PACIFIC MANAGEMENT CONSULTING GROUP
Restaurant Analysis and Advisory
By Julie Bennett
Mother was right: breakfast is the most important meal of the day. That’s especially true for franchisees of family-style restaurants. Their breakfast sales have risen ever since a global fast-food hamburger chain rolled out an all-day breakfast in Oct., 2015. Read more
DINING: Marketing Sells the Food Rather Than the Eatery’s Story
By Jared Whitlock
Call it a tale of two coasts.
In California, the marketing for Rubio’s Coastal Grill has long leaned on the story of co-founder Ralph Rubio getting hooked on fish tacos while on a Baja camping trip in 1974, and later giving the U.S. its first taste of the fare in a walk-up stand in Mission Bay. Read more
NEW YORK (AP) — Papa John’s founder John Schnatter will step down as CEO next month, about two months after he criticized the NFL leadership over national anthem protests by players — comments for which the company later apologized.
Schnatter will be replaced as chief executive by Chief Operating Officer Steve Ritchie on Jan. 1, the company announced Thursday. Schnatter, who appears in the chain’s commercials and on its pizza boxes, remains chairman of the board. He is also the company’s biggest shareholder.
Earlier this year, Schnatter blamed slowing sales growth at Papa John’s — an NFL sponsor and advertiser — on the outcry surrounding football players kneeling during the national anthem. Former San Francisco 49ers quarterback Colin Kaepernick had kneeled during the anthem to protest what he said was police mistreatment of black men, and other players started kneeling as well.
“The controversy is polarizing the customer, polarizing the country,” Schnatter said during a conference call about the company’s earnings on Nov. 1.
Papa John’s apologized two weeks later, after white supremacists praised Schnatter’s comments. The Louisville, Kentucky-based company distanced itself from the group, saying that it did not want them to buy their pizza.
Ritchie declined to say Thursday if the NFL comments played a role in Schnatter stepping down, saying only that it’s “the right time to make this change.”
Shares of Papa John’s are down about 13 percent since the day before the NFL comments were made, reducing the value of Schnatter’s stake in the company by nearly $84 million. Schnatter owns about 9.5 million shares of Papa John’s International Inc., and his total stake was valued at more than $560 million on Thursday, according to FactSet. The company’s stock is down 30 percent since the beginning of the year.
“I think it’s possible that this was a conscious decision to get him out of the line of fire,” said restaurant analyst John Gordon, who is the founder and CEO of Pacific Management Consulting Group. “The focus of the brand needs to be the pizza.”
Schnatter, 56, founded Papa John’s more than three decades ago, when he turned a broom closet at his father’s bar into a pizza spot. Since then, it has grown to more than 5,000 locations. Schnatter has also become the face of the company, showing up in TV ads with former football player Peyton Manning. Schnatter stepped away from the CEO role before, in 2005, but returned about three years later.
Ritchie said new ads would come out next year. The company said later Thursday that it had “no plans to remove John from our communications,” which it says includes pizza boxes or commercials.
The leadership change comes as pizza makers, which once dominated the fast-food delivery business, face tougher competition from hamburger and fried-chicken chains that are expanding their delivery business. McDonald’s Corp., for example, expects to increase delivery from 5,000 of its nearly 14,000 U.S. locations by the end of the year.
Ritchie said his focus as CEO will be making it easier for customers to order a Papa John’s pizza from anywhere. That’s a strategy that has worked for Domino’s, which takes orders from tweets, text messages and voice-activated devices, such as Amazon’s Echo. Papa John’s customers can order through Facebook and Apple TV, but Ritchie said he wants the chain to be everywhere customers are.
“The world is evolving and changing,” he said.
Ritchie, 43, began working at a Papa John’s restaurant 21 years ago, making pizzas and answering phones, the company said. He became a franchise owner in 2006 and owns nine locations. He was named chief operating officer three years ago. Ritchie said plans for him to succeed Schnatter were made after that.
_____
Contact Joseph Pisani at http://twitter.com/josephpisani
Those ingredients cost roughly $2. Then he pays labor. Electricity. Gas. Royalties. Credit card transaction fees. Rent.
All told, Miller, who owns three Subway franchises in Northern California, says it costs him well over $4 to produce one of Subway’s foot-long subs. And that is why, when the chain announced plans to drop the price of the sandwich to $4.99 starting in January, he and hundreds of Subway’s other 10,000 U.S. franchisees sent a strongly worded letter warning that the promotion could force some stores to close.
“The numbers don’t work for us,” said Miller, who also chairs an industry group, the Coalition of Franchisee Associations. “Ten years ago, they might have worked. But now they don’t, in my opinion.”
As fast-food chains across the country have slashed menu prices to revive flagging sales, a growing rift has emerged between some name-brand corporations and the local operators who run their outlets.
For years now, the retail industry has been shaken by giant companies that have been able to keep prices low, wooing consumers but squeezing suppliers and smaller competitors. But in the restaurant business, the push to keep prices low has pitted corporate headquarters against individual outlet owners — all operating under the same brand.
Corporations need to grow systemwide revenue to please board members and shareholders. But small-scale franchisees, who face rising costs and increased local competition, are far more concerned with store-level profits.
In addition to Subway’s plans to relaunch the $5 Footlong, McDonald’s will revive a version of its Dollar Menu next month. Taco Bell has promised to expand its selection of discount items, as have Wendy’s and Jack in the Box.
“This is an inherent financial conflict between franchisees and franchisers,” said J. Michael Dady, a lawyer at the Minneapolis firm Dady & Gardner who represents franchisees in conflicts with their corporate parents. “And some have handled it much better than others have.”
To date, the uprising at Subway has been the most visible.
In late November, franchisees began circulating a petition that asked Subway to withdraw the foot-long deal, which they said would hurt their businesses.
Under the franchise system, chain restaurants such as Subway coordinate menus, product sourcing, store design and strategy across all locations. Local operators pay the chain to belong to that system. They also manage the day-to-day business of their stores — rent, labor, ingredients, utilities, maintenance and equipment — and draw their paychecks from whatever is left.
The District has approved raising the minimum hourly wage to $15. Here’s how the measure will be implemented.
Discounts can cut dangerously deep into those margins, the petition says.
The document has been signed by nearly 900 people from 39 states who claim to own Subway franchises. Like Miller’s, many are small or family-run entities that operate only a handful of locations.
“Franchisees have repeatedly voiced concerns about frequent and deep discounting,” the petition reads. “Franchisees believe this constant deep discounting has been detrimental to the Brand — as well as restaurant profitability.”
