricing power and what are operators doing to maximize it. Certainly, great product new news does it along with reaching out to the guest in an individualistic way (loyalty, digital) that builds traffic, frequency and ticket. We need only look at Starbucks and Panera’s programs post-2010 and how they dug out of the Great Recession. We are now seeing the same words from McDonald’s in terms of the value of their loyalty program. [5]  Good-looking stores and QSC builds pricing power, too. They built a different guest mix over time.

Every brand has an aspirational guest mix they do not have yet. It takes time and money to get them. With the absolute need to pass on price increases, CEOs have a go signal to begin programming their guests away from silly discounts. In my opinion, there is no need for “Dancing Dollar Kings” [6] or even 20 under $2 menus[7] unless accompanied by a parallel upper-tier menu item in the marketing creative plan.

Lately, there has been a lot of self-expressed admiration of Chipotle and Starbucks ‘ pricing power factor. They have it easier because they never did deep discounting.

Reading SSS and Financial Results in 2022

Staying with our be flexible theme, we financial analysts need it too. So, we have finally lapped over 2020, the worst, most irregular year in restaurant financial history. In 2021, some publicly traded highlighted their financial results in change versus 2019 in commentary and side schedules while the core income statement and balance sheets reflected 2021 v. 2020. Most companies and sell-side analysts talked one year and two-year results.

In analysis going forward, there is a great need to look beyond the simple one-year SSS year over year change. There is no perfect base. 2021 is infinitely better than 2020.  2019 is a good pre Pandemic base. Parts of 2021 were influenced by reopening, which affected casual dining. And government stimulus payments flowed into the economy and restaurants in the spring/summer, causing some sales spikes. The point is, you might well need to refer back to 2019 to test the true trend.

Following is a Restaurant Business/Jonathan Maze article on same and my additional comments via Linked In:

Favorite Investor Question: What Will Happen to the Higher Mix?

Throughout 2021, I got many questions from investors wondering when the surge of additional items per food transaction that all of the QSRs and fast casuals reported in 2020 and 2021 would end. Some were afraid that purchasing behavior would end and those same-store sales will plummet as a result.

Well, we are just rolling out of 2021 and into 2022 and don’t have that many readings yet. One who reports all the sales components we do, however, is Starbucks (SBUX). SBUX reported the larger basket size consistently through 2020 and 2021 as a higher average ticket. In many of those back-year quarters, the average ticket was significantly positive and traffic was significantly negative.

In SBUX FY 22 Q1, in the North American zone, Starbucks stores reported comp sales of plus 18%, driven by a 12% increase in transactions and a 6% increase in the ticket. [8]  So, while the price was taken it seems that most of the prior year mix behavior—the higher number of items sold per transaction—seems to have been built into the base. And transactions were considerably higher albeit over a still recovering Pandemic 2021 base. So, we’ll have to watch it, but it seems we have a winner on our hands and people are repeating their post Pandemic behavior.

About the author:

John A. Gordon is a long-time restaurant industry veteran who loves the unpredictability and never-ending complexities of our business. He has unit-level experience (6 years), 18 years of corporate staff experience, and the last 20 years as a complex situations restaurant analyst and management consultant via his founded firm, Pacific Management Consulting Group. He is a certified MAFF, Master Analyst, Financial Forensics, and works special investigations for investors, new concepts business planning and assessment, proforma development, franchisee support, expert litigation actions, and more. He can be reached anytime at 858 874-6626, email,

[1]   One good resource to check US construction cost inflation is the R.S. Means Company.

[2]   Except McDonald’s, which has company operated units in Europe.

[3]   But noted this was some form of a “catch up” wage action by franchisees. MCD does not forecast 2022 franchisee wage actions.

[4]   Proteins and paper items most commonly noted. On February 14, the US suspended all Avocado imports from Mexico after a threat to US inspection personnel.

[5]   McD Earnings Call, January 27 2022.

[6]   Burger King US TV feature summer/fall 2021

[7]   Current Del Taco primary marketing feature.

[8]   Starbucks Earnings Call and press Release, February 1 2022.

Wray Executive Search – 2022: Restaurant Viewpoint: Thick Clouds and Poor Visibility

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

More Questions Than When We Started.

Typically, by this point in mid-January, we would have some idea what the restaurant operating tempo[1] for the year beginning jump-off point is going to be. We would have entered January, always the slowest month in restaurant sales and traffic in the Northern Hemisphere.  We would have good summary indicators through Restaurant Finance and Development Conference (which came off beautifully, live in November) and the ICR Conference (which unfortunately reverted to virtual earlier this month).  Frankly, none of this gave us a warm and fuzzy feeling.

Are Conditions on the Ground Clearer?

Unfortunately, not. Conditions on the ground in the field are quickly changeable. Consider:

Starbucks notifies all of its customers on January 14 electronically that US store hours, openings, business platforms, and product availability are apt to change due to the effects of COVID/supply chain issues.

The FACTEUS FIRST Report on consumer spending showed very gradual transaction count softness in QSR credit card transaction counts and full-service brands following in December and early January. [2]

Two restaurant analysts coming out of ICR mentioned their perception that companies seemed to talk “90% staffing” as the new staffing best point for now. Several companies noted the loss of sales due to closed units/early hour closes.[3]

Per my monitoring of company presentation of company presentations at ICR, I found little talk about supply chain/COGS inflation as “transitory”. [4]

Restaurant Research reported that the all-important sales to investment  ratio have declined (unfavorable movement) as higher construction costs/times to build have more than offset AUV growth. [5]

So after hearing all this, my key January-February watchpoints are (1) supply chain food commodity analysis (2) US social sensitivity/reaction to this new wave  (3) restaurant employment/staffing indicators, units closed early (4) restaurant operator marketing execution (5) unit margin contraction and impacts on franchisee new unit development in 2022-23.

No more hockey sticks please on Unit Development Guidance

I’m mentioning these observations to note that restaurant external communications, planning, and internal control must take on a new dimension this year. The days of spending monstrous blocks of expensive staff and executive time on a theoretical future 3 year/5 year plan are misplaced. The planning function has to be more current-focused and analytical focused on current drivers and then logical flex point options that can be adopted quickly. That is hard enough to get right. What I  recommended is to get the budget year set with detailed operations options and alternatives (including CAPEX, G&A, dividends, etc.) and simply flow 2-3 outyears from the most likely scenario.

For IPOs, new funding rounds, new brands, debt issues, etc.: investors typically focus on how many new units can the brand open and sustain over some time. I get questions from investors all the time about the original S-1 numbers restaurants have stuck with. 2021 has seen some very attractive young new brands go public for example.  But remember these claims of new unit count potential—5000; I just saw two fast-casual publicly-traded brands still backing 6,000 total units—that growth rationale is a tremendous burden to maintain. At the very least, those counts should be qualified as total world count up front in the book running process to allow for some time cushion.

Assessing New Concepts  Post 2020

COVID-19 and March 9 2000 changed everything of course, but business is still business. What’s always been important in this business (good food, good margins—see Gordon Ramsey quote in Time Out, January 14, 2022[6] ). COVID has caused some emphasis shifts as I can describe below:

  1. It is essential to build or bake into the company DNA where staff engagement and involvement at all levels of the company—from the store level to the office of the CEO. This includes franchisees, the ultimate grey zone that is rarely handled well.
  2. Being engineered to be on point with targeted and aspirational guests and the right revenue channels is key to finding the right sites. The hunt for sites is ever-present. The landlord win factor—and outyear rent factors are key to consider.

Management Lessons: Bill Marriott

I admit it: in the late 1980s, I was interested to join the Marriott Corp. in Washington DC. At the time, you recall, they ran several restaurant chains. Another opportunity in DC came up that I took and shortly thereafter, Marriott divested the restaurants. I did continue to follow Bill Marriott. Mr. Marriott is still executive Chair of Marriott and is active on social media, Marriott on the Move. Recently I came about “Bill Marriott’s 12 Rules For Being a Successful Manager” and thought it would be good to cite here. [7]

Several make sense to note here:

Number Five: Do it and do it now. Err on the side of taking action.

Number 6: Communicate by talking to your customers, associates and competitors

Number 7: See and be seen. Get out of the office, walk the talk, make yourself visible.

Number 8: Success is always in the details.

