Wray Executive Search – Restaurants: Rough Waters for Now

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

Negative consumer and earnings conditions in January-February:  Sorry to say, but February chain SSS results were the weakest since 2021, same month per Black Box. That was bad enough. The factors: all the usual problems at this time of year, including bad weather, negative traffic, and secular weakness at virtually all casual dining and fine dining operators. And a few factors: average check rate declines. The industry has [mostly] slowed up price increases, so much so that ticket increases are not covering traffic declines as before. However, our pricing, lower as it may be, in March was 4.5%[1]  versus 1.0% food at home. [2]  So we are still in a poor position versus grocery stores. The February Black Box index was -.6% SSS and -2.3% traffic.  [January SSS was -4.5%]

Fast casual and QSR brands were marginally positive while, casual dining and fine dining were quite negative.   Even casual dining powerhouse Darden had marginally negative SSS in all reporting groups except LongHorn last quarter.

So, with some 45 years in corporate staff and management consulting FP&A roles and engagements, I have always been known as a pricing and margin recovery guy. But with the magnitude of pricing we have taken, and the inability of the consumer to deal with the cumulative price increases taken, we are in real trouble.

Michael Halen /Bloomberg View: K Shaped Is the Word

I asked my good friend, Michael Halen, the senior restaurant analyst at Bloomberg, to provide his perspective on consumers and restaurant sales trends.  Michael noted: “ A K-shaped economic recovery [upper track, lower track] and three years of aggressive industry price hikes may fuel a greater divergence between low and higher income consumers; and quick service and full-service restaurant sales.

Year-over-year comparisons will get easier in March and should give results a lift through year-end, but cross currents will affect chains to varying degrees. Weaker low and middle-income consumers, hurt by high credit card balances and delinquencies, could pressure casual dining chains more than quick service due to higher guest checks. Fine dining sales may pick up as the segment laps over weak 2023 results and high-income spending is buoyed by rising stock, home, and crypto values.”  Thank you mhalen1@bloomberg.net

Fast Food Pricing War Redux?

McDonald’s has led the way for the last two quarters warning of the weakness of guest traffic of the $45K and under income cohort. It can be the most powerful QSR marketer in the world, and its reference power across worldwide industry is immense. It is not reacting particularly creatively to the $45K cohort problem [big discounting across the menu under $3.99 has been announced], and the risk is another fast food pricing war could be set off. It seems to me that publicly traded franchisors get paid off the top line [and comps], although it is very true to note that MCD has very difficult compares in 2024 due to a very successful 2023. A pricing war, which sets back the industry, can be averted by true leadership and creativity at MCD.

How? The industry has used variations of a HI/LO offer strategy forever. The NOA franchisee association pointed out that MCD created lower-priced wrap products and others in the past exactly at the same time of need, but MCD has ignored that input.  With all the progress the industry has made in digital and targeted marketing tactics, a fast food war would be a very disappointing outcome in 2024, in my view.

Dispatches from the California Mess 

On April 1, California AB1228 went into effect that among other things, jumped fast food restaurants minimum wage [with more than 60 national locations] to $20, a $4 immediate jump. In my experience opinion, this jump will cause compressional wage increases throughout the QSR store crews and will affect other non-QSR restaurants as well.  The implications of AB1228 have been extremely well covered by local and national press.   Publicly traded restaurant brands with a concentration of units in California noted they would employ a mix of pricing and other tactical efforts to offset the negative margin effects.

Now, we have some early data in. Our friend Lauren Silberman at Deutsch Bank published a note on April 2 (DB, California Pricin) that reported on some brand’s CA pricing actions around 4/1. For example, Chipotle increased on average by 7-8%, Starbucks increased by high single digits on average, Mcdonald’s was largely unchanged,  Shake Shack was unchanged in April [but prices taken in March], Taco Bell took 3-4% price. JACK store pricing was mixed.  No price increases at Papa John’s. Only one of five Dominos units tracked took price. Sonic (Inspire) raised prices 3.5-4.5%. Other than one menu item adjustment at Olive Garden, the casual diners did not increase prices.  No CA price increases at Sweetgreen [earlier system price of 3% on 2/21], Cava or Wingstop [yet].

And more California analysis: my friend Lisa W. Miller is tracking California consumer conditions via her proprietary research systems. She has recent data just reported. Through Q1,   66% of California consumers have pulled back on dining out due to high prices, versus, 63% of the nation as a whole. And now, diners in California have proportionally pulled back in support of higher wages versus lower dining costs (39% in CA versus 43% in total US). 65% of CA consumers are concerned that laws that force higher pay for restaurant workers will drive menu prices higher. [3]

So, we will watch California carefully, but unfortunately, the stage is set for a sales and earnings drag there. Special visibility will need to be worked for the franchise brands, as most public brands do a poor job of reporting franchise store economics.

 

What’s up with the rash of C-Level Turnover?

In the last two months, there has been a lot of turnover at the restaurant C-Level. Turnover has variable effects on restaurants. For some, the entire corporate focus and structure changes. It is high anxiety for staff. Of course, change is not always a bad thing per se, especially if it is a part of a new investment at the organizational renewal.  Other kinds of turnover are more telling, such as when Kelly Valade resigned after only 8 months at Red Lobster; they never were able to get another CEO again. Here is a sample of recent turnover:

  • Swig CEO Rian McCartan departed on March 29.
  • Dave Graves departed as president of Pizza Hut US, on March 22
  • Papa John’s CEO Rob Lynch departs for Shake Shack CEO opening, on March 27
  • Smashburger names Denise Nelsen, former SBUX Ops executive, as CEO
  • Francis Allen is stepping down as Checkers&Rally’s CEO, on April 4

I have a behavioral momentum/wave view of some things and thought earlier when prior Wendy’s CEO Todd Penegor was shown the door after 8 years in January that would open the turnover doors. I asked my friend, Kevin Stockslager, Partner at Wray Search for his expert analysis. Stockslager noted:

“Turnover was expected to be high in 2024. Reasons include that the industry is still reacting to the massive changes from COVID. In addition, the sophistication in industry technology has caused firms to shift to leaders capable of enhancing this area of the business. While conditions have stabilized a bit, there is still some economic uncertainty which tends to result in leadership changes. Finally, C Suite leaders operate in an environment of many different stakeholders. Differences in short-term goals and philosophy versus long-term often result in leadership changes.’’

The effects of this C-level surge will be fascinating to watch. And the old adage from the business development wizards of the management consulting industry is to give a new CEO 180 days for break-in and familiarization before making marketing calls. The same might be true here.

Mysteries of Franchising Explained: Big Money in Franchising: Scaling Your Enterprise in the Era of Private Equity

Amazon Link: https://a.co/d/8YZFwDn

My friend Alicia Miller NACD.DC, CMAA, CFE is a true master of franchising: as a former multi-unit franchisee and founder/Managing Director of Emergent Growth Advisors, she has worked and seen franchising from every angle. She is an expert on how Private Equity has entered and maximized investments in various segments of franchising. The book discusses PE firm’s motivations and management, operating partner career tracks, valuation philosophies, and motivations of investing in a whole brand versus as a franchisee of a large brand.

The book will be an excellent reader for both investors and franchise operators as each has roles in mixing in the franchise/private equity universe. I strongly recommend it, and it is now available on Amazon (see link above) or on the Emergent Growth Advisors website,  https://www.emergentgrowthadvisors.com

M&A Funnel

At the beginning of April, two casual diners, were for sale or soon to be for sale: Bob Evans (from Golden Gate) and Red Lobster (Thai Union). Both brands are in a weak position. Benihana was sold in March for 5X to The One Group.  On April 6, the WSJ drug up last year’s prior musing of the Jersey Mike’s founder that HE MIGHT LIKE TO SELL. I hesitate to report this as new news. More later no doubt.//

About the author: John A. Gordon MAFF is a long-time restaurant analyst and management consultant with 47 years in the industry. He founded Pacific Management Consulting Group in 2003 after 20 years in restaurant staff operations and financial analysis, FP&A roles. Since then, he has specialized in complex brand, earnings, and organizational investigative engagements of all types. He is a certified Master Analyst of Financial Forensics.  He can be reached at 858 874 6626, or jgordon@pacificmanaggementconsultinggroup.com.

[1]   Blended LSR and FSR, per BLS Reports in February.

[2]   Id.

[3]   Nations Restaurant News, Californians Pull Back, Lisa W. Miller, April 1 2024.