Such a public revolt is highly unusual, said John Gordon, the founder of Pacific Management Consulting Group, a restaurant-oriented firm based in San Diego. The closest precedent is a 2009 lawsuit filed by Burger King franchisees who claimed they were losing money on every sale of the chain’s $1 double cheeseburger.
In a statement, Subway said that the petition does not represent the views of the majority its franchisees and that the promotion is optional. Business owners who opt out, however, may face disgruntled customers.
In a separate presentation to franchisees, Subway said the promotion was intended to help them stanch several years of falling traffic.
“We are in constant communication with our Franchisees and Development Agents,” the company said in its statement. “They are actively involved in many aspects of our decision-making process, and we welcome and encourage their feedback.”
But many franchisees say that corporate attempts to grow sales have added to a growing list of challenges.
Miller said that when he bought his first Subway 28 years ago, his margins could swell as high as 18 percent. But since then, he said, competition has grown far more fierce and costs have risen dramatically for labor, utilities and rent.
Labor costs at fast-food restaurants have increased in each of the past three years, according to the financial-consulting firm BDO, the result of rising minimum wages and increased competition for employees. While the federal minimum wage has not risen since 2009, 29 states and the District of Columbia have instituted higher wages.
In California, where the minimum wage will be $11 per hour starting Jan. 1, Miller’s labor costs are up 50 percent from 10 years ago, he said. The cost of a full-price sub has risen only 20 percent.
“It’s a hard cost per sandwich,” Miller said. “People can only make so many sandwiches per hour. We find it’s about seven.”
Meanwhile, the restaurant market has grown more crowded. Between 2009 and 2014, the United States added nearly 18,000 fast-food restaurants, according to the Agriculture Department — growing at more than twice the rate of the population over the same period and continuing a decades-long trend.
To make matters worse, it’s not just quick-service restaurants competing for consumers’ dining dollars anymore. Fast-casual restaurants such as Panera, delivery services such as GrubHub and meal kits such as Blue Apron have all muscled their way into the market, as have grocery and convenience stores.
As a result, year-over-year sales at fast-food and fast-casual chains have fallen dramatically over the past two years, according to Technomic, a restaurant-analytics firm. And because name-brand chains report those numbers to investors, it has put them under enormous pressure to find ways to pull in more customers — even customers who don’t spend a lot of money per ticket.
Enter a time-honored technique: deep discounts and low-margin “value” items.
“It’s a very classic way to get [sales] up,” Gordon said. “And it’s a very common source of franchisee conflict.”
The idea behind these promotions is that franchisees sacrifice some profit per item in the hope that increased traffic will make up for those losses or that customers will also spring for a side or drink. Ideally, the deals benefit both big-name chains and franchisees.
But operators often see discounts as a gamble, said Dady, the lawyer.
“These are the people who are most invested in the business, as opposed to the big guys,” he said. “They’re not against all discounts. But what our clients want to know is: Will there be a return on the investment?”
In recent months, Dady has heard from a number of clients who are concerned about upcoming promotions. Many cannot speak publicly because of the risk of retaliation from their corporate parent, he added; many franchising contracts include disparagement as a reason for termination, and some firms have subjected complainers to nuisance health and cleanliness inspections.
But analysts say that franchisees for Little Caesar’s, the country’s third-largest pizza chain, also have been vocal behind the scenes — even refusing, in some cases, to carry the $5 pizzas widely advertised on TV.
And at McDonald’s, some franchisees have protested the chain’s cascading promotions, telling analyst Mark Kalinowski in a periodic survey that the deals had cut into their profits.
“We are discounting heavily, against my will,” one franchisee wrote. “So sales should be up and profits down.”
But despite the feedback from some franchisees, analysts say that the discounting push is not likely to end. Chains have no other choice in this ultracompetitive environment, said Malcolm Knapp, the founder and president of an eponymous market-research firm based in New York. Many, he added, have succeeded in devising tiered value menus that also work well for local owners.
“The reality in fast food now is that you need a value menu to survive,” Knapp said. “If you could live without it, would you? Sure. But the business shows you can’t.”
At Subway, the return of the $5 Footlong is also moving forward, nearly 10 years after the chain originally introduced it nationwide. Subway offered the deal periodically between 2008 and 2016, when the company raised the price to $6 — a reflection of rising costs, it said.
Those costs are still rising, Miller points out. And increasingly, he and other fast-food franchisees say that they are getting caught in the middle.
“That’s not just true at Subway, but at all quick-service restaurants,” he said. “You used to be able to make money in this business. Now, well, a lot’s different.”
But in the roughly two decades since private-equity firms thundered into the industry, restaurant companies have learned that those capital sources can be valuable partners providing far more than expansion dollars. It’s a matter of finding the right one, as PE firms have followed the natural business law of differentiating in a competitive market.
By all accounts, the PE sector is flush with capital and prowling for deals, but is having a harder time finding good ones, in part because restaurant companies are cagier about selling. Quick-service operators in particular are demanding sky-high valuations and shopping more carefully for ancillary benefits.
The situation is reshaping the PE firm into more of a hunter than a gatherer, tracking particular deals rather than working off a queue. Their focus is on the specific, not the general.
“Now you can divide them into buckets,” says John Gordon, a one-time operator turned PE advisor who runs the firm Pacific Management Consulting Group.
He and others see the firms fitting these broad categories, essentially storefronts for operators shopping for a PE partner.
Incubators
Recent restaurant deals have included equity investments in six-unit Voodoo Doughnut (by Fundamental Capital) and five-unit Velvet Taco (L Catterton). Meanwhile, KarpReilly, a PE firm known for readying infant concepts for expansion, sold Cafe Rio to another PE firm, Freeman Spogli & Co., when it hit 100 stores.
Union Square Hospitality Group, the restaurant operation that spawned Shake Shack and operates such fine-dining landmarks as Union Square Cafe and Gramercy Tavern, has just started a fund to nurture young fast-casual brands. And The Culinary Edge, a menu consultancy, has done the same with The Culinary Edge Ventures, which has already invested in a single-store concept called Starbird.
All are illustrations of private-equity companies shifting down the size spectrum to take chances on younger, smaller ventures that have yet to prove they can travel and scale up. “Everyone is looking for the next big thing, the next Chipotle,” says Jim Balis, managing director of CapitalSpring, a diversified finance company. The company, which just acquired Brass Tap and Beef ‘O’ Brady’s, has holdings ranging from “Tier 1 QSRs down to truly independent concepts that are regional,” he says.
The incubators, as epitomized by KarpReilly, provide far more than funding. The dollars come with assistance in adjusting the menu, forging systems and processes, building an infrastructure and otherwise prepping the brand for growth. Its successes in that regard have included The Habit, Mimi’s Cafe and Miller’s Ale House.