About the author: John A. Gordon is a long-time restaurant industry veteran with 45 plus years in operations, corporate financial planning, and analysis and the last 20 years via his founded firm, Pacific Management Consulting Group. He works complex operations and financial analysis projects as well as strategy assessment reviews for clients. He can be reached throughout at 858 874-6626, email,

[1]   Or OPTEMPO, a word that represents the pulse of activity of the business.

[2]   https://bit/ly/3fm99uk

[3]   YUM, LOCO, JACK.

[4]    Transitory is a  Wall Street CYA word copied from the Fed Chair, and in my opinion, does not apply to the restaurant space now.





Wray Executive Search – Restaurants: What Will 2022 Bring?

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

New Year Sales Forecasts….

Being that time of year, all the corporations and research houses are ginning up their 2022 Forecasts. We won’t see the first peek of the public companies 2022 until the ICR Conference coming up in Orlando in January (I’ll be there as usual) but Technomic and Datassential have their forecast just out. I just beat Technomic to print by a few hours, as I had an investor call the same day they published. Here is my US sales growth (not SSS) 2022 forecast, in detail:

2022 US Restaurants Total Sales Forecast vs. 2021 Base

Component Value
 New Units +1.5 %
 Price +5.5 %
 Mix +5.0%
 Traffic -2.0%
 Industry Capability/Contraction  -2.0%
      WEIGHTED TOTAL +8.0%

In 2022, I’m very sure 2021 will be the best base. By that point, 2019 will be too dated and 2020 will always be flawed as the Pandemic Year. Note that I have broken out a new factor, industry capability/contraction. This is what we see every day with restaurants losing staff, money left on the table, and demand not being fulfilled. This will be a key variable under our control…if we do something it will be better.  FYI, Technomic’s projected 2022 US sales increase is 10.4% on a 2019 base.[1] We both agree that price will be the major mover. It will be very interesting to watch price and traffic. Investors are still confused about what mix is and think it is a bad thing.

Restaurant Career Ladders: Missed Opportunities  

The December 4 Wall Street Journal ran an article detailing how hard it was to recruit and retain assistant managers.[2]  Think Your Job’s Tough–Try Being the Assistant Manager! The article detailed the exploits of two female senior hourly employees, one in an independent casual dining operation, one in a Panera franchisee unit, that were eventually promoted to store assistant manager positions through hard work and being on the spot. Their enthusiasm eroded over the years as they never learned any “managing skills” as they saw it and were just gloried hourly employees that worked any number of hours, apparently on salary. They both left restaurants as they saw too many years slipping by, and not making lateral moves either.

I don’t remember this from my many years ago years as Assistant Manager and GM. There was training, delegation, and a sense of career track at least to GM was clear. And I don’t see this problem everywhere, in every brand. But where this does happen, it tears down the whole industry.

Is a Subway Solution in the Cards?   

On November 23, Dr. Peter Buck, the co-founder of Subway died. Buck, a nuclear physicist, gave a young Fred DeLuca a $1,000 loan in 1965 to open a sub shop modeled on Amato’s, the still operating New England sub shop franchisor. Subway grew units, as we all knew, too much. Buck was the 50.1% owner, and after DeLuca’s death, remained in control. There was a tie of sorts between him and Fred’s widow, who had no restaurant experience, and Subway entered a difficult period, losing thousands of stores in the US and AUVs falling.

M&A interest in the brand was present earlier; it was reported by franchisees that Fred said he wasn’t interested in selling. After his death, both the New York Post and Restaurant Business reported that Restaurant Brands conducted some due diligence but ultimately passed. After Buck’s death, New York Post reporter Josh Kosman published that any potential sale of Subway was now complicated by Buck’s escrow and that one of the Subway royalty entities had a decline of $200 million year over year. [3]

RBI has moved on and made a nice acquisition in FireHouse. YUM has 4 brands. Inspire has a sandwich brand. Could Jollibee be interested if Subway US was broken away from Subway international? In any case, the Buck heirs and DeLuca’s will want maximum value. The problem is the quality of the franchisee base and earnings potential has declined over time due to long ago missteps. This bears further watching.

About the author: John A. Gordon is a long-time restaurant industry veteran with 45 plus years in operations, corporate financial planning, and analysis and the last 20 years via his founded firm, Pacific Management Consulting Group. He works complex operations and financial analysis projects as well as strategy assessment reviews for clients. He wishes all a Merry Christmas and Happy Holidays period and can be reached throughout at 858 874-6626, email,


[2]  WSJ, December 4 2021. articles : think-your-job’s rough?-try being-the assistant-manager–11638594003

[3]   Probably the US entity and referring to 2020 versus 2019.

Adweek – Why Papa John’s Is Breaking With Fast Food Tradition and Nixing Its Menu Boards

That and other design changes are the latest steps in a long post Schnatter turnaround

By Robert Klara | 1 day ago

Big overhead menu boards—a fixture every fast-food chain uses—are
missing in Papa John’s latest prototype.

Earlier this month, Papa John’s released its third quarter earnings, giving CEO Rob Lynch some meat to toss to the wolves of Wall Street. Systemwide sales were up 11.2% for the period, EPS doubled and revenues of nearly $513 million represented an 8.4% increase from the prior year.

Click on the link below to read the full article:

Adweek November 2021 – Papa Johns

Wray Executive Search – Restaurant Imperatives: People, Product, Pricing, and Planning

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

So we are back from Restaurant Finance Conference last week where we were delighted to catch up with 2000 or so of our extended family. The same will happen in 60 days at ICR Exchange Conference in Orlando where the public traded CEOs and pre-IPO hopeful companies attend. I’ve attended both conferences for 16 years straight. In every year, there was a set of themes and critical challenges that emerged.

In my view, this year, and forthcoming years, the industry will be challenged by the bitter backbite of the Pandemic, in four key areas: PEOPLE, PRODUCT, PRICING, and PLANNING. Simply, we don’t have enough employees; we will have to struggle with supply chain problems to get product at the backdoor costs we need; the need to cover dual food and labor cost impacts make pricing a prime concern; and lastly, effective short-run and long-run corporate planning are essential for all kinds of brands.  Planning will be a challenge because business and social conditions are incredibly confusing right now.

Observations at Restaurant Finance Conference

There is a dichotomy now between current restaurant-level margin deterioration driven by higher food and labor costs versus favorable balance sheet conditions. Balance sheets are strong and EBITDA has been strong for many brands [note EBITDA isn’t cash flow; lots of real cash outlays remain to be paid from EBITDA]. The issue right now we have double food and labor cost inflation impacts: RFDC M&A session moderator Allan Hickok reminded us correctly that no one present has managed double inflation. The P&L turning point was evident in Q1 2021, versus 2019 as a base.

And we have an eroding workforce. No one at Restaurant Finance had any magic solutions to make us preferred employers. Some employees can’t stand working for us. Starting wages have floated up way beyond what one would think. The key numbers to watch is average wage, staff complement, staff hired v. lost, operating hours lost. Our employee counts per store are down. And the cost of new store construction is up. The supply chain difficulties will be with us going forward, it’s a global problem affecting all businesses and nations. We can maximize supply chain operations, with specs, packaging, and routing economies but these are all that we can influence. If there are no drivers, our cost containment plans mean little. Where more creativity is needed is doing something to make our brands more employee-friendly. Talk about culture has to be manifested in action. If we have fewer and fewer employees, spreadsheets and earnings call estimates mean little. What repeatable series of small things can the company do for your employees that are meaningful and say that you care?

On the positive side, investors, lenders, and funds are available for restaurants. Only a year after the Pandemic year that is great. I asked a unit growth question at the M&A session and the panelists confirmed there was a lender/underwriting appetite for US new unit growth. But they watch margins; the lessons seen just in Q3 with compressed store margins are visible to all. The 2022 risk is that restaurant earnings dollars could erode vs. 2021 due to margins.

Where there is waste in restaurant processes, such as TV marketing discounting or coupons, companies need to consider quickly as the food and labor inflation problems are not transitory. In addition, strong new operators like Dutch Bros (BROS) are now public and are on the hunt for smaller, efficient drive-through sites. Legacy QSR operators, get smart on your site standards. Don’t make them too large. Spend time and money on loyalty and digital infrastructure via your CAPEX budget. Insure new market growth proformas are solid. If the growth pattern looks like a hockey stick, you have a problem.