Restaurant Business – Hype Aside, is Panera Exempt From California’s Wage Bill?

News analysis: The controversy involving Panera Bread franchisee Greg Flynn may be moot, but the exemption baked into the impending fast-food wage remains unexplained.

By Lisa Jennings and Peter Romeo on Mar. 08, 2024

Legal experts say more clarification is needed on the exemption for bakeries in AB1228.

California Gov. Gavin Newsom is facing allegations that he showed favoritism to Greg Flynn, a political donor who’s also the nation’s largest operator of franchised restaurants. At issue is whether a portion of Flynn’s portfolio was shielded from a 25% increase in California’s minimum wage for fast-food workers that takes effect April 1, a (perhaps overblown) controversy that centers on a key question:

Why is there an exemption for bakeries written into the law setting the new minimum wage of $20 an hour, and who does it apply to?

Flynn has stated that he won’t claim any exemption and will ensure that employees of his 24 Panera Bread bakery-cafes in California are paid at least the new minimum fast-food wage, rendering the matter virtually moot. Yet the firestorm rages on, with a social media tag known as “Paneragate.”

It’s a byproduct of the already contentious legislation creating a fast-food wage in California, known as AB1228. In addition to setting minimum pay for most fast-food workers in the state,  the bill creates a Fast Food Council that will determine future wage increases and have a say on workplace standards. It was enacted last year after a three-year pitched struggle between organized labor and the restaurant industry. The warring parties eventually struck a compromise at the instigation of Newsom.

The bill targets limited-service chains with more than 60 units nationally. But tucked into the law’s definitions is also an exemption for businesses that, as of Sept. 15, 2023, operated a bakery that produces and sells bread as a stand-alone menu item.

On its face, the exemption appears to apply almost exclusively to Panera Bread. Early on, it was termed the “Panera exemption.”

Behind the scenes, sources closely following the legislation speculated that the carve out was designed to specifically benefit Flynn, a sometimes resident of San Francisco, where Newsom was previously a two-term mayor. Flynn has also been a donor to the governor’s campaigns in the past, and he and Newsom also attended high school together, but the governor has said the two didn’t meet until after graduation.

Flynn’s company operates more than 2,600 restaurants across the country, including units of Pizza Hut, Taco Bell and Wendy’s. His holdings include a significant portion of the Applebee’s casual-dining chain. The only limited-service brand his company operates in California, however, is Panera. Flynn Group owns 24 of Panera’s 188 locations in the state.

Individuals involved in the negotiations that resulted in AB1228 have refused to reveal what happened in the closed-door sessions. But some acknowledged they were surprised by the Panera exemption, saying it was presented to the negotiating group as a fait accompli as they started the bargaining. Indeed, the carve out was included in an earlier version of the bill, when the legislation was known as the Fast Act.

At least one participant in the negotiations expressed anger at what was viewed as special treatment for bakery-cafes and indicated that the provision was never on the table during the negotiation sessions.

Flynn has stated emphatically that he never asked for a carve out, saying his input was limited to suggestions to the governor’s staff that fast-casual restaurants be differentiated from fast-food places. He has declined requests for further comment.

Alex Stack, a spokesman for Newsom quoted in The New York Times, called the controversy “absurd,” saying the governor never met with Flynn about the bill.

Immediately after signing AB1228 into law, Newsom was asked why an exemption for bakeries was included in the legislation. The Democrat dismissed the provision as an example of “sausage-making” and moved on to the next media question.

State Republicans, however, see it differently. Last week, a group of lawmakers sent a letter to California Attorney General Rob Bonta asking for an investigation of what they described as a “pay-to-play” deal. Bonta’s office reportedly acknowledged receipt of the letter but did not immediately respond.

“If the governor helped exempt one of his largest political donors from a bill that harms small businesses, the people of California deserve to know,” Republican Assemblyman Josh Hoover said in a statement. “Our leaders cannot be allowed to hide behind the veil of legislative ‘sausage making.’ They must be held to a higher standard.”

Newsom’s spokesperson said the governor’s legal team had reviewed the bill and that Panera Bread would actually not likely be exempt from the law because the fast-casual chain makes its dough off site and ships it to units for baking. Yet the bill says California will rely on the definition of a bakery that’s included in a voluminous description of most U.S. business types by the federal government.

That characterization essentially says a bakery is a place that produces bread, without defining “produces.” Elsewhere in the code, a retail bakery is defined as a place that produces or processes bread.

Panera officials did not respond to questions about the bill or its bread-baking procedures.

Observers in the legal world agree the legislation is ambiguous.

Los Angeles employment law attorney Anthony Zaller said the governor’s office is likely taking the stance that Panera is not exempt in part to move on from the issue.

“There could be an argument that ‘producing’ does not mean that the establishment needs to take all of the steps in making bread,” Zaller said. “But given that AB1228 does not define the term ‘producing,’ it would ultimately be left up to the courts to define the scope of this term, unless the legislature amends AB1228 to provide further clarification.”

Others say the issue is a potential pain point for Panera Bread, a part of the larger Panera Brands group that’s expected to be sold to the public possibly later this year. Panera has been a leader in shifting to less processed and fresher menu options.

“One issue is, as there is more discussion about this, the ‘secret’ about Panera’s bread will get out,” said consultant John Gordon, principal of Pacific Management Consulting Group in San Diego. “Panera has fresh dough manufactured somewhere else and then shipped in to each store. It begins to knock down the ‘fresh bread quality’ moniker a bit.”

Wray Executive Search – Restaurants: 2024 Comes Into View

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

Happy New Year to all! 2024 has begun and everyone has been looking to the new year and the future for restaurant planning and operational execution for some time. Corporate budgeting begins in earnest in August typically, and marketing event planning has to stay 2-3 windows ahead at all times.
We still have Q4 2023 earnings to hear, but based on surveys, conversations, and reports at ICR 2024 that just concluded, we have some idea of what is coming. Master Card Spending Pulse reported restaurant sales were up 7.8% year over year, for the period November 1 through December 24, 2023, the highest in their survey category mix.  This does not strip out price or mix inflation of course, but there is reasonable hope that the traffic residual was positive. The last week of December was also reported to be strong. US stock companies reported demand resilience, notably Darden (DRI).  The exception was Jack in the Box (JACK) which noted mixed consumption trends at lower income cohorts breakfast and robust competitive activity.[1]
In Q4, International does seem to have the cluster of downside reports, with MCD, SBUX, and PZZA calling out Middle East, China, and Europe softness. PZZA noted international was -6%.[2] In the US, past January 1st, we understand that the first week of January sales were softer. [3]
Is Optimism Warranted?
The overall operator and investor tone at ICR was one of cautious optimism. Brand operating margins are creeping closer to 2019, and food commodity costs are believed to be moderating after two extremely different years. Some brands, both Domino’s (DPZ) and now Papa John’s (PZZA) have announced new operating models (PZZA) or marketing partnerships (DPZ) that will be meaningful in my opinion.
Supporting this optimism, consumers are feeling better about inflation. The Federal Reserve Bank of NY reported last week that consumers believed the median 2024 inflation increase would be 3%, down from 6.8% in mid-2022.[4] And of course, the FED has signaled its intent to move to lower interest rates.
To be sure, the beginning of the year optimism is nice. The industry challenges remain, including the disconnect between our prices taken vs. food at home (grocery story inflation). And years of cumulative labor inflation are baked into the store economics model. In California, the utter disaster of AB1228 [see more discussion below] is about to hit  QSR operators with a directed $4 wage hike all at once by April. Judging by the JACK management commentary at ICR, they do not yet have a sophisticated solution. As one PE investor noted, today’s interest rates are up 5 full percentage points over 2022 and earlier, but the industry has managed much higher interest rates than this in the past. [5] “These rates are not all that bad”, said Amy Forrestal, Managing Director at Brookwood Associates. “ We got used to a period of low rates”.  That is a very good point.
Operators simply must engineer superior brands with great economics to cover the  CAPEX buildout costs [which are up 30-40% from 2019]. Franchisors must be adept and flexible enough to create variable unit prototypes to maximize market-specific ROI for franchisees who will always be sensitive to the initial buildout.
ICR 2024 was full of stories of individual brands, both public and still private, that were making use of their values [not only prices] but experiential benefits and new organizational and marketing alignments. More notes on that in the next issue.
Restaurant IPO and M&A Notes
Despite the higher interest rates, much M&A activity can be seen already. Pinstripes, a 13-unit chain of food and bowling centers entered the NYSE on January 2, via a SPAC acquisition vehicle. It is expecting 2024 revenue of between $185M to 195M and adjusted EBITDA of between $30-33M. It presented strongly at ICR. Then, later in the year, FAT Brands has solid interest in the IPO of its highly profitable and growing Twin Peaks, casual dining brand.
Then, in a surprise move announced Tuesday, January 16, Burger King franchisor RBI announced it would acquire long-time public franchisee Carrols (TAST) for $1 billion and sell the stores to smaller franchisees in the market area. This strategy was mentioned recently by Executive Chair Patrick Doyle, to get franchisees closer to their stores.