Investor as operating company
The clock doesn’t tick as loudly as it once did for private-equity companies. The whole rationale was to buy, fix and flip the brand at head-turning speed, then distribute the money to the fund contributors and do it all over again.
Now, says Gordon, a PE investor might hold onto a chain for a while because of its cash flow or franchising opportunities. A so-called “asset light” brand, where all stores are franchised, enjoys a low overhead and strong revenues—a formula that can translate into high valuations.
Balis says his firm is a case in point, because it doesn’t follow a rapid-fire buy-and-sell formula. “If we find a good investment and it makes sense to hold onto it, we will,” he says. “We want to be opportunistic. We don’t put specific lives around our investments.”
That tendency has given a number of former restaurant executives a second life as private-equity management advisors. “I’ve been a CEO of a number of restaurant companies,” says Balis, noting he currently holds that title at 17-unit Norms Restaurants. “I know how to do a turnaround. I know how to grow something. I know how to fix operations.”
Edna Morris, the former president of Red Lobster, is now managing partner of Axum Capital Partners, which recently acquired Backyard Burgers.
The king of the investor-operator is Roark Capital, whose Focus Brands subsidiary operates such brands as Moe’s Southwest Grill, McAlister’s Deli, Schlotzsky’s, Cinnabon and Auntie Anne’s. Roark bought Jim ‘N Nick’s Bar-B-Q in July, raising its tally of restaurant concepts to 20, and purchased a minority stake in Culver’s in October. It’s only divested of one to date: Wingstop, which is now public.
Franchisee finders
After chasing franchisors and brand owners for decades, PE firms have steadily broadened their scope to include franchisees, notes Gordon. “They see that consolidation is underway, from smaller franchisees to larger franchisees,” he says.
No longer are these just mom-and-pop prey. And they may sport more affordable valuations than the parent company.
Longtime specialists like Argonne Capital, a franchisee of IHOP, Sonny’s BBQ and Applebee’s, is being joined on the hunt for licensees by the likes of Sun Capital, which acquired a 21-unit HuHot franchise last year. Sun has a larger restaurant portfolio than any other PE firm, but CCW LLC is the only franchisee in the mix.
H.I.G. Capital bought Outback Steakhouse’s franchisee for California, T-Bird Restaurant Group, the year earlier.
Mega dealers
At the high end of the buyer’s market are the multibillion-dollar funds that don’t balk at paying huge multiples for a blue-chip brand. The consummate example is JAB Holding Company, which took Panera Bread Co. private with a bid of $7.5 billion or $315 a share—a 20% premium over the trading price at the time. Analysts say the price equates to a 41- to 46-time multiple of Panera’s fiscal 2017 earnings.
JAB is used to paying that kind of premium. A year earlier, it bought Krispy Kreme for $1.35 billion, or 19 times the franchisor’s EBITDA. Its portfolio also includes Keurig.
Other deep-pocketed concerns include Golden Gate Capital, which paid an estimated $565 million this spring for Bob Evans Restaurants, and Oak Hill Capital, which spent $525 million for Checkers Drive-In Restaurants.
Six Argo Tea locations in Chicago will go cashless Monday, a sign of the growing influence of plastic and mobile ordering at restaurants and retail stores.
The Chicago-based chain will stop accepting cash at its cafe in the Loop and those at the University of Illinois at Chicago, the Merchandise Mart and three locations at O’Hare International Airport.
Argo said the introduction of cashless cafes will allow it to speed up service. It has 16 Chicago-area locations, according to its website. It didn’t say why these locations were chosen, but they are in some of the most trafficked places in the city, making speed of service critical. It also didn’t say what percentage of sales are cash transactions.
Argo is encouraging customers to use mobile payment options more often by offering a $5 credit when they download the company’s app.
As an alternative for those customers who don’t want to use their smartphones, credit or debit cards, Argo said it is working to develop an in-store gift card kiosk that will accept cash.
In addition to increasing service speeds, banning cash also allows a retailer to collect more data on its customers’ buying habits. It’s also considered safer, since cash won’t be available in the register, deterring possible thefts.
The trend toward banning cash has been slow so far in Chicago, but some retailers and restaurant chains have tried it. Sweetgreen, a salad chain that opened in Chicago last year, is now cashless at all of its locations. Clothing retailer Kit and Ace, which has a store in the Fulton Market district, has never taken cash, saying it allows stores to be more efficient.
For Argo, especially in the locations it chose, going cashless doesn’t run a significant risk of angering customers, said John Gordon, principal at Pacific Management Consulting Group. Restaurants and coffee shops in city centers tend to see the least cash sales, Gordon said. And brands like Argo and Starbucks tend to see fewer cash sales than brands like Dunkin’ Donuts or McDonald’s because they cater to a more affluent customer.
There’s an added benefit of going cashless, as well: People tend to spend more when they pay with their phones or credit cards.
“Will it turn off some customers? You bet. But I’m guessing there is a significant upside,” Gordon said.
Gordon believes that the cashless trend is still in its very early stages, but he expects big restaurant and retail brands could follow in five to 10 years.
Lauren Zumbach contributed.
sbomkamp@chicagotribune.com
Twitter @SamWillTravel
Wow Bao is set to open a new location that will be missing something big: waitstaff.
The quick-service Asian chain will open Chicago’s first restaurant with fully automated service Dec. 1.
Customers will order and pay at a kiosk and pick up their food from one of a dozen LED-lit cubbies, which will display their name on an LCD screen when their food is ready. Wow Bao is also introducing a new app in tandem with the Near North restaurant so visitors can order on their phones.
There will still be cooks preparing the chain’s steamed buns, noodles and rice behind the scenes, but they will be invisible to customers. The only staff customers will see will be a“concierge” or two tasked with guiding them through the order process and assisting with problems.
But are Chicagoans ready for this restaurant of the future, devoid of human interaction? Wow Bao President Geoff Alexander thinks so, noting that Wow Bao has always been a leader in technology, adding self-order kiosks and online ordering in 2009. And because customers are already accustomed to digital options at the chain, Alexander said the automated restaurant “is a natural evolution for us.”
The new technology has failed to catch on in markets outside of San Francisco for its creator, Eatsa, a grain bowl and salad chain that scrapped its own plans for a Chicago store and announced last month that it was closing existing sites in New York, Washington, D.C., and Berkeley, Calif.
But Wow Bao is betting heavily on automation. The chain plans to double its locations next year, implementing the new technology at all new sites. The Near North restaurant will be Wow Bao’s sixth location in Chicago and 14th overall, including a delivery-only location in Los Angeles and stadium, airport and college campus outposts.