Paul Brown, the Chair of the multi-concept Inspire Brands spoke and showed off their new Alliance Kitchen concept, which is a ghost kitchen-like property that combined product and equipment platforms of five of their seven brands to considerable cost and space savings. [1] Paul was demonstrating exactly the common support practices sharing that Inspire is charged to do, similar to his experience at Hilton Hotels. Paul was wary and said “we are good” when asked by John Hamburger when he would acquire another brand. Perhaps that should be read as ‘we are good for now and have to work what we have.’  (my wording). Inspire is a rumored eventual IPO.

Dr. Scott Gottlieb, the former FDA Commissioner, presented that with 80% of the US population vaccinated or naturally immunized, that the going forward COVID threat should decline rapidly after January 2022, similar to the UK trend.  He noted that preventative COVID pills were almost on the market that would help too.

Sales Momentum, Discussion of Check/Mix/Price

Analysts do field checks, look at Black Box, subscribe to Technomic or watch its published index, look at the NRA indices, talk to specialized analysts like myself, listen to any current quarter discission on calls, and look at the federal BLS survey to detect what is going on. There are some other credit card/digital data shops that report as well. One new data source I’ve found gives us an early peek at retail/foodservice data before the BLS is released in mid-month. From the Chicago Fed, it shows we have an improving retail/foodservice trend in October which is welcome of course.  It tracks declining September-October national COVID cases and deaths. We will have to confirm what the foodservice sales growth portion is because our inflation is much higher.  See Table One below:

Chicago FED CARTS, Retail/Foodservice Sales Activity v. YAG

Measure Oct. 2021 Sept. 2021 Aug. 2021 July 2021
Nominal +2.6% +.8% +2.0% +1.7%
Real, X Infl. +1.8% +.3% +1.5% +1.1%


Restaurant Pricing/Mix/Traffic: Is Price Too High?

I have had many conversations with restaurant investors who are concerned about the amount of restaurant price and average check growth the industry has taken and recorded in the last two years. Predictably, some publics have removed their average check breakouts in an attempt to avoid questions.

Some investors don’t seem to understand that when COVID hit, drive-thru brands had an increase in drive-thru sales rates to as high as 100% for a time but now slightly lower—that’s called mix—and that the number of food items per bag increased as customers ordered more. Both McDonald’s and Starbucks have talked about this consistently on their calls.  Casual dining brands don’t have drive-thrus but they had to pivot to sell more take out which typically has a higher average check than in dine-in guests. So all this is called mix.

Restaurants also have had to take price—with dual food and labor cost inflation hits. Historically it ran around 3%, but now the trend is 6%. Restaurants do not like to take price naturally and many see it as a last resort.

Is the current price too high?  Perhaps not! The restaurants with good feedback polling systems will know, as will marketing research and management consulting companies with the market research infrastructure in place. One simple way is to check against US food at home—grocery store inflation. Here finally, we have some good news, at least right now, grocery store inflation is exceeding food away from home inflation in 2021.

US BLS Rolling Year Food at Home v Food Away From Home Inflation, October 2021

US Food at Home 12 mo. Inflation, October 2021 +6.2%
US Food Away from Home, 12 mo. October 2021 +5.3%

About the author: John A. Gordon is a long-time restaurant industry veteran, with experience in restaurant operations, 20 years in corporate staff roles (Finance, FP&A), and via his own management consulting firm, Pacific Management Consulting Group, since 2002.  He works with investors, restaurant operators of all types (large franchisees, franchisors, corporate HOLDCOs), attorneys, a sell-side restaurant team, strategy management consulting firms, and others on complex restaurant issues. He can be reached anytime at, office 858 874-6626.





Herb on the Street – One Under-Appreciated Risk of the Dutch Bros Hot IPO

Herb on the Street
Open this article on LinkedIn to see what people are saying about this topic. Open on LinkedIn

Newsletter cover image


► One of my favorite interviews – many years ago – was with Gordon Segal, founder of home décor retailer Crate & Barrel…

We discussed why he never got tempted by the riches offered by investment bankers to take Crate & Barrel public. Segal hated, just hated, the thought of putting up stores for the sake of meeting Wall Street’s growth forecasts.

Instead, he preferred opening new stores when he could find the right location, then staffing them with current employees.

The truth is, once a retailer or restaurant goes public, especially if it has a seemingly hot concept, the goal is fast growth. That means slapping up stores as fast as possible – and wherever possible – even if it’s a terrible location.

As veteran restaurant analyst John Gordon of Pacific Management Consulting put it, “This is the trouble every cool brand gets into.”

► And with restaurants, especially, the eyes of management are often much bigger than their stomachs…

A perfect example is Buca di Beppo, which had grand plans to dot the U.S. with 450 of its cavernous family-style Italian restaurants. As I wrote in Fortune magazine in 2001, when the company had just 68 stores in 21 states…

Good luck! Says one former brokerage industry analyst who now works as a hedge fund manager: “I would be very careful of any management team that thinks it can build a “national brand.” It just will not happen.”

And it didn’t…

Buca di Beppo’s stock wound up collapsing until it was acquired in 2008 by Planet Hollywood. Even today, the company’s website says it has “over 100 locations worldwide.” (Translation: If it does, it’s not much more than that.)

The truth is that some concepts don’t travel well to other geographies… or they aren’t economically feasible for rapid or even broad expansion… or, if they’re publicly traded, they simply can’t remotely get close to the forecasted numbers they use to lure investors.

► Enter the newly public coffee chain Dutch Bros (BROS)…

With 471 drive-thru locations in 11 states – almost all west of the Rockies – the company’s initial public offering (“IPO”) last month caused lots of chatter. Born out of a coffee cart in Oregon, Dutch Bros rapidly created a cult-like following for its coffee – almost In-N-Out-like. The company also separated itself from competitors with mostly cold, high-octane drinks. Roughly a quarter of its sales, in fact, come from an energy drink that has no caffeine. Execution has been beyond reproach.

The real sizzle in the story, though, is what the company says in its IPO filing about its future growth: That it believes it can balloon to 4,000 units.

That got Wall Street’s attention.

► But some big questions remain… 

Just how realistic is that number? And just as important, how long will it take to get there?

After all, much like Crate & Barrel, Dutch Bros has prided itself of only opening stores staffed by existing employees. In a story last June in Restaurant Business, Dutch Bros President Joth Ricci told the magazine’s Jonathan Maze…

We make sure the culture and the way we do things is protected. We only promote from within related to how we expand our culture and our business.

That may be easier said than done now that Dutch Bros is a public company. As John Gordon says…

Now they’ve got the burden of growing responsibly what they want to do versus the natural pressures that come with being publicly traded and pressures of quarterly earnings

But for Dutch Bros, there’s something else that may give investors pause…

Unlike most restaurants – or even coffee chains – Dutch Bros is drive-thru only. While that’s good from the cost of the buildout and revenue per square foot, it’s terrible for finding locations … especially post-pandemic and especially in crowded, well-established markets. As Gordon says…

Demand for drive-thrus is great… After pandemic they became the golden property and will remain the golden property because for those afraid to get out of the car it became the ultimate convenience.

► Therein lies what quite possible could be a possible problem for Dutch Bros…

According to Gordon…

Everyone realizes your fighting the likes of Starbucks (SBUX) and Dunkin’ Donuts… They’re all out for exactly the same kind of site – either conversion or new unit sites that Dutch Bros is.

And it doesn’t matter that the competition might not be as cool as Dutch Bros. This isn’t about the coffee, the food, or even the product

The only thing that matters is the general lack of viable drive-thru locations, both new-builds and existing. Gordon put it this way…

It’s very difficult to get sites right now… I’m working for huge international QSR franchisor that has me looking for drive-thru sites. I will tell you… for one of their brands, it is beyond impossible to find drive-thrus.

Given how hard it is – and to show what Dutch Bros is up against – Gordon says he and his client think it will take more than a year to find the right spots.

As one friend in the coffee business put it to me…

There aren’t many options and Starbucks is really big on going that route. Landlords don’t know much about coffee so a lot of them would take Starbucks because of the name.

Plus, Starbucks can pay more.

That also doesn’t bode well for part of the growth story… that Dutch Bros has yet to fully tap Southern California, especially Los Angeles and San Diego. As Gordon says…

In certain dense states, California being one, it’s going to be an immense challenge… [In other populated parts of California] city zoning makes it very hard to construct a new unit because of traffic and noise.