And in a final divestiture move announced Tuesday [not so much of a surprise, really], the operator of Red Lobster, Thai Union Group, has signaled that it plans to exit its Red Lobster minority ownership, citing,” prolonged negative financial contributions to Thai Union and its shareholders via the Red Lobster investment.  Red Lobster has recorded a $19M loss to date and a $530 M non-cash impairment. Thai Union paid Golden Gate Capital Group $575M for a minority stake in 2020.   [6]  

Food Price and Commodity Cost Details for 2024

Definitely better news in 2024. Most US food forecasting starts with the USDA, Economic Research Service. Here is what they had to say about 2024:

     “In 2024, all food prices are predicted to increase 1.2%…Food at home prices are expected to fall .6%… while food away from home prices is expected to rise 4.9%.” These are decreases from the 2023 levels. [7]

In December, the food at home actual was 1.3%.  Full-service food away from home was 4.5%, and limited-service food away from home was 5.9%. So this is where our “value gap” may be coming from—along with reminders everywhere to tip!

Our last “normal “ year was 2020, when both food at home and food away from home rose about the same, 3.4%. Perfectly in balance then. Since then, the gaps have been huge.

My preferred Commodity Analyst friend and partner is Datum FS, Mr. David Maloni. He tracks and provides commentary on all major foodstuff and supply chain topics. Right now his December and January 2024 food market basket value is tracking just below a year ago.   Suggest you follow his newsletter for weekly commentary.

Hotspot Highlight: Not California Dreamin’   

While the wage inflation (AB1228) targeting ‘fast food’ restaurants in California will hit officially in April 2024, some operators have moved more quickly in implementing the $20/hour minimum wage. Expect that there will be wage compression throughout these restaurant chains: more tenured employees now making $20 or more such as shift supervisors or culinary will feel they need an upward adjustment. Therefore it will be more than just entry-level employees being affected. And it is entirely likely that other restaurant chains—fast casual and casual dining operators –will feel upward hiring restaurant wage pressure from this as well. The true authors of AB 1228—two Labor women from California targeted fast food because they disliked franchisors and franchisees so intently and believed they were abusing workers—but did not care if there would be spillover effects.

Several things are tragic about AB1228 developments. One is that the Governor approved spiking the wage from $4 at once to $20, without any adjustment period. [8]This was a result of the egging of SEIU and even the collaboration of the IFA, Matt Haller, personally, and the National Restaurant Association. IFA/Haller and the NRA were brought in as “color” to prove the restaurant industry as a whole supported this “deal” with the Governor. Nothing could be more false. No California franchisees except two McDonald’s corporate franchisee ‘friends’ were involved.   So this was a midnight deal.

The Governor is materially to blame, as are SEIU and the California Labor Women. [9]The Governor has owned restaurants in the past and still owns a winery. Certain Democratic legislative members blindly followed SEIU’s pressure. IFA’s upside in this midnight run is impossible to understand.

The other tragic thing is that jobs and the tax base will be lost. Two Pizza Hut franchisees have already notified they will terminate over 1100 employees.  New restaurant construction can’t possibly hit the required hurdle rates with all these negative factors underway.      

The outsized negative impact on JACK as a consequence

Unfortunately, Jack in the Box  (JACK) will receive the chief negative consequences from this. With app. 100 company units in California, they will see company margin hits, so they are motivated to take price actions and use technology to improve labor scheduling and the like. They will need to model this because franchisees typically follow what the company has tested and proven—one of the reasons why company stores are needed in any franchise organization.

The issue at the moment is JACK reported weaker trends in lower income cohort breakfast spending at ICR.  And it is still dealing with a messy acquisition of the Del Taco brand. It just announced [unbelievably in my view] that the Del Taco franchising would be decremental to earnings until 2027. The reason is the company stores they are selling to franchisees made more money than the royalties they will be getting. Until 2027 they project.  And they are raising capital spending in 2024. So JACK management has its hands full.

More to come…….

About the author:  John A. Gordon is a long-term restaurant industry veteran with 47 years of operations (6 years), corporate staff—financial planning and analysis (20 years), and 21 years via my founded restaurant consultancy, Pacific Management Consulting Group. Pacific works complex brand, financial analysis, and organizational reviews. John can be contacted anytime at 858 874 6626, jgordon@pacificmanagementconsultinggroup.com.

[1]   Sourcing Hat Tip: Sara Senatore, Bank of America Note, January 10, 2024.

[2]    Sourcing Hat Tip, Lauren Silberman, Deutsche Bank, Note, January 12, 2024

[3]   Hat Tip: the great Michael Halen, Restaurant Analyst, Bloomberg.

[4]   WSJ, January 12, 2024.

[5]   Hat tip: Amy Forrestal, Managing Director, Brookwood Associates.

[6]   Restaurant Business Online, Jonathan Maze, January 16 2024.  

[7]   USDA ERS paper, December 21, 2023, Morgan S. Sweitzer, Analyst.

[8]   Most governmental cost mandates have a phase in period, not here.

[9]   Contact me directly if you want to more about this story.

Wray Executive Search – Restaurants: 2023 Lessons and Trends Carry Forward into 2024

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

We are about to close out 2023, although a few more surprises may yet come our way. We are expecting Darden’s (DRI) earnings to come up on December 15, which will tell us much about the casual dining and fine dining segments. Darden is a powerful operator and has been adjusting value messaging. However, smaller M&As (ex Subway—more on that later) and proxy board battles—(see discussion on  SOC (SEIU proxy organization) battle to gain 3 Starbucks board seats by proxy battle later) issues have popped up lately. We got confirmation of the 2023 lessons and trends from the great Restaurant Finance and Development Conference last month where some key takeaways were presented. We hear more 2024 perspectives at the 2024 ICR Conference next month in Orlando, where many public and private restaurants will present.

We did not get a recession in 2023 but….

Despite forecasts, the US and most of the world dodged a recession. Consumers kept spending, although weakly. At McDonald’s Investor Day last week, CEO Chris Kempczinski rather cheerfully admitted “I was wrong” on his projections for US and global mild recessions. However, many restaurant brands, QSR, fast casual, casual dining, and fine dining are reporting: (1) weakness in the under $45K income cohort (2) weakness in the over $125K income cohort.  That dual observation is not typical.  Over time, the upper-income spending holds up in all except situations like the 2009-2010 recession.

What we did get fortunately is…..general food commodity moderation (except beef). QSR brands that had decent SSS had restaurant margin improvement. What we got that was expected but very troublesome was higher interest rates (plus 500bpts) which makes remodels and new unit ROI much more difficult. The cost of new unit builds is up 30-40% since 2019, another Pandemic effect. Restaurant equipment and permitting were also difficult. The most important development is that we have finally hit the wall on too much pricing.   The industry, especially limited services restaurants, has been taking price increases way above food-at-home (grocery store) prices. [1]  See the historical Food Away  From Home (FWFM) price trend via the footnote below. It is stunning.

In my view, it is only logical that the middle of the P&L must receive greater attention. Many initiatives can be done in addition to targeted pricing.  [2]

2024 Projections upcoming.   Projections from various sources are now coming up. However, I’m going to study Q4 projections as well as the direct person-to-person sentiment to be heard at next month’s ICR Conference to provide you that will be a  more studied recap and projection.

2023 Restaurant Finance and Development Conference:  Key Truth Moments for the Industry

RFDC2023 was outstanding with over 3400 attendees. At this conference, there were two moments  of truth for this industry worth mentioning:

First, Patrick Doyle, now the Executive Chair of RBI laid out very clearly what the duty of a franchisor is: to turnover a good franchise economic model to the franchisees that is profitable so that they can improve upon it. Further, the every day, priority one HQ mission is to improve and enhance franchisee profitability.   Patrick linked this to the disclosure of average franchisee EBITDA for the 4 RBI brands earlier, as a benchmark.