“Was the world ready for Facebook? Shopping on Amazon? It’s the same thing in restaurants,” Alexander said. “Hospitality is evolving.”
Technology in the restaurant industry is changing quickly, with even large chains like McDonald’s rolling out mobile order and payment systems and installing ordering kiosks in restaurants. For restaurants, there are a number of benefits. Orders that come through kiosks or on mobile phones can be placed more quickly and with fewer errors. Customers also tend to spend more when ordering electronically, and the technology allows restaurants to scale back employee hours.
Alexander said Wow Bao’s order kiosks are overwhelmingly preferred by customers.
“There are times when we have no one in line at the cashier, and six or seven deep at the kiosk,” he said.
Alexander admits that it may take customers time to adjust to a restaurant without any waitstaff, but he said he believes that the model is a sign of where the restaurant industry is headed.
“Are we early? We may be. But the world changes in a heartbeat, and we’re not far off from it becoming mainstream,” he said. “We are going to help make it mainstream.”
Wow Bao is the first restaurant chain to license this technology from Eatsa, which is operating just two locations in San Francisco as it tests and builds out its brand.
Eatsa also hopes to pursue other deals that involve licensing its technology to established chains, CEO and co-founder Tim Young said.
At Eatsa, Young said, customers place orders and get their food in less than 90 seconds, which is comparable with fast-food service. He added the model also takes out “pain points” that can be present at restaurants, including the slowdowns and glitches that can occur between different apps and in-store technologies.
But John Gordon, principal at Pacific Management Consulting Group, said that while there are clear benefits to technology in the restaurant industry, full automation may not sit well with customers — especially older generations.
“We’ve got to remember that the restaurant business is still essentially a human-to-human endeavor,” he said.
Wow Bao, which was founded in 2003 by Lettuce Entertain You Enterprises, recently got an undisclosed investment from Chicago private equity firm Valor Equity Partners to accelerate its growth. Valor Equity has an existing partnership with Eatsa.
Twitter @SamWillTravel
“We believe yesterday’s naming of Mr. Boehm to the board likely would accelerate any potential refranchising program,” wrote Maxim Group analyst Stephen Anderson in a note Friday morning. “For now, however, we expect such a program to be delayed until a permanent CEO position … is filled.”
Former CEO Aylwin Lewis was left in August just as the company announced it had JPMorgan Securities LLC to advise on the review.
Boehm’s position on the strategic review committee is part of a larger settlement between Ancora and Potbelly. The firm cannot acquire more than 9.9% of Potbelly’s shares and must keep its stake above 3% or else it will lose its seat.
The board goes to eight members from seven with the appointment.
Cleveland-based Ancora holds a 4.4% stake in Potbelly and has asked the company to consider refranchising at least part of its 413 company-owned locations and improve margins through the use of technology. The firm has said that if Potbelly did not enact these changes it would push for a sale. Potbelly has provided no update on the review since August.
Activist funds often push restaurant chains to franchise more stores and use the proceeds for stock buybacks or dividends as a mechanism to boost total shareholder returns. That’s part of what Ancora, which owns a 4% Potbelly stake, is after at the sandwich chain. Marcato Capital Management LLC employed the strategy at Buffalo Wild Wings Inc. (BWLD – Get Report) , and it’s also possible that activist Glenn Welling could soon push Ruby Tuesday Inc. (RT) to franchise some of the hundreds of stores it operates. In addition, activists could push for further franchising and M&A at Jack in the Box Inc. (JACK – Get Report) .
As for Potbelly, the company has seen sales lag recently and it operates in the over crowded fast casual vertical where more tantalizing targets may be on the market.
John Gordon of Pacific Management Consulting Group suggests that a strategic acquirer would be the best fit for Potbelly as the company could benefit from a parent with greater scale and infrastructure that could help implement company-wide changes to help improve the company’s operations. Pizza Hut owner National Pizza & Wing Co. as well as Jimmy Johns, which is backed by Roark Capital, would be logical suitors as would JAB Holding Co., which recently took Panera private. However he notes that the Panera deal likely rules out JAB and that the Pizza Hut franchisee already branched out by acquiring a significant chunk of Wendy’s locations.
Privately held Firehouse Subs owner, Firehouse of America LLC, may also be a logical depending on the overlap of its store footprint with that of Potbelly.
Despite the potential lack of suitors, a sale may be the best bet, seeing as Potbelly recently took a number of steps incentivizing executives to do so, including bonuses if the company is sold before a new CEO is found.
Potbelly shares shot up 4.12% to $12.65 apiece on Friday.
Maxim’s Anderson holds an $11 price target on Potbelly, representing a enterprise value to 2018 Ebitda ratio of about 6.4 times.
“We believe continued near-term sales softness, as highlighted by our downwardly revised 3Q17 (September) comp estimate … is likely to limit near-term upside potential,” Anderson wrote, adding that the sale prospects also limit downside, for now.
Potbelly and Ancora did not respond to requests seeking comment.
The shareholders include the family of the chain’s late founder, Fred DeLuca, and his co-founder, Peter Buck.
“Our franchisees are actively involved in many aspects of our decision-making process, and we welcome and encourage their feedback,” Subway said in an emailed statement. “We have support from the majority of franchisees on this program and many others we are testing. However, we typically do have a number of restaurants that don’t participate in our national promotions. It is always optional.”
“Subway is in the midst of a massive transformation, and change of this size takes time,” the statement said.
The petition underscores the challenges that large, franchise-heavy quick-service brands have in pushing value in the current environment. Many systems feel they have little choice, given intense competition and offers from major competitors.
Indeed, news of the petition comes just days after McDonald’s revealed its own upcoming value offering: a $1 $2 $3 Dollar Menu with several items and a planned Jan. 4 start date. Several other quick-service chains have their own value offerings, or are planning them.
Subway grew for years in part because of its value, driven by the ultra popular $5 Footlong promotion, which helped it establish its credentials as the value player in the growing sandwich business—while also helping the chain grow into the largest single restaurant chain in the U.S. by unit count.
But rising costs led the company to move away from that promotion in 2012. Subway has since struggled to come up with an adequate successor—similar to McDonald’s own struggles finding an adequate successor to its popular Dollar Menu.
According to the memo, the end of that deal and increasing check averages at the chain have hurt Subway’s perceived value, particularly when compared with McDonald’s.
That memo also blames growing competition from the likes of Arby’s, which has seen same-store sales increase for six straight years, as well as other sub chains Jimmy John’s and Jersey Mike’s.