► There’s something else to consider…

Even if the company can build 4,000 units… how long will it take? In a recent report from investment bank Piper Sandler, I saw some impressive-looking stats…

However, the length of time to hit 4,000 units is one thing (surprise, surprise!) that Dutch Bros doesn’t say.

Piper Sandler tried to take a stab at it, though… Based on “theoretical” performance, analyst Nicole Regan said her best guess is that “it may take as many as 12 years for this ultimate unit count to materialize.”

Twelve years?

Forecasts based that far out, in my opinion, are generally meaningless. Besides, it doesn’t really matter because from here to there, the only thing that matters for Dutch Bros (or any other fast-growing retailer or restaurant) is growth relative to expectations. That goes for revenue, average unit volume, and (key in the mix) the number of units.

If Dutch Bros can’t find enough good drive-thru locations, all bets are off. And while analyst after analyst in recent days has put a positive spin on Dutch Bros in their post-IPO initiation reports, it’ll take a few quarters of earnings – especially guidance and management’s commentary – for the real story to start emerging.

And that doesn’t even get into the question of whether Dutch Bros will play east of the Rockies.

Two other points to consider…

1.   If its stock ever craters – or even if it doesn’t – if Dutch Bros shows it has legs, and isn’t proven to be a mere fad, it could wind up be a potential acquisition target for a mature chain like Starbucks or Dunkin’ Donuts.

2.   Remember what I said earlier about how nearly a quarter of Dutch Bros’ sales come from one product – a non-caffeine energy drink? What’s to keep the company from striking a distribution partnership with a consumer packaged goods (“CPG”) firm for a canned version – much like Starbucks does… or like California Pizza Kitchen does with its pizzas

That’s a long-winded way of saying that while the company faces an enormous hurdle in finding drive-thru locations, there are levers that could bail out investors. The short-term could be rocky, but for investors with a time horizon of longer than “immediate gratification,” it’s definitely worth watching.

► In the mailbag, reader responses about Medicare, GoodRx (GDRX), and Traeger (COOK)…

As always, feel free to reach out via e-email at And if you’re on Twitter, feel free to follow me there at @herbgreenberg. My DMs are open. I look forward to hearing from you.

► “When comparing pricing of Plan D plans vs GoodRx don’t forget to add in the amount Social Security charges you for the privilege of using a Plan D. There is also GoodRx Gold for even better pricing. I use Kroger’s (KR) drug Savings plan which is run by GoodRx. Two years ago, I quit Medicare Plan D and am self-insured. I can’t figure out how GoodRx makes any money? Could it be that the drug store gives them a rebate for the store selling at a reduced price?” – George C.

Herb comment: George, you quit Medicare Part D? That’s a bold move… but I’m glad to hear the Kroger plan is working.

Turning to the way GoodRx makes money, as my colleague Enrique Abeyta wrote in the May issue of his Empire Elite Growth newsletter…

GoodRx pays the PBMs [pharmacy benefit managers] a fee to get access to discounted drugs. That price includes the cost to manufacturers for those drugs, as well as what they pay for the drugstore to make their margin. The markup from those inputs becomes GoodRx’s revenue.

(Subscribers can read the full issue here… And if you aren’t a subscriber, you can click here to find out how to gain instant access.)

► “Herb… Don’t forget to check for other discount drug prices beyond GoodRx. They are not always the least expensive. For example, I get [a] continuous glucose monitor. In my area GoodRx has it at around $128 for two from CVS (CVS) with about $117 from Giant Pharmacy or $120 from my local pharmacy. A different discount card which seems to go by has them for $92 at CVS rather than $128 (same CVS location) but in searching around I found another card that has them for $77 at a CVS in Target (TGT)… still CVS but it has to be one in Target. If you get them at a regular CVS, it is more. Makes you wonder even more how much they really cost. Medicare doesn’t cover them yet but when it no doubt does it will pay more than this. Very strange and dysfunctional medical market in the USA.

“Another thing that is also odd is the many drugs are lower priced for commercial insurance patients only. If you are on Medicare they are not discounted. I was taking one drug on a commercial insurance plan before my wife retired and it was a $5 co-pay each month. Under Medicare and a Plan D it was a $40 co-pay until the donut hole then it was a $112 co-pay each month. GoodRx didn’t help with this one as it was one of those advertised on TV.

“And then there are the dental discount plans that you pay for rather than free that discount the dental cost by 40% or 50%. Be sure to look into those if you have to pay your own dental bills. I think GoodRx is going to expand to do that as well but for now I use the Aetna one.” – Larry M.

Herb comment: Thanks for the insightful comments, Larry.

GoodRx definitely has competition, including in-store at the likes of CVS, when at point-of-sale the clerk might steer you to their even cheaper price. You know, the one that wasn’t advertised but is offered because you showed a GoodRx coupon. Still, GoodRx probably has the single-best pricing platform, which is to its advantage. I think the one thing we can agree on is that there when it comes to screw ups, drug pricing in this country is at or near the top of the list!

► “So given what you’ve written I assume you’re no longer voting Republican right?” – Jack H.

Herb comment: Hi Jack, I see the sarcasm there! Reality: I rarely discuss politics… but, for the record, I am and have been for years a registered independent.

► “Herb, your discussion regarding Traeger evoked some thoughts. We bought our first Traeger over fifteen years ago when they were produced by a small company in Oregon. We have purchased seven more since then as we moved from one home to another and left ours for the lucky homebuyer. We even gave one to our parish priest for a home warming gift. We did buy one at a Costco and while the price was attractive the model was different than Traeger’s own models and was “bundled” with pellets, cover, etc. to make it seem like more of a bargain.

“Why would they do this you asked. For people like you who haven’t heard of Traeger and might never know of them! Costco has millions of members who shop regularly and many of them will be introduced to the brand during their normal visits. Once someone is ‘hooked on Traeger’ few will move away from them. Meanwhile, Traeger sells their top-of-the-line ‘Timberline’ models at premium prices available only at select retailers who won’t discount them. You should check out a Traeger… they’re used to cook many dishes besides barbecue for which they are well known. My wife even bakes cakes in ours as well as recipes aimed at an oven! The Traeger imparts special flavors using different wood pellets and temperatures are electronically controlled as precisely as our kitchen oven. We love our Traeger and use it several times a week! Best,” – Robert O.

Herb comment: Hi Robert, unfortunately my over-priced Lynx is built-in, and everybody I know who uses a Traeger swears by it (though one friend who recently bought one was a little underwhelmed).

I think the bigger issue here is why Traeger was discounting its grills at Costco Wholesale (COST). It’s one thing to be at Costco, which sometimes is a “tell” that a company is having problems pushing a product. I understand the difference with Traeger, and its Costco relationship, but discounting at Costco – with not only special sales but even deeper-discounted road shows – is a red flag. Of course, so was Starbucks opening up stores across the street from one another, and you see how that turned out!

CNBC Make It – Here’s how much money you’d have if you invested $1,000 in Domino’s pizza 10 years ago

Domino’s Pizza

In 2011, one share of Domino’s cost less than $30, enough to get you a few pies and a 2-liter bottle of Coke. The pizza chain was still in the midst of a major rebrand that saw it toss out its old recipe and admit to its customers that it had failed to deliver quality food.

But over the past decade, Domino’s has undergone one of the biggest transformations not only in fast food, but also in corporate America. At nearly $480, the price of a single share of Domino’s today could pay for an entire pizza party.

And despite posting its first drop in same-store sales in more than a decade this week, the chain’s long-time shareholders still have come up out on top.

If you had invested $1,000 in Domino’s on Oct. 14, 2011 at a share price of $28.32, the market value of your shares would be $19,980 today, according to CNBC calculations. In contrast, a $1,000 investment in the S&P 500 index would have seen a 343% return over the same time period and would be worth about $4,340.

Domino’s transformation can’t be pinned on a single factor, but instead on a savvy rebrand that saw the company improve every aspect of its business, says analyst John Gordon of Pacific Management Consulting Group, who has 45 years of experience in the restaurant industry.

In early 2009, Domino’s shares were trading under $10 and the company had seen years of weak sales. The company brought in new CEO Patrick Doyle who set about to turn the company around.

The first step was improving its food. The pizza chain was open in its marketing about the failures of its old product and emphasized how much of an improvement its new recipes were.