All the readers of this column know that some franchisor priorities vary widely around this imperative; while all talk about supporting franchisees.  It is industry wisdom that a strong franchisee economic model has to produce growth and success, and ultimately higher EV and market capitalization if publicly traded.  [3] 

Secondly, a real moment of truth was displayed by Lisa Miller and Neil Culbertson who told the industry that restaurants should focus on promoting brand attributes, and that “value is not price”. Neil noted, “Top performing brands, when you think of value, they don’t promote on price very often…Not there is no place for it, but if used to the extreme, it can undercut brand value and the brand itself.” Lisa noted growing anxiousness in consumer sentiment and introduced the notion of “price shock” due to our cumulative pricing markets actions. [4]
The industry has been confused forever, equating value with low prices. This refutes it. Consider the struggling Burger King and Subway that historically were extremely discount-heavy. Under new US leadership, BK is reengineering its approaches. Subway has not. Its US franchisee profitability is reported to be extremely low.
McDonald’s Investor Day was a glitzy affair that was unfortunately short on hard numbers. It is targeting 8,800 new units by 2027, with incremental capital spending ramping up each year as a result, $300M to $500M per year.  That is startling. 900 US units are targeted, 1,900 in their company-owned international markets and app. 7,000 by its developmental licensees.  We can expect the bulk of the CAPEX to be in the US and the international company-owned markets.[5]    They did not break out company unit margin guidance.  On sales channel management, they made it very clear that digital sales turning into loyalty platform sales was the absolute pathway to success. “Loyalty drives the business” noted CEO Chris K.  In response to a question, the CFO noted US franchisee’s “cash flow” was up in 2023 and that credit to franchisees was always available backstopped by McDonald’s.[6]
The new coffee concept CosMc’s was briefly discussed, now building to a ten-unit, one-year test. High-priced we think; handcrafted beverages most similar to Dutch Bros. We peeked at the menu[7] and think they had too many beverage options but they would discover that in a field test.  It needs volume to make it, the suburban Chicago site has four drive-thru lanes. This new concept creation is exactly what global leading franchisors need to do. The concept will have to post a ROI.

Through the presentation, I was impressed by the new dedicated Global Business Services (GBS, VP Skye Anderson), to work with corporate field staff on internal reengineering projects; as well as a large number of future themes the CMO presented ( global events) that McDonalds can build upon. 

More Notable News: 
Restaurant activism is afoot in several brands.   We will start with the most troublesome, the SEIU-driven SOC organization starting a proxy campaign to win three board seats on the Starbucks Board in 2024. The SOC is a union think tank and activist organization that owns stock in targeted companies, among other things. Two years ago SOC targeted Starbucks for unionization for a variety of reasons.[8]  Now, in reaction to its efforts, it is accusing Starbucks of “severe human capital mismanagement that has materially damaged the Company’s reputation and exposed it to significant financial, legal and regulatory risk”. It is noting potential future risks to shareholder value.  The three nominees have impressive legal and political credentials but no retail or restaurant experience.[9]
So the note must be made: Starbucks would have no issues had the union targeted another restaurant chain. Starbucks partner level satisfaction was historically higher in the past but has declined with higher AUVs and more drive-thru sales. In response, the company has already re-engineered equipment, and workflows and raised pay and benefits. In my view, there is nothing more productive that a union can do.  At this time, there are only about 370 US unionized units and some union decertification actions are pending.
From a broader perspective, there seems to be no great demand for more unionization. Press reports in 2023 indicated that field-level interest has ebbed. What value can SOC bring to the table, either at the store level or at the board level? Hard to see in my view. 
A proxy campaign would be a waste of time and money on both sides. On Friday, December 8, Starbucks notified the union that they would be willing to resume contract talks. Given this, perhaps this will dampen the proxy campaign, a good thing.
Bloomin Brands and perhaps Wendy’s have activist activity underway:  Veteran restaurant activist Starboard Value has taken a 10% stake in Bloomin Brands which it feels is undervalued to peers Darden and Texas Roadhouse on an EV to EBITDA basis. Chair Jeff Smith is personally interested in restaurants, having lead roles at Darden and Papa John’s. In its initial presentation, Starboard noted operational store-level improvements at Outback were mission one; more “fun” themes in its marketing needed; and more expansion in Brazil where it is doing very well. Starboard mentioned the smaller brands and their promise. Unlike other raiders in the past, Starboard did not mention spinning off Fleming’s, a sign that it believes management plans for growth.[10]   This doesn’t seem like this will turn into a pitched battle like Darden was; I bet CEO Dave Deno and the Board will welcome Jeff Smith. The large issue is how much new OPEX for marketing and CAPEX for brand expansion can be generated.

The ongoing Roark/Subway acquisition process runs on and on… readers by now probably thought this process had ended, but no. The FTC is reviewing it per their regular competitive process, but this seems to be the first restaurant review on the FTC’s books, as I noted to Jonathan Maze last week. Jonathan was kind enough to invite me into the Deeper Dive podcast on December 6 [11]  to talk about the FTC and Roark. I pointed out that franchise business structures were not specifically noted in the FTC analysis procedure but they had discretion. Employees could be a review factor. Looking at Roark, their restaurant brands are so diverse they populate 6 groupings with only 3 existing QSR /sandwich brands. It is hard to see where a critical anti-competitive cluster would emerge.

What may have gotten the FTC’s attention is the sheet risk of the Roark deal. Every restaurant universe potential buyer but Roark walked away from the Subway/DAI deal, and even then they did not get the $ 9.6 billion price at first, they have a $800M earnout. US franchisee profitability was very low in the base case, now it is even lower as Subway is mandating accepting digital discounting.

More to come//

About the author:

John A. Gordon is a long-time restaurant industry veteran, with 47 years of industry experience in operations, corporate staff  (20 years), and 21 years via his founded management consultancy, Pacific Management Consulting Group. He does operations, financial analysis,  organization reviews, and special investigations for clients who need detailed restaurant perspectives. Please see his website, Linked In profile, and X links at https://www.pacificmanagementconsultinggroup.com. He is always available at 858 874-6626, jgordon@pacificmanagementconsultinggroup.com.

[1]  Bureau of Labor Statistics, November 14 2023. See trend at https://fred.stlouis.org/series/CUUR000SEFV

[2]  In California, due to the disastrous AB1228 effect coming on wages in 2024, QSR restaurant chains have no choice but to take large price increases.  Recall the chief actors in this mess were SEIU, the Governor, the California Legislature, and the IFA.

[3]   Recommend compare the publicly traded restaurant stock tables with the brand values and franchisee strengths.

[6]   True on “cash flow” or EBITDA as it really is. On credit, while MCD franchisees should get good rates, interest rates have risen 500 bpts year over year.  

[8]   For more discussion in a future column.

[9]   See Businesswire.com November 21 2023, Strategic Organizing Center Nominates Three Candidates to Starbucks Board of Directors 

Restaurant Business – Why the FTC is Targeting the Subway Sale

A Deeper Dive: Restaurant consultant John Gordon joins the podcast to discuss Subway and the FTC review of its sale to Roark.

Why is the FTC looking into Subway?

This episode of the Restaurant Business podcast “A Deeper Dive” features John Gordon, a restaurant consultant out of San Diego, who discusses the apparent investigation of the sale of Subway to Roark Capital.

The investigation is apparently examining whether the acquisition of the sandwich giant would give the private equity firm Roark too much power.

We discuss that issue, and how much of the restaurant market Roark really would have if the sale were to go through and whether that is all that unusual. (Hint: It’s not.)

We also talk about some of the chain’s efforts to push discounting through its app, including its upcoming requirement that franchisees accept digital coupons. As we reported in September, Subway wants franchisees to accept the offers by the end of this month.

But we also discuss what this review could mean for the restaurant business as a whole.

We’re talking Subway and the FTC so please check it out.