In 2016, Subway’s U.S. system sales declined by 1.7% to $11.3 billion, and unit count declined by 1.3% to 26,744, according to the Technomic Top 500 Chain Restaurant Report.
“The shareholders do understand the magnitude of this situation,” the memo quotes Subway CEO Suzanne Greco as saying in discussing the $25 million investment. “However, the shareholders’ commitment to provide these significant additional resources is contingent on solidarity. The U.S. franchisees must be committed to a unified plan with solid execution and an outstanding guest experience.”
John Gordon, a restaurant consultant in San Diego, said that Subway was “stuck” in pushing value, given that it spent so much time pushing value.
“The $5 Footlong, they worked it too long,” he said. “It was the perfect thing during the Great Recession. Subway garnered a lot of market share during that time and their sales went up. Their problem is they didn’t turn it off.”
The $4.99 Footlong offer would largely resurrect that $5 deal, and has been tested in some markets.
Operators are concerned about the Footlong offer largely because establishing that price point nationwide would hurt operators in more expensive markets where labor, rent and other costs are higher. Labor costs in particular are rising annually amid competition for workers and rising minimum wages.
While other chains have used $5 price points to lure customers—like Yum Brands’ KFC and CKE Restaurants’ Hardee’s and Carl’s Jr.—Subway’s small, $420,000 average unit volumes, according to data from Technomic, make such discounts more difficult to swallow, operators said.
The discounts come as the chain seeks to improve its use of technology and convince operators to remodel locations.
“Our goal is to strengthen the Subway brand in every market around the world to give Subway franchisees the greatest opportunity to successfully grow their business,” Subway said in its statement. The company said that it is “realigning markets to ensure the right Subway restaurants are in the right locations.” And the company said that remodeled restaurants “are already reporting significant lifts in sales.”
“We have built Subway into the largest restaurant chain in the world,” the company said, “and we are confident that these changes will position the brand for long-term growth.”
Yum! Brands, Inc. (YUM – Get Report) knows it’s a winning combination and that’s why the Pizza Hut owner is piloting a new beer and wine delivery program in Phoenix, Ariz. The program debuts Tuesday, Dec. 5 with beer offerings. Wine will be available in that market in January and then the company hopes to expand the service to other metro areas.
“Beer and wine are the perfect combination to pizza, and we can serve as a one-stop shop because we can do that all in-house, no added fees, no extended time.” said Yum! Brands spokeswoman Stacy Lynn Bourgeois.
Customers will be able to order alcohol with or without pizza, she told TheStreet. In Phoenix, the first four offerings are Budlight, Budweiser, Shock Top and local favorite Kilt Lifter for $10.99 each for a six-pack. All four brands are owned by Anheuser Busch Inbev NV (BUD) .
Pizza Hut will use its existing delivery program to support the service, Bourgeois said. Delivery fees will depend on the restaurant, usually varying between $2 and $3. The pizza chain will be the first fast casual franchise to offer booze for delivery, but it will not extend its alcohol selection beyond beer and wine, the company said.
Delivery workers in Arizona have been trained to ask for IDs during delivery. Prices will vary depending on the market.
“I’m really excited about the fact that they’re doing it themselves,” said John Gordon, a restaurant analyst at Pacific Management Consulting Group. “The restaurant industry is still grappling with delivery.”
Adding beer and wine to the mix of offerings, he told TheStreet, will drive the average ticket higher while the cost of delivery remains the same per order. For Jimmy John’s Franchise, LLC, for instance, the cost of delivery per order is about $10.
While chain restaurants at large have struggled in recent years, Yum! has done considerably well under a highly franchised model and the leadership of a new CEO, Greg Creed. Its most notable success story is Taco Bell, whose brand strongly resonates with Millennials. Pizza Hut and KFC, meanwhile, are in earlier stages of a turnaround.
In the third quarter, Yum! posted same-store sales growth in all three chains. Pizza Hut saw a 1% uptick in same-store sales while boasting a new delivery algorithm that improves timing by six to seven minutes.
Pizza Hut beer will be delivered in specially designed coolers, Bourgeois said, similar to its new heat retaining pizza delivery bags unveiled in September.
@SherisseDecember 5, 2017: 10:02 PM ET
The Seattle-based coffee company opened a 30,000-square-foot store in Shanghai on Tuesday. It’s the first Starbucks Reserve Roastery — the company’s new retail offering — outside the U.S.
It’s also the largest Starbucks in the world, spanning an area nearly twice as large as the next biggest, a Roastery in Seattle that opened three years ago.
Executive Chairman Howard Schultz said the store would blend the company’s 46-year history in the coffee shop business with “China’s rich, diverse culture.”
China is a vital market for Starbucks (SBUX), according to John Gordon, a restaurant analyst at Pacific Management Consulting.
The company’s latest quarterly earnings were pretty gloomy, showing disappointing sales growth in a tough retail environment.
The one bright spot was China, which stood out as Starbucks’ fastest growing market. Sales there were up 8% compared with the same quarter last year.
The company is riding that wave and expanding aggressively in China, opening a new Starbucks store every 15 hours on average.
Even though Chinese are traditionally tea guzzlers and less hooked on coffee than Americans, the country’s growing ranks of upwardly mobile consumers still view Starbucks as an attractive, aspirational brand.
The company is playing to that perception with its new Shanghai shop.
“This is a show store,” Gordon said. “The point is to be in a highly, highly visible, touristy [area] where there’s foot traffic, offices and urban housing in order to promote the brand.”
The store features massive copper casks for storing coffee beans, although the actual roasting will take place elsewhere on the premises. There is also a special emphasis on tea, with a dedicated bar offering items like nitrogen cold brew tea.
In a sign of the times, Starbucks partnered with Chinese tech giant Alibaba (BABA) to aggressively promote the Shanghai store opening online. Customers can book coffee tasting experiences on Alibaba’s e-commerce site and also buy special Starbucks Reserve coffee and related products tied to the store’s launch.
But the Shanghai roastery won’t hold the title of largest Starbucks for too long. The company has already inked a deal for an enormous 43,000-square-foot Reserve Roastery in Chicago that’s set to open in 2019.
Last week, Chipotle Mexican Grill Inc. (CMG – Get Report) announced its co-founder, Steve Ells, will be relinquishing his position as CEO, as the beleaguered fast-casual chain began a process to search for a new chief executive.
However, the move raises questions about whether Chipotle might instead put itself on the auction block in the hopes of escaping the volatility of the public markets – it has been a rocky ride for the chain in the public markets over the past few months, capped by third-quarter earnings in October that missed Wall Street estimates by nearly $1.