“They actually celebrated it, they made fun of themselves on TV,” Gordon says. “They developed a knack for very good marketing that they were able to fine tune over a period of time.”

Domino’s also led the way, along with Starbucks and Panera, in digitizing its operation. It built out its website and app, and encouraged customers to stop placing orders over the phone and instead do it through the company’s online platforms, which Gordon says allowed stores to run more efficiently.

“As the transactions became more and more digital, the average ticket became higher,” he says. “Franchisee cash flow improved from $49,000 per store in 2008 to $158,000 in 2020. That gave them the internal cash flow to build more stores on their own without having to go to the bank.”

The company also doubled down on analytics and increased the efficiency of its pizza delivery routes, which allowed franchisees to maximize revenue for their stores, Gordon says. And over the past decade, these improvements have turned it into “the dominant global U.S. pizza operator.”

“Among the publicly traded stocks, I can’t really think of any other stock that has recovered to this degree, both operationally and on the stock side,” Gordon says. “Other stocks have gone up and down, but this company has fundamentally, operationally and financially recovered for its franchisees and shareholders.”

Wray Executive Search – Restaurant Excitement and Complications Underway

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

For those of us restaurant industry lifers who are hooked on the excitement, complexity, moving pieces, and unpredictability of this business, the last 60 days have given us the reward we crave. More is coming. By the middle of July, we thought we were on a glide path to the magical  “other side” of the Pandemic. Unfortunately not so fast. The other side is not here yet.

“The Wait for the Re-Opening Goes On”  

This was the headline from the WSJ’s always well-written Heard on the Street financial analysis and commentary column on September 10. It noted the Delta variant surge and “while this hasn’t knocked the economy back on its heels, it slowed it down”. Later, it noted, Brinker’s (EAT) stock was down 33% from its highs. As I noted last month, evidence of casual dining softness was apparent from several trackers, and EAT confirmed it in both brands in August.

Darden’s (DRI) earnings are coming up on September 23 (Q1, 2022) and as always they are a critical benchmark. Darden, no doubt will discuss what they are doing to maximize their brand’s operations and fiscal posture, as well as employees and guests, a sound position no matter what problems are underway. In short, they demonstrate there is plenty to do.  More on this in a bit.

Restaurants have reopened, and we have IPOs ready to go, and credit markets and investor money available for expansion

Restaurants are a leading indicator coming out of recession. Virtually all public chain restaurant units have reopened. Dave and Buster’s (PLAY) confirmed theirs had on their very positive call last week, one of the last laggards. (FYI—they have new multi-channel programming coming).  Even more significantly, five new restaurant brands have filed for IPOs or are in the pipeline:

Krispy Kreme     $DNUT

Dutch Bros      $BROS

Sweetgreen     TBD

Portillo’s     TBD

First Watch     $FWRG

In addition, Torcy’s Taco’s has been discussed since 2019.

The Company Owned v. Franchising Ownership Debate

This does not appear to be a very heavy “expand by franchising” group, although that could come later in some brands. In fact, most of the smartest operating executives I have met have said they would always prefer to do franchising later. Krispy Kreme (DNUT) has defranchised since we saw it last public, and soon to IPO Dutch BROS has a limited franchised program and is now more heavy company operations skewed. My opinion is some brands should only be company-owned and others franchised with a strategic mix of company units[1]; others can do both over time. In 2019, I had a heated discussion with an investor who couldn’t understand why Dave& Buster’s (PLAY) then problems would not be solved by refranchsing all the units. “Because it isn’t as simple as a McDonald’s, where a franchisee would be motivated to expand units all over the market,” I said, among other things.

The Complexities of Overexpansion

There are some very nice companies on the IPO list. For clients recently, I have studied and again confirmed what most restaurant analysts, investors, observers, operators, and industry journalists with perspective know: overexpansion is the number one killer of restaurant brand momentum. My study references the Burger Chef[2] overexpansion of the early 1970s to the Noodles (NDLS) 2012-2017 expansion, with both cited by their CEOs as dysfunctional. Now, NDLS has rebuilt and is on a positive pathway.  Think about the other 2012-2015 IPO brands and the difficult result they got when they came into expansion markets.

In the late 2010s, I  worked a confidential forensic analysis for a brand, whose whole internal goal for a time was to go public. Unfortunately once that finally happened, the company went off track. The PE sponsor and rotating CEOs lost the operating culture that was once in place. The brand, still public,  was beaten down over time by bad earnings, concept failures, and tremendous value was finally lost in a distressed exit transaction.

Less Room for Error in 2022 and Out: Operator and Investor Due Diligence Required

The development risk for new brands if not carefully staged post Pandemic 2022 is several-fold. One, now as an industry we don’t have enough employees; we are hemorrhaging employees in fact. Employee complements per store appear to be falling. [3]   And as well known, we can’t get some food and supplies at least right now, but likely lasting into 2022. The BLS food producer price index showed another uptick (2.9 pts) in the index in August.[4]  Sysco (SYY) and  US Foods (USFD), Starbucks (SBUX), and McDonald’s (MCD) are routinely noting supply chain disruptions are expected. [5]

And finally, it is not like there are spare guests. Competition remains fierce.

The QSR operators, especially those tier-one operators with drive-thrus, digital, loyalty, regular new product new news, with a strong company store, and/or franchisee store-level economics platform will be powerful competitors. [6]  Restaurant Business documented the advantage the top ten operators gained over everyone else, comparing the performance of the Top 500 brands. However, the Delta surge has affected casual dining out confidence.[7] So the sit-down space will be most affected. On the upcoming Darden (DRI) earnings call, I’m waiting for discussion and questions to see how they will be flexing back to takeout and working large party catering this fall and winter.

Marketing teams and their agencies will need to be extremely omnichannel flexible as a result of Pandemic consumer changes. The marketing function, often the slowest to change tactics due to the “Big TV” media buying attitudes of their large advertising agencies will be challenged to keep up. You wouldn’t see an omnichannel approach by the huge TV media campaign now running in a national casual diner chain featuring its “country roots”.  It seems to be now betting on-premise dining. However, QSR has gotten the message.  In Q4, all three international burger majors—McDonald’s (MCD), Burger King (QSR), and the first to have it on the street—Wendy’s (WEN)–will have live US loyalty programs in place that will be readable. That will be exciting—and telling.     


About the author:   John A. Gordon is a long time restaurant analyst and management consultant with 45 plus years in restaurant operations (6 years), corporate staff positions (20 years), and management consulting roles– a global management consulting firm plus his own founded restaurant consultancy, since 2003, Pacific Management Consulting Group (19 years). He is a Master Analyst of Financial Forensics (MAFF) and works complex restaurant operations, financial management, organization, and strategy assessment engagements. He can be reached at office (858) 874-6626, email


[1]   Similar to the McDonald’s investment rationale expressed over time.

[2]   Burger Chef was owned by General Foods from 1968 to 1883. See  General Foods Annual Report press report, New York Times Archives, hppts://





[6]   Restaurant, Patronix and PYMENTS2020 data

[7]   See my August Executive Connection newsletter. Input from Civic Science and  Morning Consult picked it up first.

Wray Executive Search – Restaurants: Many Issues Underway

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

The COVID Movie, Take III

By now that very old and tiring plotline that we have seen before is sadly reemerging: the excellent momentum we had this spring and summer in the sit-down segment is lately weakening due to another COVID wave. [1] The actuality of new COVID cases and the drumbeat of bad news has driven confidence to dine out worse again. I can see this in the national pollsters that I track that comment on such matters as well as in Restaurant Research’s future dine-out visitation index, Traffic Cast, as below:

Recall from the initial Covid wave in 2020 that smart operators were watching the news and hospitalization and infection rates. One of the problems in the current Delta wave is that Texas and Florida are both relative hotspots and are heavy casual dining states.  The sequential sales weakening pattern brings up the next point.

The difficulty of getting useful signals from quarterly earnings calls   

I work complex earnings call disclosure issues with clients. One certain thing is that the reporting company is mostly focused on talking about the past, not the future.[2] There are many reasons for that. The result is that the focus of the analyst attention and press analysis is often on data that is 6 to 8 weeks old. The analysts are busy keeping up with the calendar of publicly-traded company earnings releases and other special projects in between and figuring out what they have been told. Occasionally, they can get a CEO to speak at their annual investor conference. In July, I watched an interview with Chris K, the McDonald’s CEO with a very good analyst. Chris must have been on a teleprompter script written by their media relations staff. It was the most torturous, boring, useless conversation, ever. It is not what the analyst intended.