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Orlando Sentinel – Darden Activist Investor Sets Sights on Outback Steakhouse, Carrabba’s

Outback Steakhouse and Carrabba's Italian Grill at International Drive, on Tuesday, October 24, 2023. Years after investing in Orlando's Darden Restaurants, Starboard Value is at it again with a plan for Outback Steakhouse and Carrabba's owner Bloomin' Brands.
(Ricardo Ramirez Buxeda/ Orlando Sentinel)
Outback Steakhouse and Carrabba’s Italian Grill at International Drive, on Tuesday, October 24, 2023. Years after investing in Orlando’s Darden Restaurants, Starboard Value is at it again with a plan for Outback Steakhouse and Carrabba’s owner Bloomin’ Brands. (Ricardo Ramirez Buxeda/ Orlando Sentinel)
Austin Fuller, Orlando Sentinel staff portrait in Orlando, Fla., Tuesday, July 19, 2022. (Willie J. Allen Jr./Orlando Sentinel)

PUBLISHED:  | UPDATED: 

The activist investor who shook up Orlando-based Darden Restaurants now is taking aim at Outback Steakhouse and Carrabba’s Italian Grill, in what could be a less tumultuous move than nearly a decade ago.

Starboard Value, which won control of Darden’s board in 2014, has about a 10% stake in Tampa-based Bloomin’ Brands. There are some similarities between Bloomin’ and Darden, and Starboard has already brought in a former Darden top executive as an adviser.

“We’re Back with Another Restaurant Conglomerate: Bloomin’ Brands,” a recent slideshow from Starboard for the Capitalize for Kids charitable investors conference declared.

The slideshow called for Outback’s marketing to get back to being fun, noting past commercials featured cowboys, surfers and football. It also said better and more consistent service and food would bring more success to the chain, which has 564 company-owned locations.

The presentation also said there is room to grow its Carrabba’s chain into the clear No. 2 behind Darden’s Olive Garden in Italian casual dining. Carrabba’s has 199 company-owned restaurants and Olive Garden has 906.

Bloomin’ also owns Bonefish Grill and Fleming’s Prime Steakhouse & Wine Bar.

When asked by the Orlando Sentinel about Starboard’s presented plan and stake in Bloomin’, as well as if the company had already changed anything to adjust to Starboard, Cathie Koch, Bloomin’ vice president of corporate affairs, said in an email that “Bloomin’ Brands has engaged with Starboard Value since it invested in the company and we have appreciated hearing their team’s views.

“We look forward to continuing a constructive dialogue as we remain focused on enhancing value for all shareholders,” Koch said.

San Diego-based restaurant analyst John Gordon doesn’t expect Starboard’s investment in Bloomin’ to be as much of a fight as its involvement with Darden turned out to be.

In Darden’s case, every board member was replaced as Starboard CEO Jeffrey Smith won a vote to put in place himself and 11 others on it in October 2014. Gene Lee was named Darden CEO in 2015 after taking on the interim role following the board replacement and longtime CEO Clarence Otis announcing his retirement in July 2014.

Otis, who was criticized for the $2.1 billion sale of Red Lobster, revealed his departure after months of fighting with investment groups about Darden’s direction, the Orlando Sentinel reported in 2015.

“I don’t think that anybody wants to go through another battle for Darden again,” Gordon said. “[Bloomin’ CEO David Deno is] a little more politically savvy … whereas Clarence had been a longtime CEO at Darden and he felt that he knew best.”

Gordon said Starboard’s Smith is a positive influence for restaurants based on his work with Darden as well as Papa John’s after the pizza company’s own troubles.

In 2015, Darden’s board approved spinning off the real estate of the Olive Garden and LongHorn Steakhouse chains. Cash from the deal was planned to help get rid of about $1 billion in debt. Starboard exited the Darden board in 2016.

Starboard’s presentation pointed out the success Darden has had since Starboard’s involvement as well as the similarities between the chains owned by Bloomin’ and Darden.

One slide was titled: “Like Outback, Olive Garden Suffered from Execution Issues Prior to Starboard’s Involvement at Darden.”

Starboard has also brought on a retired Darden executive, David George, as an adviser for its investment in Bloomin’, according to a Securities and Exchange Commission document. George retired from Darden as executive vice president and chief operating officer in August 2020.

Gordon said Starboard was a “catalyst” for Darden.

“The CEO had to exit. The board exited. A high performer [Lee] was installed as CEO,” Gordon said. “… Bloomin’ is in kind of a dead zone right now. They’re in a momentum-less mode right now. They need a catalyst in order to get their brands moving.”

Gordon described Starboard’s slideshow as a “wave-top level” look at Bloomin’ and he expects Starboard will come out with more plans.

He added that based on his own visits, Outback appears to have the same look as it has for two decades.

“No. 1, is that the look and feel of Outback isn’t conducive or friendly for lunch business, in my opinion,” Gordon said.

As for growing Carrabba’s, Gordon believes the brand needs a new approach.

“Carrabba’s is going to have to change,” Gordon said. “It’s already been middle class. So for it to zoom up, where’s it going to go? How is it going to be repositioned? They’re going to have to do the conceptual work with planners and with all kinds of folks.”

Gordon said he believes Darden could be standing in its path.

“The issue is how do you bring Carrabba’s up to Olive Garden’s strength,” Gordon said. “Olive Garden was created by Darden… it has years and years of history and tradition and successful advertising.”

“Carrabba’s can’t grow because Olive Garden is blocking their way.”

Darden spokesman Rich Jeffers said the company doesn’t comment on its competitors.

Orlando Sentinel – Endless Shrimp Falls Short as Red Lobster Sees Bigger Loss, 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)
Austin Fuller, Orlando Sentinel staff portrait in Orlando, Fla., Tuesday, July 19, 2022. (Willie J. Allen Jr./Orlando Sentinel)

PUBLISHED:  | UPDATED: 

Red Lobster’s turnaround in the first half of the year appears to have stalled, even after making its Ultimate Endless Shrimp deal a menu mainstay, a major shareholder in the Orlando-based seafood chain has revealed.

Thailand-based seafood supplier Thai Union said in an earnings report that Red Lobster’s share of loss from operations got worse in the quarter ending Sept. 30. Converted from Thai currency in November, the loss went from about $9.5 million last year to about $11.1 million this year.

Red Lobster’s move at the end of June to start serving its Ultimate Endless Shrimp promotion every day also didn’t appear to make as big a wave as what was expected from the investor. 

A webcast slideshow from Thai Union said the deal did drive some traffic growth but fell short of expectations and financial performance.

San Diego-based restaurant analyst John Gordon said the deal’s $20 price was too high, noting Olive Garden’s Never Ending Pasta Bowl promotion starts at $13.99.

“The marketing effort to do this floundered,” Gordon said. “The new CEO is already in place. So they’ve got to try again. They’ve got to try something else that works.That was a reasonable effort on the shrimp, for a fish house to do that, but they’ve got to try something else.”

After nearly a year and a half without a CEO, Red Lobster in September named longtime executive Horace Dawson to the top position. Dawson had been the chain’s executive vice president and general counsel since 2014.

Thai Union’s report, released Monday, attributed the quarter’s loss to “industry headwinds, including higher material and labor costs, high interest rates, and a cyclically lower quarter.”

Gordon said that Red Lobster’s bigger loss compared with last year was not all that material of a shift in terms of dollar amount.

“The casual dining space is still burdened with some inflation,” Gordon said.

Restaurant operators have reported declines in customer traffic for six consecutive months, according to the National Restaurant Association’s September Restaurant Performance Index.

A Red Lobster spokeswoman did not immediately respond to questions from the Orlando Sentinel.

Conditions had been improving at Red Lobster, with Thai Union reporting a “share of profit from operations” for Red Lobster in the first quarter of this year. In the second quarter, its share of loss from operations in Red Lobster decreased by 66% compared with the same time last year.

Thai Union, whose brands include Chicken of the Sea tuna, became a Red Lobster stakeholder in 2016 before teaming up with a group of investors in 2020 to acquire the rest of the company.

afuller@orlandosentinel.com 

Orlando Sentinel – Will Ozempic Tamp Down Consumer Hunger For Olive Garden Breadsticks, Groceries?

The injectable drug Ozempic is shown Saturday, July 1, 2023, in Houston. (David J. Phillip/The Associated Press)
The injectable drug Ozempic is shown Saturday, July 1, 2023, in Houston. (David J. Phillip/The Associated Press)

Austin Fuller, Orlando Sentinel staff portrait in Orlando, Fla., Tuesday, July 19, 2022. (Willie J. Allen Jr./Orlando Sentinel)

PUBLISHED:  | UPDATED: 

Darden Restaurants CEO Rick Cardenas got a question on a recent earnings call that even the industry analyst asking it thought was odd.

The analyst wanted to know about what effect diabetes and appetite suppressant drugs such as Ozempic would have on restaurant demand. Cardenas heads the company that owns Olive Garden, home to “never-ending” soup, salad and breadsticks.