Specifically, on Nov. 29, Chipotle said Ells would step down but remain as executive chairman at the firm. Governance experts argue that it may be hard for Chipotle to find a CEO, in part, because whoever is chosen will have to deal with Ells, who observers insist will still be effectively in charge despite relinquishing the chief executive role.
Also, Chipotle has four directors on its board who were brought in by activist fund manager Bill Ackman, including Ali Namvar, a member of the insurgent investor’s investing team. Ackman said he fully supports Ells decision. Nevertheless, activist-pressured companies often sell themselves when they are pushed to improve results and have no full-time CEO. Consider activist Mick McGuire’s success at installing three dissident directors onto the board of Buffalo Wild Wings (BWLD – Get Report) earlier this year in a move that also drove the wing and beer chain’s CEO, Sally Smith, to announce her resignation. But instead of finding a new CEO, BWLD agreed to sell itself to Arby’s Restaurant Group owner Roark Capital for $2.9 billion.
John Gordon, a restaurant analyst at Pacific Management Consulting Group, argues that it will be difficult for a new CEO to come in and have full control with Ells overseeing the board. As a result, he contends, it was possible that Chipotle may seek to sell itself at the same time as it seeks out a permanent CEO, especially given all the volatility in the company’s shares in recent months. Chipotle has experienced problems with its new Queso sauce and a string of bad news in recent months, including rodent sightings at one location and sick customers at another.
“The publicly-traded world is driving brands like Chipotle crazy,” Gordon said. “Strategically it makes sense for Chipotle to recover outside of the public eye. And there is no doubt that the worldwide bandwidth for money and underwriting exists for a consortium of PE firms to acquire Chipotle. There is a lot of cheap money at reasonable interest rates available to buy restaurant chains.”
A buyer or group of buyers would need to pay roughly $400 a share to buy Chipotle, considering a 30% premium, putting a price tag of roughly $11.3 billion on Chipotle, which also would assume current liabilities and deferred rent, Gordon estimates.
Nevertheless, he argued that it was more likely that a consortium of buyout shops would be interested rather than a publicly-traded restaurant chain, partly because of a large amount of capital available for take-private deals.
Roark Capital, the PE shop that acquired Buffalo Wild Wings, is seeking to raise $2 billion to buy additional restaurant chains, according to an Axios report. However, Roark Capital wouldn’t be able to acquire Chipotle on its own, Gordon notes. However, he added that the fund could find partners to help with an acquisition.
According to Axios, Roark would like to make further acquisitions with the goal of taking its entire restaurant platform public. However, Gordon said didn’t believe the markets would recognize the underlying value of such a wide variety of different kinds of restaurant and coffee brands. “One combined restaurant entity offering is not going to work because Roark already has a grab bag of brands,” Gordon said. “Investors get confused when there are too many restaurant chains in one company.”
Gordon suggested that Roark could seek to break up its restaurant chains into categories, such as fast-casual or quick-service chains, and take those public separately.
When it comes to a Chipotle acquisition, strategic operating rivals may also have a difficult time. Gordon said he did not believe McDonald’s Corp., (MCD – Get Report) which spun off Chipotle in 2006, would ever be interested in rebuying the company. “The McDonalds demographic is more blue collar at the same time Chipotle is still very expensive and would require taking on a lot of debt,” he said.
One additional caveat is Pershing Square’s Chipotle investment. The Deal has learned that Ackman’s fund has a cost basis of about $404 or $405 a share on its Chipotle investment, well below its current $315.56 a share trading price. Ackman may see more value in the chain and could oppose an acquisition. Alternatively, he may be willing to take the cash and liquidate his position in the hopes that it could be allocated to a more favorable investment elsewhere
The value of Wendy’s stake in Arby’s may rocket higher thanks to the latter’s parent’s acquisition of Buffalo Wild Wings.
Arby’s owner, Roark Capital, plans to buy Buffalo Wild Wings for $2.4 billion and fold the chicken wing restaurant company under Arby’s management.
Wendy’s owns an 18.5 percent stake in Arby’s, a relic of when Wendy’s merged with Arby’s before Arby’s was sold to Roark in 2011. Wendy’s stake in Arby’s was valued at $325.8 million as of Oct. 1, according to a filing with the U.S. Securities and Exchange Commission.
How much that investment grows with the purchase of Buffalo Wild Wings is unknown, but Wendy’s approves of the purchase.
“Given our investment position in Arby’s, we are supportive of the proposed transaction,” Wendy’s said in a statement. “As has been our practice, we will provide periodic updates on the value of our ownership stake during our regular financial reporting.”
Wendy’s added that it is too early to know what impact the deal will have on the value of its investment in Arby’s.
One analyst, Chris O’Cull of Stifel, said in a research note that if Arby’s plan to merge with Buffalo Wild Wings goes through, Wendy’s stake in the new entity will likely increase in value, but the exact amount is unknown. When Arby’s was sold to Roark in 2011, Wendy’s 18.5 percent stake was worth about $30 million.
Arby’s fortunes have soared since splitting with Wendy’s. Roark paid Wendy’s a special dividend of $54.5 million in 2015 after a particularly good quarter.
It isn’t well understood, though, just how Buffalo Wild Wings and Arby’s will be consolidated.
Roark is a private-equity firm, which doesn’t make financial disclosures. Arby’s and Buffalo Wild Wings will share a CEO, which makes it look like Arby’s might just swallow the wings chain whole, according to John Gordon, principal of Pacific Management Consulting Group, and a restaurant industry analyst.
“This would imply Arby’s would get the value upside, and thus, Wendy’s,” Gordon said.
Roark said in announcing the deal that Buffalo Wild Wings will operate as an independent brand. Roark also owns Hardees, which is a separate investment from Arby’s.
Gordon thinks more will come out next year as the deal is finalized and Wendy’s divulges the value of its stake in Arby’s. The deal is expected to close during the first few months of 2018. It still needs the approval of Buffalo Wild Wings’ shareholders. If the value rises a lot, investors will want to know what Wendy’s plans are for their stake, he said.
“When and why would they sell it?” Gordon said.
Information from the Associated Press was included in this story.
Now that Potbelly has hired J.P. Morgan Securities to develop “strategic alternatives” to business as usual in the tough restaurant marketplace, it’s easy to assume the 40-year-old Chicago sandwich brand is putting itself on the auction block. While a sale is a likely outcome, experts say Potbelly has other options despite a lackluster performance since its 2013 IPO.
“Everything is up for grabs at this point,” says Stephen Anderson, an analyst at Maxim Group, a New York-based investment bank. “The most likely event that will occur is a refranchising,” or selling company-owned restaurants to franchisees. The advantage: It’s more profitable to sell the right to operate Potbelly stores, and then collect annual fees, than it is to sell Wreck sandwiches and oatmeal chocolate-chip cookies (no matter how delicious they may be).