There is a solution for restaurant operators, investors, and others who must have actionable granular information about our industry. It is to find several checks of the conventional wisdom that the industry has about certain companies and situations that may be only partially correct. It takes some time and creativity and I’d be happy to talk to you more about it.  In the meantime, focus relentlessly on thinking about tomorrow, not yesterday. One bit of advice I gave a client recently is to begin every annual budget process with an update to the 3 or 5-year planning process. Even to sketch out or revise overall imperatives and the planned sources/uses of cash statements will be a useful start to the budget year.

Mid-single-digit and higher inflation on both food commodities and labor wage rates at the same time!

One need only look at CNBC or the Wall Street Journal or more on point, your master distributor invoices or payroll reports to see that we have both global supply inflation, goods unavailability, and supra wage inflation underway for some time. This looks to continue. Grain, herd rebalancing, lack of slaughterhouse workers, lack of ocean transport, diesel and driver shortages are all issues. The recently concluded Q2 earnings cycle implied more was to follow. Per my listening, Jack in the Box (JACK) was high on the board with COGS at plus 6% and labor at plus 7%.

The most recent commodity crisis is arabica coffee with cold weather and drought affecting the crop in Brazil in July.[3] Starbucks (SBUX) noted via its contracting it was protected for about 1.4 years.

In the Q2 earnings calls, there was some discussion that in the states where the extra federal unemployment comp had ended the application flow had picked up. McDonald’s (MCD) noted that as did Sysco (SYY). What they didn’t note was if new hires had picked up. We will see what happens. There is a school of thought that industry employment will take a long time to rebuild given the disruption of 2020.

Current Food and Labor Cost inflation plus Delivery Cost Burden Result in Historic Cost Pressure on the P&L and Menu Price.

With COVID still nipping at us in multiple ways, it is rare to have both a food and a labor cost problem at the same time. I can’t recall it over my long time in the industry. Added to that is the pressure from the third-party commission expense that restaurant operators assume. This has been building for some time but also increased in the Pandemic Year.  Not surprisingly, menu prices have risen. [4]   For example, Chipotle took two earlier 2021 price increases centered on delivery items. Many restaurant operators have a separate pricing menu for delivery items and have negotiated with the 3rd party delivery shops to allow it.

The Risk of Too High Prices and What Operators Can Do

The price of any consumer discretionary product can be too high. Consumer feedback is slow and inefficient back to headquarters. Anyone reading this newsletter has had their share of cutting costs exercises over the years. [5] One tactic I’d like to suggest is to review the marketing plan and cut the discounts that don’t seem to work or don’t support the brand position. This requires matrix analysis by marketing, finance, and operations; and will have the effect of raising the net check without raising prices if done properly.


About the author: John A. Gordon is a long-time restaurant analyst and management consultant, with 45 plus years in operations, corporate staff (20 years), and management consulting roles (21 years). His founded firm, Pacific Management Consulting Group, works complex restaurant operations, financial management, and strategy roles for clients. He can be reached at, office (858) 874-6626.  



[2]   See:

[3]   Coffee Prices Jump to Six Year High as Brazilian Frost Risk To Crop, WSJ, July 27 2021.

[4]   https://www. raising-prices-too.

[5]   See for example,

New York Post – Subway franchisees are fed up with Megan Rapinoe’s TV ads


Megan Rapinoe kicked up another round of controversy at the Tokyo Olympics — and now a group of Subway franchisees are pressuring the fast-food giant to give her the boot.

The 36-year-old, purple-haired soccer star — who kneeled ahead of a match before leading the United States to a bronze medal this week — began a stint as a pitchwoman for the fast-food giant this spring.

In one spot, Rapinoe — who has been a vocal proponent of equal rights and equal pay for women — knocks a burrito out of a guy’s hands by kicking a soccer ball at him.

The response has been mixed, according to franchisees. Late last month on a discussion forum hosted by the North American Association of Subway Franchisees, a Wisconsin store operator posted a picture of a hand-scrawled note from an irate customer taped to the front door of his shop.

“Boycott Subway until Subway fires the anti-American … Megan Rapinoe, the creep who kneels for our beloved National Anthem!” the note read.

“The ad should be pulled and done with,” the franchisee wrote of the Rapinoe spot. “It gets tiring apologizing.”

The purple-haired soccer star -- who kneeled during the National Anthem to kick off the Tokyo Olympics before leading the United States to a bronze medal this week -- began a stint as a pitchwoman for the fast-food giant this spring.
The purple-haired soccer star — who kneeled during the National Anthem to kick off the Tokyo Olympics before leading the United States to a bronze medal this week — began a stint as a pitchwoman for the fast-food giant this spring.SOPA Images/LightRocket via Getty Images; AP

Subway doesn’t own any of its nearly 22,000 locations, but it charges franchisees 4.5 percent of their revenue for a national advertising fund and controls how the money is spent. Now, many store operators — particularly those in red states — say they’re facing a harsh backlash from the parent company’s decisions.

Last week, reps from the NAASF told members the group had already taken grievances over the Rapinoe ads to the company’s top management, led by Chief Executive John Chidsey.

“Your NAASF Board has already communicated with [Subway] leadership the concerns voiced by NAASF membership,” the group’s executive director, Illya Berecz, told franchisees, according to a letter obtained by The Post.

handwritten note on notebook paper taped to a glass door
A hand-scrawled note from an irate customer that one Wisconsin store operator said was taped to the door of his shop.

“I had a bunch of franchisees calling me on this today,” a lawyer who represents Subway franchisees told The Post earlier this week. “They are trying to get the ads pulled.”

Berecz didn’t respond to requests for comment. Subway also didn’t respond to requests for comment.

“They probably wanted more splashy advertising to go along with more splashy foods,” said John Gordon of Pacific Management Consulting Group, which advises restaurants. “We are so politically divided in this country and Subway should have done more careful due diligence, without a doubt, before choosing [Rapinoe].”

Megan Rapinoe kneels prior to the women's bronze medal soccer match against Australia at the 2020 Summer Olympics.
Megan Rapinoe kneels prior to the women’s bronze medal soccer match against Australia at the 2020 Summer Olympics.

One exasperated West Coast franchisee told The Post he believes the company’s ads should focus on the improved bread. The franchisee, who spoke on the condition of anonymity, also suggested that Subway’s ad gurus focus on the chain’s mom-and-pop owners so Subway comes off as less corporate.

“Spending our money to make a political statement is completely and totally out of bounds,” an Arizona franchisee said on the NAASF blog about the corporate parent.

Another Midwest-based franchisee said Subway should have seen this coming before signing Rapinoe. In July 2019, she took heat for allegedly stomping on the American flag. Weeks earlier, she created headlines when she said she was not going to the “f**king White House” if invited to visit President Trump.

Donald Trump
Former President Donald Trump, a frequent target of Rapinoe’s, slammed the soccer player after the US women’s team failed to win a gold medal at the Tokyo Olympics.
Getty Images

Indeed, after this week’s disappointing bronze medal, Trump took a few digs at Rapinoe.

“If our soccer team, headed by a group of Leftist Maniacs, wasn’t woke, they would have won the Gold Medal instead of the Bronze,” Trump said in a statement. “The woman with the purple hair played terribly and spends too much time thinking about Radical Left politics instead of doing her job!”

Rapinoe this year has inked other endorsement deals besides Subway, including a tie-up with Victoria’s Secret in June.

Wray Executive Search – Restaurant Conditions: What is Going On?

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

We restaurant types tend to focus on what is right in front of us now from our operations days [ “what, so and so called in sick! “ Or, “oh the walk in cooler is running 10 degrees too warm?” ]. To be sure, there are some good things underway. Versus either a 2019 base (the correct base) or a 2020 base (a terrible base) sales and traffic have improved, mostly sales, not traffic. More on this shortly. This can be seen in every restaurant numbers tracker. But remember we are in the heart of the summer seasonality peak right now; both casual diners and QRS have done well and performed at par.[1] The $1400 Biden stimulus effect is gone, now we are watching for the Child Care credit effect starting next week. The May retail sales month-to-month gain was weaker than hoped. Average real earnings have been very slightly negative since January.[2]

Step back to look out more broadly to see what is going on

We have to step back to see what is going on. It is harder than ever to figure it out with so much data and noise everywhere.