“Full-service dining occasions are driven by a desire to connect with family and friends,” Cardenas answered on the earnings call last month, noting he did not expect a “meaningful impact” for his Orlando-based company.

Despite all those breadsticks at Olive Garden, Cardenas said Darden has spent a lot of time over the years developing menus to give guests a wide range of choices.

“If it suppresses appetite a little bit, they’re still going to eat,” Cardenas said. “So we’re going to be there for them when they do.”

Darden has 1,998 restaurants including Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen and Ruth’s Chris Steak House.

But it’s not just at Darden where these kinds of questions are coming up. Walmart U.S. CEO John Furner told Bloomberg that the company has seen a “slight pullback” from shoppers taking those medications.

GLP-1 drugs such as Ozempic are Type 2 diabetes medicines that help with blood sugar and might also help with weight loss. According to the Mayo Clinic, the drugs appear to assist in subduing hunger.

Still, restaurant and retail experts say it’s too soon to know for sure what will happen.

“It’s more of a Wall Street story as opposed to a consumer story because if it becomes a big consumer story it would take so long to work its way through all the different consumers,” San Diego-based restaurant analyst John Gordon told the Orlando Sentinel. “I think it would take years to reach mainstream coverage and adaptation.”

One unknown for restaurants, Gordon said, is if the prescription could mean different things for different kinds of eateries, such as Denny’s versus Darden’s The Capital Grille, a fine dining chain.

“It’s an issue that those that follow stocks day in and day out … might find to be a catalyst, and a catalyst is something that is new news that might drive stocks either up or down,” Gordon said.

But traditional grocers such as Lakeland-based Publix could be more exposed than retailers such as Walmart or Target that offer more than food, said Amanda Lai, a director at Chicago-based retail consulting firm McMillanDoolittle.

“Retailers like grocers that are more food-centric would likely be more impacted if the trend of pulling back on shopping for food as a result of appetite suppressant drugs continues to grow,” Lai said.

Lai also noted shoppers have been tightening their wallets for an entirely different reason: high inflation in recent years.

“Since we’re just hearing some of the preliminary findings from retailers, it’s still fairly early to draw definitive conclusions,” Lai said.

When asked about the comments from Walmart and what, if any, effects Publix had seen or expects to see from shoppers who might be on these medications, spokeswoman Maria Brous said in an email the company did not have “direct data that would correlate or support this theory.”

Publix has more than 1,350 stores in the Southeast and 859 stores in Florida.

Lai said the issue could put “the onus on food companies to continue to innovate their offerings.”

Wray Executive Search – Restaurants: Caution: Banana Peels Lurking Ahead

Time for thoughtful planning and execution ahead.

The industry has made it successfully into mid-September, seasonally the second slowest point of the year. Cable TV is full of QSR brands running discount-oriented offers (Dominos Pepperoni Bread, for example), and others that are in a much stronger position like Olive Garden have a TV flight featuring “more”, a benefit of Olive Garden. The industry is struggling with guests who haven’t come back from the Pandemic break, inflation, too much unit growth (see below), and more.

Several macro-econometric developments are converging this fall that we all need to be aware of for better planning. This is not a call for more discounting, which is the industry’s usual quick-term reaction. The restaurant industry is resilient, and the progress we have made since the Pandemic is amazing. But, for us, it seems like there is “one more banana peel after another” on the road ahead.

Gasoline prices rose to $3.87 nationally per the AAA just after Labor Day.  Prices are still rising. This rising pattern is unusual and unwelcome coming after the peak summer driving period has ended. [1] Lower gasoline prices are an important potential positive adjustment to consumer discretionary income that we need.

Labor strikes. The UAW has active strikes against all three Detroit major automakers.[2] This takes autoworkers and restaurant consumers’ frequency down in those strike cities as one would expect.

Of the critical impact on our industry, I feel, is student loan repayment must begin again in October.[3] It is estimated that 27 million borrowers will guggle a new monthly payment of $350. [4] As this group skews younger, restaurants can expect a hit.

DC Shutdown? Finally, the House and Senate need to pass spending bills by September 30 to keep the US Government in operation. While stop-gap, temporary measures are the norm, this year there is abnormal tension in the House. [5]  Full government shutdowns disrupt the economy.

What to do….

So these issues speak to the need for the new budgeting and planning cycle that has been discussed in this column before. It is a model of Mike Bloomberg’s advice to do a good operations and capital budget, but with identified options and reaction levels to react quickly. No one ever knows exactly what the future brings but we can do a limited number of “what ifs drills” to be mentally agile. I worked 20 years in corporate staff roles and now another 21 years via my consulting firm, and my observation is it is true it takes a long time for some companies and cultures to “turn the battleship”. Don’t let that happen. CEOs, force the various corporate disciplines to work together to evolve solutions that everyone owns.

McDonald’s Takes Surprising Action…

In a move bound to be copied worldwide, McDonald’s announced it would phase out the self-serve beverage stations over the next several years. Its stated objective was to achieve a consistent dining room look and appearance worldwide.[6] This move comes at an interesting time as guest traffic eating in is at a low ebb historically (but still up a bit from the COVID-affected months). During that time, some operators came to appreciate a drive-thru-only operation.

McDonald’s no doubt took a look at syrup yields, which I imagine had to have deteriorated over the years.  There are some questions looking at this. No doubt dine-in or take-out guests might consider self-serve a benefit, an ability to customize or mix their drinks.  Also, for families, a core McDonald’s group, the self-serve fountain is always an area of activity. The kids love it. That in the future is taken away. McDonald’s will have to find some other personalization benefit to replace that value removed. We’ll see.

Analytical Notes   

The very long-running Subway/DAI auction was concluded on September 6 with Roark purchasing the franchise at a certain $8.95 billion price, with a potential up to $9.55 billion via an earnout clause. Given the estimated DAI annual EBITDA of $750M, that is a floor multiple of 11.9X. Subway will be its entity in the Roark organization. No doubt, international growth will be the key to making this transaction work. There will be both US and International franchise structure reorganizations coming. To make their proforma, I would bet there would be changes in the supply chain operations and the Area Developer structure. Subway has said in the US it doesn’t need Area Developers anymore, but in international markets, that is a future question. Some discussion has recently emerged about what kind of review the FTC will make of the merger, since similar, sandwich brands are involved in the Roark portfolio.[7]

US store growth situation: In doing work for a client recently, I noticed that US restaurant store counts have grown again more than expected. This is one of the big reasons that industry same-store sales growth has been declining, even before the Pandemic. [8] As of Q1 2023, restaurant count was 695,821, versus 654,207 in Q4 2019. [9] The point is that the erosion of restaurant counts during the Pandemic years has been offset even more over time.

The issue becomes that new sites and new concepts absorb customers faster than existing base brands can generate or regenerate them. Our industry has always had elements of trial and new guest appeal in it, hence why new concepts get a look once they achieve scale and have a story to tell.

What to do?  At the very least, the publicly traded franchise brands have to balance their earnings commentary from focusing so much on unit growth. There are many other metrics of a quality franchise organization that can be highlighted. Some brave CEOs have discussed the benefits of pruning very old franchise systems of older, economically unviable units that are a waste of both franchisee and brand resources.  

M&A Market Note:

It is commonly acknowledged that the IPO and franchise markets have improved finally. The CAVA IPO this summer was the US equity star for several days and has had its first earnings call. Other IPOs, including FAT Brand’s profitable Twin Peaks brand, are planned for 2024. A theme is experiential works which bodes well for FSR. In franchise activity, buyer and seller activity has picked up.  Rates are still high but EBITDA trends are slightly better now with food cost percentage reductions seen.

 

About the author:

John A. Gordon is a long-time restaurant industry analyst and expert, with 20 years in restaurant corporate staff roles (Finance FP&A), and 21 years via his founded restaurant consultancy, Pacific Management Consulting Group. He works on complex operations and managerial finance engagements for all kinds of clients who need a deep restaurant perspective. Call him anytime at 858 874 6626, email, jgordon@pacificmanagementconsultinggroup.com

 

[1]   New York Times, Marie Solis, September 15 2023.

[2]   New York Times, Ivan Penn, September 17 2023

[3]   Due to Supreme Court Decision in 2023.

[4]   New York Times, Holman, Smialek and Karian, September 15, 2023.6

[5]   New York Times, Carl Hulse, September 17 2023.