At the end of last year, Potbelly owned 411 of its restaurants and franchised just 43.
Selling franchising rights is also an easy way to pull in cash that can then be handed over to shareholders via dividends or stock buybacks, thus mollifying activist shareholders. Potbelly’s own activist, Cleveland-based Ancora Advisors, is clamoring for the move. In a June letter to Potbelly, Ancora CEO Fred DiSanto blasted the chain for delivering “nothing but losses” to investors over the last four years and recommended “dramatically increasing the franchise mix of its store base.”
DiSanto wrote that franchisees would be interested in buying because of Potbelly’s strong store-level sales, high-quality product and strong brand. The company, which reported $407.1 million in 2016 revenue, averages about $900,000 in sales per store—more than twice as much as the $424,300 that QSR Magazine estimates an average Subway location pulls in.
Restaurant industry experts aren’t so sure, however, that refranchising would work at Potbelly. “The problem is that when Potbelly began franchising, they went after small, one-person owners,” says John Gordon, principal of Pacific Management Consulting Group, a San Diego-based firm that focuses on chain restaurants. “It’s always easier for a chain to grow with existing franchisees because they already understand the business. But Potbelly’s small franchisees don’t have the wherewithal to buy stores quickly.”
“I think we certainly need to be open to larger deals,” Potbelly interim CEO Michael Coyne acknowledged on an Aug. 4 conference call with investors. That could include sales to “master” franchisees who would control an entire territory instead of a location or two. But finding big partners may take longer than executives or investors would like.
That brings the conversation back to a sale. J.P. Morgan will spend a few months assembling a pitch book and another few months shopping it around to the usual suspects—a wide range of private-equity firms.
“I think there are a lot of people interested in the brand,” says Howard Penney, managing director at Hedgeye Risk Management, an investment research firm in Stamford, Conn. “It’s a good brand that doesn’t have too many units. It’s not Applebees with 2,000 stores. The food travels well, which is important as people increasingly want food delivered.”
Penney points out another reason that Potbelly makes an attractive acquisition: It can use “dark kitchens.” The term refers to a restaurant that serves only delivery and catering customers and has no seats. Chains love the idea because they don’t have to pay for prime real estate or build out an attractive restaurant, and on-demand food delivery is continuing to explode.
Potbelly already is nodding to these forces by exploring smaller store formats under a project called “Shop 2020.” The effort, still in its planning phases, was presented at investor conferences in June. While discussing the idea at one conference in New York, Coyne pointed to a 600-square-foot Potbelly inside Lurie Children’s Hospital in Streeterville.
“It is doing phenomenally well, better than even our average revenue” at a 2,000-square-foot store, said Coyne, who took over from Aylwin Lewis earlier this summer. “We actually have the ability, we think, to go even smaller as long as we have some nearby space for commissary to store some things.” Potbelly executives think the model could work in high-traffic areas including hospitals, office tower lobbies, airports and universities.
(The company did not respond to requests for comment.)
Despite the harder time even some of the biggest chains have had lately at maintaining traffic and sales, private-equity investors have been increasingly interested in restaurants. Earlier this year, former McDonald’s CEO Don Thompson, through his new Chicago private-equity firm, Cleveland Avenue, bought a majority stake in PizzaRev, a 40-site chain that started in Los Angeles. And Portillo’s Hot Dogs sold itself to Berkshire Partners in mid-2014 (less than three months after the Oak Brook company hired an investment firm to explore its options).
Maxim’s Anderson says its impossible to say which private-equity firms would make a Potbelly bid, but he namechecks Sun Capital Partners of Boca Raton, Fla., which owns Boston Market, Friendly’s and Johnny Rockets; San Francisco’s Golden Gate Capital, which bought Red Lobster; and JAB Holdings of Luxembourg, which, with minority investor BDT Capital Partners of Chicago, has been rolling up premium coffee chains including Chicago-based Intelligentsia and recently snapped up Panera Bread, too.
Others say Potbelly’s small size puts it below those firms’ strike zones. But macroeconomic forces may push would-be buyers to act fast. “I would say with interest rates rising and access to capital starting to be a concern, the clock is running,” Anderson says.
By John A. Gordon, principal and founder of Pacific Management Consulting Group
There are several large restaurant pressure points right now: That restaurants aren’t getting their fair share of the pretty healthy economy and employment/spending base is one, too many restaurants is another and that labor market conditions are difficult is a third. Read more
By John A. Gordon, principal and founder of Pacific Management Consulting Group
Just about everyone reading this newsletter either knows the restaurant business or want to know a lot more about it. Many of us love the space, hence why we are still engaged in it via differing roles over the decades. The industry is stressed right now, for all kinds of reasons. Read more
By John A. Gordon, principal and founder of Pacific Management Consulting Group
As restaurants reach out to more sales channels out of necessity, counting restaurant activity levels becomes more complicated. Defining the “traffic” metric is especially important in this current time of low or negative traffic counts, and business models adding catering and delivery options. Read more
As the country wilts under summer heat, the nation’s largest fast-food chains are increasingly rolling out ever-more elaborate — sometimes outright crazy — drinks both to drive profits and draw attention.
These hand-crafted beverages bring in customers who want to quench their thirst, try something new or snap a photo to post on social media. Something chilled and sweet and often creamy is enough to make anyone nostalgic for childhood summers. And they’re a relative inexpensive pleasure, though the markup is high enough that the chains adore the easy profits in an era of struggling sales.
From Starbucks to McDonald’s to Panera, more and more chains are rounding out their menus with these drinks — cool in both temperature and style. Some are part of restaurants’ year-round rosters, while others are as fleeting as a summer rain shower, They’re named for the make-believe (unicorn, Lucky Charms), Mother Nature’s offerings (shamrock, liger) or ingredients (frozen coffee, matcha lemonade)
For restaurants, they’re a lure for customers at a time when the industry trying to overcome declining foot traffic and customer loyalty and an evermore competitive landscape; the overall chain restaurant industry hasn’t had a month of positive sales since February 2016, according to TDn2K, an industry analytics firm based in Dallas.. For customers, the treats are a novelty, but they also carry risks. Like anything packed with lots of sugar, calories and food coloring, consuming too much can lead to weight gains and other health problems.
For beverage-centric chains, like Dunkin’ Donuts and Starbucks, these drinks are a way to inspire customers to branch into baked goods. For more traditional chains, like Panera or Arby’s, they’re a way to add to the tabs of customers who come in for something other than a drink, said John Gordon, restaurant analyst with Pacific Management Consulting Group. In all cases, a limited-time offer draws anyone who wants to try a now-or-never beverage.