One thing that is happening is that the financial markets believe “restaurants are back”. Restaurant stock valuations are way up. [3] While  SPAC fever has cooled greatly now that there are so many SPACS chasing potential opportunities and that there are troublesome SEC rules[4], a lot of restaurant companies are on deck to IPO status—Sweetgreen and Dutch Bros for sure and Krispy Kreme went public again last week. Torchy’s and Portillo’s are on the on-deck list.[5]  It looks like the restaurant cycle is repeating itself. But the foundations underpinning this recovery aren’t really that strong yet.

One matter that brings uncertainty to all is that the primary intakes of restaurants—food and labor—are both limited now and in inflationary mode. It is relatively rare that both food and labor are a problem at the same time. It will take extraordinary planning throughout the restaurant operator’s system’s to not get swamped.  Unnecessary forms of waste have to be removed from the business cycle. Unfortunately, this operating inflation is occurring at the same time many brands must make IT CAPEX investments and more remodeling must occur at both company and franchisee units.  The point here is that the Pandemic Year has passed but not the aftermath.

Confusion About QSR Average Ticket

There is confusion among some analysts and investors about the increase in the average ticket at QSR brands in 2020 and continuing to date in 2021.  Once the Pandemic hit in March, it was widely reported that drive-thru sales spiked and the average ticket per drive-thru transaction also spiked. This was due to the larger party size and more food and drink items sold per transaction. As we all know, this effect is called mix. Along the way, the restaurant brands took price increases. The two effects, price, and mix are summed together in the average ticket effect, which is sometimes reported by restaurant brands in their 10Qs, 10Ks, and earnings calls.

In 2020, virtually all QSR restaurant brands stopped reporting price/mix and ticket statistics. I would reasonably speculate if they did not want to field questions from analysts why traffic was negative and the ticket was positive. Starbucks (SBUX) continued to break out the sales components as earlier. It showed traffic was way down—20% and ticket way up—20%.

For a client, I worked a review showing that QSR restaurant brands increased menu prices about 5-6% in 2020—higher than the US historical norm. They were betting that guests would buy into the price increases.

Given the Starbucks example, if price was 6%, then mix was 14% of the ticket increase. The question for the future remains whether guest’s habits have changed enough to adopt the higher drive-thru mix going forward. After all, it was 65%, to begin with. The analysts are concerned that drive-thru guests will suddenly revert to lower average lower ticket patterns to save money. I think that it is a stretch and requires a return to pre-pandemic social patterns which will take years.

Important to Watch Upcoming:  US McDonald’s Loyalty launch July 2021; late July: traditional week for IPOs before Summer break.


John A. Gordon is a long-time restaurant industry veteran, with 45 plus years in operations, corporate staff (finance/financial planning and analysis), and the last twenty years as a management consultant, including 20 years with his founded firm, Pacific Management Consulting Group. He works complex operations, financial analysis, and strategy engagements for clients who need a detailed restaurant perspective. He can be reached at 858 874-6626, and




[3]    See Yahoo Finance and Restaurant Business Online, June 25, 2021.



Silicon Valley Business Journal – Togo’s 3.0: San Jose sandwich chain uses a layered strategy in its 50th anniversary update

By Lynn Stock

July 9, 2021

When your company has been layering meat and veggies on sandwiches for decades, what’s the next step? In typical Silicon Valley fashion, you pivot.

For San Jose-based Togo’s Eateries, celebrating its 50th anniversary this month, that means rolling out version 3.0, updating its operating system and introducing a new line of sandwiches.

Wait, what?

A sandwich shop has its own operating system? This one does, said CEO Glenn Lunde, and it’s been successful.

Togo’s, with its more than 160 locations in California and other western states, is part of the more-than-$26 billion franchise sandwich industry in the U.S. It’s a sector with one giant player — Subway, with its approximately 22,000 locations, accounting for more than $9 billion of those sales in 2020, according to Nation’s Restaurant News’ latest restaurant rankings — and plenty of both national and regional competitors.

In the Bay Area, Togo’s is the largest of the homegrown sandwich chains, but it’s not alone. Santa Clara-based Ike’s Love & Sandwiches, with its idiosyncratic sandwich names, has more than 70 locations, with only about a third of them in the Bay Area. And Specialty’s Cafe & Bakery, which started in San Francisco in 1987 and grew to have 50 cafes in three states before going bankrupt in 2020, is trying to make a comeback.

What Togo’s is attempting to do is get to the next level.

“We’re looking for sites that have a good blend of lunch and dinner and weekend business. Historically, I think our focus was more on the lunch business,” said John Dyer, Togo’s director of franchise sales and real estate. “We were trying to center around large office communities, but there wasn’t much nighttime and weekend business in those markets. We’re looking for a good blend of daytime population, but also residential in the area so that we can pull from those folks at night and on weekends.”

Togo’s by the numbers

161: Locations throughout the West. All but six are owned by franchisees.

110: Togo’s franchise owners

$216,100 to $443,700: Total initial investment to operate a Togo’s. The initial franchise fee ranges from $15,000 to $30,000. On average, it takes about six to nine months between the signing of a franchise agreement and opening of a new location.

2,500+: Total full- and part-time store employees

15: Number of restaurants converted to Togo’s 3.0

Source: Togo’s

Despite a history that has the birth of Togo’s taking place not in the Bay Area, but in Michigan (technically, Togo’s origins date back 57 years when a single shop opened near Northern Michigan University), the chain is firmly rooted in the West. Togo’s marks its official debut in its current form in 1971 when a San Jose State University student named Mike Cobler bought Togo’s from the transplanted Michiganer who moved the sandwich shop to San Jose.

Cobler is the one who started to franchise the brand, eventually selling the company in 1997. It’s gone through several ownership changes, most recently in 2019 when Southfield Mezzanine Capital, a Connecticut firm that invests in lower middle-market businesses, bought Togo’s.

It’s in the West where Togo’s plans to keep expanding. Last year, despite the Covid-19 pandemic, Togo’s signed franchise agreements for 14 new locations to open over the next several years. In 2021, the chain will open eight new locations in the West, including its first foray into Nevada with franchise operators opening in the Las Vegas area. Reno will also soon be home to Togo’s.

Over the next five years, Dyer said the company’s expansion will focus on California, where most of its restaurants are already located. But that’s not stopping the company from eyeing other territory.

“We get a lot of folks that grew up in the Bay Area or another area of California and they find themselves in Boise or Las Vegas or Phoenix and they’re shocked to find out that the Togo’s isn’t there because they grew up with it,” Dyer said.

Wherever Togo’s expands in a post-Covid world, the company’s site search strategy has shifted a bit, he said. “We’re finding that the real estate opportunities are far greater in this post-pandemic environment, unfortunately, because so many restaurants closed. But it has created a great opportunity for some great real estate that wasn’t previously available,” Dyer said.

Togo’s ranks No. 256 out of 500 of the top U.S. restaurant chains, ranked by 2020 annual U.S. sales, according to a June report by Nation’s Restaurant News. Togo’s brought in $98.3 million in sales, down 19.3% over 2019. It had an average of $585,000 annual sales volume in 2020, which was down 16.4% from 2019.

Analyst John Gordon sees growth potential for Togo’s in former Subway’s franchisees.

“As Subway continues to implode, they could very well try to pick up some franchises that aren’t ready to leave the sandwich space yet,” said Gordon, founder and founding principle of Pacific Management Consulting Group, a restaurant analysis and management consultancy. “There’s an estimate that 30% of the Subway franchisees’ contracts are coming up in the next two to three years.”

Sandwich-making tech

The company’s plan to open more restaurants is only part of its “rebirth” story. The other is its revised approach to how it actually makes sandwiches.

The company’s new operating system revamps how sandwiches are ordered, in addition to how they are made. Even before the pandemic, Togo’s had embraced online ordering. The company has invested in technology behind a new point-of-sale system, and it added self-ordering kiosks in many stores.

CEO Lunde said that “off-site sales,” where customers order through a third-party app like DoorDash, weren’t the best fit for a delicatessen and its previous “one-on-one” approach where one Togo’s employee made a sandwich from start to finish.