[6]   https://www.restaurantbusinessonline.com/operations/mcdonalds-getting-rid-its-self-serve-drink-stations

[7]    NY Post, Josh Kosman, September 17 2023.

[8]   Black Box come up with same opinion in 2022.

[9]   Bureau

AdWeek – After Clashing Over Marketing For Eons, Here’s How CMOs And Franchisees Can Finally Get Aligned

Marketing Innovation https://www.adweek.com/category/marketing-innovation/)

It won’t be easy, but experts have a few ideas on where to start

By Robert Klara |10 hours ago

The CMO/franchisee relationship is often contentious.

Credit:Boris Zhitkov/Getty Images

If you want a snapshot of the sort of conflict that’s always simmering between the CMO’s office and a company’s franchisees, you might start by asking Bruno Cardinali.

For three years, Cardinali was the CMO of Popeyes, where he presided over one of the most successful promotional blitzes in recent history—the
Popeyes Chicken Sandwich
https://www.adweek.com/brand-marketing/what-popeyes-chicken-sandwich-can-teach-us-going-viral-connectingcommunities/)
. Introduced in August 2019, the item awakened passions rarely seen in fast food. Customers formed lines around the block, waiting an hour or more to sample the crispy chicken breast on a brioche bun with pickles and Cajun sauce. Jimmy Kimmel tweeted about the sandwich. Saturday Night Live parodied it. And as 20 competing chains scrambled to mount their own
versions—touching off what would later be called the Chicken Sandwich Wars—Popeyes notched a quarterly sales spike of 38%.

“It was a massive sales return for everybody,” said Cardinali, who earlier this month took the marketing helm at fast-casual chain Oakberry. He’s referring to corporate performance, of course, but also to the revenues of franchisees, who operate 99% of the Popeyes system. Some units generated an extra $400,000 thanks to the sandwich alone.

You might think that franchisees were overjoyed at such a windfall. But it’s not that simple.

Cardinali recalls, not uncharitably, that he received an earful from some franchisees who bristled under the operational strain of serving so many sandwiches. One franchisee whose restaurant served up 1,200 chicken sandwiches per day told The New York Times: “It was so stressful. I’m amazed that team members stayed. It was absolutely just mayhem.”

And while he’s still proud of the promotion, he told Adweek that “increasing traffic created a lot of need for everybody to rethink a lot of the processes to make it smoother.”

Popeyes’ sandwich pandemonium is only a recent manifestation of a familiar dichotomy within sprawling chain systems where franchisees work the front lines. Following the usual remit, a CMO focuses on big picture marketing to generate buzz, increase customer counts and boost top-line growth. But a chief marketer also has a responsibility to work on behalf of franchisees—and
their
day-to-day realities are different from (even at odds with) what happens at the head office. In theory, a CMO should devise marketing initiatives that benefit both parties. But a host of issues conspire to make that task a difficult one.

Difficult—but not impossible. Adweek asked a range of experts to share their thoughts about why the CMO/franchisee relationship is so often contentious, and to suggest ways it could be improved.

Cut out for conflict

To a great extent, the competing interests of the CMO and the franchisee are baked into the franchising model itself, which relies on disparate skillsets in order to work.

“This problem is old as the hills because the marketing people, the operations people and the finance people are different personality types,” said John A. Gordon, founder and principal of Pacific Management Consulting Group, which specializes in restaurant finance and franchising issues.

CMOs are inherently optimistic and often cook up clever ideas, Gordon said, but they “don’t understand store economics very well.”

Franchisees, by contrast, eat and sleep store economics. That singular focus can admittedly make them resistant to ambitious marketing campaigns—yet the franchisees are also the ones with the most skin in the game. “Franchisees are generally small to midsize businesspeople,” Gordon said. Unlike the CMOs who enjoy a regular paycheck, “They have a note on their property. They have to pay royalties. They’re in it for the long term.”

As the founding partner of franchise law and commercial litigation firm Zarco Einhorn Salkowski, Robert Zarco has represented franchisees from more than 550 brands over the course of his 38-year career. From his perspective, franchisees are not only subject to the caprices of marketing decisions made at headquarters, they’re bound by the terms of contractual agreements that maneuver them into an inherently disadvantaged position.

Not a fair shake

For example, a promotional program developed by a CMO might well generate additional revenue—but it can also force franchisees to sell items under cost. In many instances, “the franchisee is undertaking greater expense in delivering that promotional product to the consumer than the profit that that transaction would bring to the franchisee,” Zarco said. “In fact, those transactions typically are losing transactions.”

The textbook case is Burger King’s double cheeseburger fiasco. In 2009, BK rolled out a promotion that dropped the price of a double cheeseburger to $1. At the time, the home office in Miami hailed the marketing campaign for delivering “exceptional value.” A value for customers it doubtless was, but not for franchisees, who found themselves selling a premium menu item at a loss. They sued, and BK settled in 2011.

Here’s a more recent example. In 2017, McDonald’s corporate began pushing its franchisees to sell soft drinks for $1. Franchisees didn’t like it, but when inflation began driving their costs through the roof in 2022, they revolted. Eventually, headquarters backed off. “The issue there is that the pathway to riches in a fast food operation is French fries and soda,” Gordon said.

An aggravating factor in cases like these is that, while the CMO and his marketing department might be aware that its promotion is a hardship for franchisees, there’s no disincentive to going ahead with it anyway.

“Not only is headquarters not going to feel any pain—headquarters is going to feel a profit,” Zarco said. “Because, while the individual transaction in the corporate stores may not generate a profit at the unit level… corporate-wide, there’s a tremendous uptick in profitability because of the additional royalties and marketing fees and service fees, and all other fees that are tied to the gross-revenue business model.”

Can’t we all just get along?

The obstinance of these problems begs some difficult questions: Can anything be done to fosterbetter cooperation between a CMO ensconced in a carpeted suite and a gaggle of franchisees on thefront line? Is it possible for a CMO to create campaigns to satisfy corporate’s growth agenda thatfranchisees will also like? At least one prominent CMO thinks so.

Eric Keshin spent 30 years at
McCann WorldGroup https://www.adweek.com/agencies/how-mccannworldgroups-
internal-sustainability-tracker-steers-it-toward-net-zero/)
, where his clients included Wendy’s, Burger King and Applebee’s. In 2014, he signed on as chief marketer for Great Harvest Bread Company, a bakery-café concept with more than 200 franchised locations. Keshin’s long experience has taught him that, sooner or later, many franchisees “feel like the franchisor is a little out of touch or is making them do things they don’t want to do.”

His solution? Stop making them do it.

At Great Harvest, Keshin has no national marketing program. Instead, he focuses his energy on unit-level marketing, and on winning the trust of franchisees with an initiative called “Guaranteed to Break Even.” In this setup, headquarters devises regional marketing messages (usually some variant of “baked fresh every day”) and furnishes templates for franchisees to implement them—copy for Google display ads, for example, or crib sheets for local radio DJs to read on the air. The franchisee is under no obligation to buy into Keshin’s strategy. But many do, because Keshin has the data to prove that it will increase their sales.

“I’m able to compare the universe of the test market versus the universe of the people that aren’t doing anything—and I could show a 5% to 15% improvement in comps,” he said. “I guarantee [my
franchisees] that it’s going to pay back. But if for whatever reason it does not, then we would cover the cost.”

Hybrid marketing

In addition to her work as a certified franchise executive, Kristen Pechacek is also the chief growth officer at St. Louis-based MassageLuXe. When she joined the luxury spa chain in the summer of2020, she set about finding ways to foster a more productive working relationship between the home office and the franchisees who operate all of the brand’s 69 locations. Even now, she said, maintaining those good relations is “the hardest part about my job.”

Why? On the one hand, “franchisees didn’t get into business to be marketers,” Pechacek said. At thesame time, franchisees don’t appreciate the CMO shoving onerous marketing ideas down theirthroats. To address this paradox, Pechacek created what she calls a “hybrid approach.”

As you might expect, the home office in Chesterfield, Missouri handles PR duties and runs national marketing. (While Pechacek does do pricing promotions, “we tier them based on [a franchisee’s]normal pricing and geographic areas, so there’s a little bit of flexibility.”) Meanwhile, on the locallevel, franchisees handle marketing on their own, most often relying on support from Pechacek andher staff.

For example, while headquarters expects individual stores to be active on social media, it knows that most operators don’t have the time to keep coming up with fresh ideas for content.

“We have to find a way to get that local content out,” Pechacek said. “One of the ways that we do that is by telling [franchisees] what to post. All they have to do is hand [the briefing] to their manager and read the prompt that says, ‘Interview that massage therapist about why they love their job.’ Boom—post it.”

Pechacek also encourages her franchisees to engage in local civic activities. But since few franchisees relish the task of writing a speech, “[we] give them the actual script—exactly what to say,” she said.

Courtesy calls

Of course, the boutique approaches that Great Harvest and MassageLuxe have developed would be challenging to implement in a system that has 20,000 franchised locations instead of 200.

But according to Gary Stibel, most any CMO can foster a better working relationship with his franchisees by doing something that too many senior executives don’t do: talk to them. “The biggest challenge is to remind those two sides that they aren’t in competition with one another,” he said. “They’re in competition with other chains.”

Stibel is in a position to know. As founder and CEO of the New England Consulting Group, he’s worked for major chains (“all of them,” he said) and for large franchisee organizations. Stibel advises all CMOs to make time to reach out to franchisees.

“Involve them all, so they feel like they’re part of the process,” she said. “Human beings rarely object to aligning behind any strategy if they’ve been consulted in the process. Meet with your franchisees early and often—not just your supporters—they’re already in your camp—but your outliers.”

The rubber stamp committee

Many CMOs would say they already do practice this type of outreach in the form of their company’s franchise advisory council, a group of operators chosen by the C-suite that—to cite the International Franchise Association’s definition—is “charged with enhancing communication,
working together to improve the system and helping resolve challenges that impact the franchise system as a whole.” By this standard, if a proposed promotion from the CMO’s office secures a thumbs up from the advisory council, the brass assumes its franchisees are cool with it.

But Zarco is deeply skeptical of the setup. The councils, he argues, are too often made up of handpicked yes men whose approval means very little. If a CMO really wants the support of franchisees, he said, then the CMO should be willing to consult a true cross-section of his operators.

“Have the CMO make a business case for why this particular marketing program will work and how it benefits the franchisor, the franchise system and the franchisee,” Zarco said. “And then invite these people to comment on why it’s good or it’s bad or it’s both or it’s not a question of degree, and ask them: ‘How will this impact you?’ And then listen—literally—and not shove it down their throat.”

Gordon agrees with that advice, adding that CMOs should also find time to visit franchisees’ units—not only to learn more about store-level economics, but also to observe how marketing initiatives translate into daily operations. “Get them into the field,” he said, “so they could see how the sausage is made.”

For his part, Cardinali can at least attest to how crispy chicken sandwiches are made. Theexperience of watching Popeyes franchisees execute his promotion in 2019 has given him much toreflect on. Asked what sort of advice he’d give CMOs these days, he said, “Communicate as much aspossible. It’s very important.

“I can have the best idea, the best innovation, the best product,” Cardinali added. “But if it’s very complicated for the restaurant, it’s not going to happen. It’s a marriage.”

© 2023 Adweek, LLC. All Rights Reserved.

Wray Executive Search – Restaurants: Notable New News Seen Recently

by John Gordon, Principal and Founder, Pacific Management Consulting Group
The March 2020 Pandemic changed global business and society in every way imaginable. Our industry, a service industry essentially based on commercial fixed assets working with and serving guests was fundamentally affected. We are recovering but with many issues remaining.
To see ahead, we have to look at current conditions but also forward-looking forecasts, history, and looking at the industry in every which way possible. I’ve noted several events and observations over the last month that are useful:
Quarter 2 Earnings to date are OK, but not great. The global QSR powerhouses such as McDonald’s and YUM have done well, as have the US-based company-operated concepts such as Darden and Starbucks as well as Chipotle.

Orlando Sentinel – Robert Earl’s Virtual Restaurants Grow As Others Fall By The Wayside

Orlando restaurateur Robert Earl’s Virtual Dining Concepts is still growing, providing delivery and takeout-only brands and menus to his own and other restaurants. Earl is pictured in his office on Friday, June 2, 2023. (Stephen M. Dowell/Orlando Sentinel)
Orlando restaurateur Robert Earl’s Virtual Dining Concepts is still growing, providing delivery and takeout-only brands and menus to his own and other restaurants. Earl is pictured in his office on Friday, June 2, 2023. (Stephen M. Dowell/Orlando Sentinel)

Austin Fuller, Orlando Sentinel staff portrait in Orlando, Fla., Tuesday, July 19, 2022. (Willie J. Allen Jr./Orlando Sentinel)

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Food from Pardon My Cheesesteak arrives from Uber Eats in a bag with the restaurant’s yellow logo on it, but the kitchen that makes it could belong to an IHOP, TooJay’s Deli, or another eatery.

Virtual restaurants like Pardon My Cheesesteak allow existing kitchens to add new menus under different names on delivery apps like Uber Eats. They became so popular amid the coronavirus pandemic that Uber said in March it had more than 40,000 virtual storefronts and the company was launching a certification program to improve their quality.

Pardon My Cheesesteak’s parent company, Virtual Dining Concepts, is seeing growing business and expanding internationally, said Orlando restaurateur Robert Earl, a co-founder and shareholder.

“We’re seeing increases in our total volume, and it continues to grow,” Earl said.

Pardon My Cheesesteak is a brand from Virtual Dining Concepts co-founded by Orlando's Robert Earl. (Austin Fuller/Orlando Sentinel)
Pardon My Cheesesteak is a brand from Virtual Dining Concepts co-founded by Orlando’s Robert Earl. (Austin Fuller/Orlando Sentinel)

But some virtual restaurants owned by other companies are losing thunder, three years after the start of the coronavirus pandemic and the ensuing frenzy of ordering in.

Winter Park-founded Tijuana Flats launched a virtual restaurant called Smack Wings in 2021, but it has since been discontinued. A representative for Tijuana Flats said executives wouldn’t do interviews about Smack Wings and directed the Orlando Sentinel to the brand’s website, which says wings will be available at Tijuana Flats.

Chili’s virtual restaurant, It’s Just Wings, remains available for delivery, but offerings are now also on Chili’s restaurant menu, according to a report in Forbes.

“Several brands after giving it a trial didn’t receive the sales returns and menu mix that they expected, so they have gone on to higher priority projects,” said San Diego-based restaurant analyst John Gordon.

Earl’s Virtual Dining Concepts, meanwhile, provides virtual restaurant menus and brands, often with celebrity partnerships, to existing restaurants. It is part of Uber’s new certified virtual restaurant program.

Virtual Dining Concepts is in more than 3,015 kitchens, with about 4,525 brand locations as some restaurants offer more than one of the menus, said Earl Enterprises spokeswoman Amy Sadowsky.

When Virtual Dining Concepts started, it was focused on smaller restaurants surviving during the pandemic. Earl said the market continues to flourish, but there is now more focus on larger companies.

Take Pardon My Cheesesteak, which launched in May 2022. Its cheesesteak sandwiches and loaded cheesesteak fries are being cooked in IHOP kitchens around Orlando and across the country.

Earl said a lot of people order delivery late at night, so 24-hour operator IHOP was a “perfect partner” for Pardon My Cheesesteak, which gets its name through a partnership with the Pardon My Take sports podcast.

Although Earl can’t name all the chains he works with, he said restaurants are realizing they have extra capacity and are concerned about a potential recession as well as the competitive nature of the business.

“I think it’s fair to say that everyone is looking for more sales,” Earl said.

Virtual Dining Concepts’ MrBeast Burger brand, a partnership with YouTube celebrity Jimmy Donaldson, known as MrBeast, has been so successful that it opened a brick-and-mortar restaurant in New Jersey last year.

“It’s that strong a brand,” Earl said.

As for the state of delivery three years after the start of the pandemic, Gordon said there are different perspectives, adding there is a view it could drop with the projection of a mild recession.

But Uber reported its delivery gross bookings were $15 billion in the quarter ending March 31, up 8% year-over-year.

“I get different stories,” Gordon said. “The fact is that delivery is extraordinarily expensive, though there is a segment of the population, particularly in big urban areas where their car is buried in a parking lot … or where convenience is just such that delivery is demanded and most convenient.”

Earl acknowledges the economy might lead some consumers to opt for cheaper takeout, but he thinks people will keep ordering in.

“My view is that the total market for delivery will continue to grow,” Earl said. “There will be periodic ups and downs.”

Earl noted that curbside pickup is part of his virtual restaurant business.

“A virtual brand is more than just something that’s going to be delivered to your house by Uber and DoorDash,” Earl said.

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.