“That didn’t have the same kind of speed that customers are looking for today,” Lunde said, explaining that the chain created a “speed line” that has one person taking an order, another cutting the bread, a third adding the meat, and a fourth adding vegetables before wrapping it.

“We needed to change with the times and have an operating model that still worked for dining guests and people that walk in, but also the people (ordering) online,” he said.

The pandemic accelerated off-site orders for Togo’s. Eighteen months ago, Lunde estimates 15% of sales were off-site. Today, that number is 35%.

“It exploded, of course, with Covid. We were already integrating all of those into our POS (point-of-sale systems). … We thought it’d go 15, 20, 25, right? Not 15 to 35 overnight,” he said.

The state of franchises

773,603: Number of franchise establishments in the U.S.

26,000: New franchise businesses expected to open in 2021

191,146: Quick-service restaurants

4.1%: Increase in the number of quick-service restaurants in the U.S. over 2020.

8.3M: Number of people employed by franchises in the U.S.

800,000: New jobs added in 2021

$787.5B: Total economic output of franchises in the U.S.

Source: Statista and International Franchise Association’s 2021 Economic Outlook for Franchising report

Franchise owner Letha Tran’s restaurant on Meridian Avenue in San Jose’s Willow Glen neighborhood went through the physical and technological transformation in 2019. Gone are the drab, 1970s-era wood paneling and high counter, which you can still see in the chain-owned store on Camden Avenue in San Jose (That corporate-owned entity, Lunde said, is slated to move across adjacent Union Avenue in the next year).

In 15 of the chain’s 167 stores, the 3.0 transition is in place. They have bright white and deep blue-tiled walls, new lighting and a lower ordering counter to make Togo’s more visually appealing.

Togo’s 3.0 “streamlined the process where it’s much more efficient and the employees love the atmosphere a lot more,” Tran said. “It has given the customer a better customer experience, and just adding things like the kiosk, more technology — that’s very helpful. You just get more through the line, less wait time. I think it’s a win-win situation.”

Tran has owned up to six Silicon Valley Togo’s franchises over the past 10 years. She even met her husband when he was a regular customer, and they have been married for two years. She now has three stores in San Jose and one in Morgan Hill.

Dan Pearson, a long-time Togo’s franchisee, has found 3.0 so refreshing he has put off retirement. The 68-year-old invested $150,000 in renovating his San Jose store and updating its technology to launch 3.0.

“My San Jose store has been converted for over a year,” said Pearson, who started with Togo’s as a sandwich maker in 1974 and opened his first store in Dublin in 1977. He currently has three Togo’s locations — two in San Leandro, and one at Capitol and McKee in San Jose. “Brands tend to get tired over the years, and to be around 40, 50 years is not the average anymore. 3.0 was really a revelation for us.”

Pearson’s San Leandro stores have about 20 to 25 employees each, while 15 or so work at his San Jose location. “Because the system is so much more efficient, we don’t need as many people on,” he said. “We can do with a crew of five what we used to do with six or seven.”

While some franchise owners — such as Pearson — have been with Togo’s for decades, many of the new franchisees are first-time restaurant owners, Lunde said. Those buying an existing store, or building a new one, “tend to be first-time entrepreneurs, maybe first-time restaurant people, maybe their first time into the entrepreneurial world,” the CEO said.

What’s next? More Togo’s locations will offer soft-serve ice cream cones and milkshakes, such as in Tran’s Meridian Avenue store. The chain also is testing a Korean-style bulgogi beef sandwich, Lunde said.

“You always have to keep innovating with the products and what are people looking for,” he said. “We’re going to continue to expand the appeal for Togo’s.”

Restaurant Business – Subway’s royalty fees place it among the country’s most expensive franchises

The franchise’s ongoing charges are higher than all but one other system, backing some operators who want them lowered. The company argues it has many other strengths that make it a better option.

Wray Executive Search – Restaurants: Everything Relates to Everything Else

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

The restaurant industry continues to recover from the Pandemic Year. Looking back over history, while there were all kinds of signs of an over development and easy money finance bubble, and too expensive rent cost bubble in place pre-March 2000. The industry overall was in pretty good shape then. All that changed in a few days in March 2020. But within weeks, aspects of the industry began showing signs of strength in the US with recovery in some segments within months.  The US has fared better than some international markets due to its drive-thru penetration, rounds of stimulus, and vaccine advances. The March Biden stimulus was immediately successful in lifting restaurant sales, but it has likely worn off. Now, summer seasonality, travel, general reopening, and improved dining out confidence will be key. Parts of the industry have not recovered yet. And a lot of things are happening at once.

The Pandemic Year Tail Is Long and Wide

As we might have expected, the global supply chain is now a mess. The Bureau of Labor Statistics reported that US inflation jumped to a 13 year high in May,  up 5% versus year-ago, the highest since August 2008. In the restaurant space, corn, wheat, and soybeans are all problems and causing cost spikes throughout the food complex.  Hedging programs in place in some brands will soon expire. Plastics, lumber, steel, paper, and labor are fundamental parts of the problem. Availability of drivers and wage costs; availability of ocean freight containers and diesel are problems.

The BLS FoodStuffs Index began moving up in November 2020, plus 10.6%, and rose steadily, then spiking at plus 39.6% in March, 66% in April, and 57% in May. [1]  As a consequence, full-service restaurant prices jumped 4.1% in May and limited-service restaurants increased priced 6.1% annually. [2]   While high inflation gives us some cover, there is a limit to what amount of price increase we can pass along. For decades, restaurant price increases rose 3% per year on average.

In addition to commodity cost issues, labor availability has been an issue as every operator and industry observer knows. We don’t need to have both a food, labor cost, and CAPEX problem at the same time! Many factors seem to be responsible. Recent polling notes that restaurant operators blame overly generous unemployment authorizations while employees say they have left the industry because of too low pay. Such talk does not change the on-the-ground reality. Restaurant brands with true brand strength (and corresponding pricing strength) and a supportive progressive employee culture that isn’t just talk comes are now essential.  That may be a particular challenge for certain franchisors whose only culture is “us versus them”.

The Right Product Mix (and Store Mix) Covers a Multitude of Problems  

Our best bet is to work to retain the check and product mix we have and get more of it. Darden (DRI) is doing it in its media; McDonald’s (MCD) and Jack in the Box (JACK) are among restaurant chains to launch loyalty programs this year to retain the digital customers they gained during the pandemic.[3]  And via price where we can. Chipotle (CMG) took a 4% price increase last week to cover its transition to a $15 wage. Earlier, it took the price to cover eroded delivery transaction margins.  It is adding windows everywhere it can.

Any QSR brand working on its CAPEX plan not thinking about trying to build find or transform any logical location to a drive thru or curbside or popup drivethru should revisit their plan quickly.

McDonald’s Misspeak at Bernstein Conference

On June 2, at the Bernstein Strategic Decisions Conference, McDonald’s CEO Chris Kempczinski answered a question regarding a dispute with its US franchisees regarding prior technology fee billings. He mentioned that the amount in question, $70 million was a “rounding error” in the immense cash flow that the franchisees generate. “ If you look, 2020 was a record cash flow year…So three consecutive years, we can say confidently of record cash flow levels.”

The problem here is the definition, not the raw numbers. Many McDonald’s franchisees have noted that McDonald’s officers are speaking of the store level EBITDA number, which is before taxes, capital spending, debt service (interest and principal), and overhead, among other expenses and outlays.  McDonald’s has extensive unit CAPEX standards and a mere EBITDA number doesn’t tell the story. What’s up maybe actually down and vice versa.  McDonald’s has contributed much to the modern-day restaurant industry. Ray Kroc’s grill man and later Senior Chairman, Fred Turner, wrote the industry’s first operations manual, for example. They have the data. They can communicate more appropriately on this important store economics topic. Many investors would like to know.


John A. Gordon is a long time restaurant industry veteran, with 45 plus years in restaurant operations, restaurant financial management corporate staff roles and the last 20 years, via his founded restaurant management consultancy, Pacific Management Consulting Group. Gordon, works complex operations and financial analysis engagements, and can be reached at (office) 858 874-6626, email: jgordon@pacificmanagementconsultinggroup,com, website:

[1]   https: //

[2]   May 2021 BLS Report, as reported by Restaurant Business Online, June 10 2021.