Mitch Cooper is a big fan of cool drinks and he’s usually the first among his friends to head out and sample them. If he’s really gaga over a new one, he’ll talk about it on social media.
“I love those things,” said the 29-year-old marketing specialist from Stow, Ohio. “If I try it and I like it, I’ll definitely get it again.”
Regardless of what pulls in customers, the markups are huge. The margins for these often high-sugar, high-calorie drinks can be as high as 80% to 90%, Gordon said. Beverages are 20% to 25% of the average order.
“Their motive is to decrease the amount of customers who only get water when they come in,” Gordon said, noting that soda sales in the United States have plummeted over the last several years. “To the degree they can invent a new drink, they have the potential (to motivate) a water consumer to go to a $1.95 blended drink.”
If the drinks are unique or shticky enough, they’ll explode on social media, where they’ll get much bigger promotion than they would through traditional advertising; customers will try one and post photos to show how hip they are to the latest food trends. While that is true of almost every demographics, the most sought-offer segment, Millennials, are particularly predisposed to do this. These hand-crafted beverages are usually photogenic — due to an unusual color or a whipped cream crown, say — which also ups their play on Instagram, Twitter and Facebook.
And if the drink is offered for a limited time, expect posting to jump up exponentially.
Currently, the hot cool drink is Burger King’s Lucky Charms shake, which came out this month and is made from the children’s cereal. It was inspired by the popularity of the chain’s other breakfast-inspired shake, the Froot Loops shake, which it offered in April. The “magically delicious” version is available for eight weeks, though Alex Macedo, president of Burger King North America, said the drink is proving so popular that they might run out “much sooner.”
That doesn’t mean Burger King OKs every shake it dreams up; the s’mores one, for example, wasn’t green-lighted, because it was “commonplace.”
“There’s a growing need for interesting ideas that people can’t readily make by themselves and the more creative you are, the more successful you’ll be in attracting people to your restaurants,” he said.
Macedo explained that these drinks have high margins and that 30% to 40% of people walk into a Burger King specifically to get them.
Arby’s also grabbed some attention in June with its Liger Shake, a lion and tiger hybrid mix popularized by the movie “Napoleon Dynamite.” The orange-with-brown-striped beverage isn’t the chain’s first foray into specialty drinks; its Jamocha shake was introduced 50 years ago. Today, shakes make up nearly 6% of the Arby’s sales mix, according to the company.
“They’re conversation pieces and they’re also nods to cultural happenings,” explained Neville Craw, Arby’s brand executive chef.
Other chains riding the wave of new drinks include McDonald’s, with its Chocolate Shamrock Shake, inspired by its popular seasonal Shamrock Shake; Dunkin Donuts, with its Frozen Dunkin Coffee, a coffee-based drink that replaced the water-based Coffee Coolatta; and Panera, with a new line of fruit and tea drinks made with artificial preservatives, sweeteners, flavors or colors.
Starbucks’ Unicorn Frappuccino was a blockbuster in April, spawning a rush to the stores, lots of social media chatter and plenty of non-social-media think pieces.
Imbibing these calorie- and sugar-packed drinks too often could cause customers’ waistlines to expand as their wallets shrink. A person taking in an extra 100 calories a day can add 10 pounds of weight a year — and most of these drinks have high calorie counts, like the Lucky Charms shake with 740 and 107 grams of sugar. Or the Chocolate Shamrock Shake with 510 calories and 70 grams of sugar for a small.
“Americans, in general, consume too much sugar and sugar-sweetened beverages are a big culprit,” Mitzi Dulan,. a Kansas-based registered dietitian, said. “Good old water is free and sugar free,” she added. “A twice-a-year indulgence or once a month? That’d be fine,” she said. “When you’re getting into the daily habit or even several times a week, it’s just adding calories and it can make people really struggle to maintain their weight.”
Cooper, the marketing specialist, estimates that he buys one or two of these drinks a week, spending about $10.
“They’re not something I can easily justify buying every day. It’s definitely something if my wife and I are going out, we’ll swing by and grab a drink like that,” he said.
Follow USA TODAY reporter Zlati Meyer on Twitter: @ZlatiMeyer
In what should be good news for its patrons, Jack in the Box is planning to offer later this year deep discounts on lower priced menu items in the face of growing competition from its fast food rivals.
In an earnings call Wednesday, CEO Lenny Comma said that it has no choice but to start discounting more heavily than has been their practice over the years.
Where the San Diego chain has normally promoted value for budget-conscious customers by offering bundles of sandwiches, fries and soft drinks, it will now start lowering prices on individual menu items, he said.
“I think that you’ll see us pivot to at least some single item promotions in the back half of the year, simply because we’re sort of being dragged into that space by all the competitors, including those that have a higher average check in our space,” Comma said. “Even they are delving into the single item discounts. So I think we’re not going to be able to prevent that from happening.”
He cautioned, though, that Jack in the Box has to be careful to not discount too much and for too long a time or it runs the risk of damaging the brand.
“We don’t want to put ourselves in a position where we simply devalue our brand by essentially turning ourselves in to a perpetual discounter and training the consumer that they should no longer come to us for mid- and top-tier product,” he said. “That’s been our bread and butter over the long term and we will continue to invest there.”
Comma didn’t mention what menu items in particular would be targeted for lower pricing. He noted that recent examples of the company’s more conventional promotional offerings was its Jumbo Meal, which bundled a Jumbo Jack burger with two tacos, fries and a soft drink for $3.99.
The company also is struggling to overcome declining sales at its fast casual chain of Mexican restaurants and is looking at the possibility of unloading the once high-performing Qdoba brand.
Jack in the Box announced this week it has hired the investment banking firm Morgan Stanley to evaluate options for the under-performing Mexican food brand. Although Comma has not specifically stated that spinning off the Qdoba brand is an option being weighed, analysts say it’s clear that is a very real possibility.
“At our investor meeting last May we said that one of the factors that would cause us to reconsider our strategy with respect to Qdoba was valuation,” Comma told analysts during a Wednesday earnings call. “It has become more apparent since then that the overall valuation of the company is being impacted by having two different business models. As a result we have retained Morgan Stanley to assist the board in its evaluation of potential alternatives with respect to Qdoba as well as other ways to enhance shareholder value.”
While Qdoba has a very limited presence in Southern California, including just one outlet in San Diego — at the airport — the brand has grown to 700 locations in 47 states and Canada since Jack in the Box acquired it in 2003.
In recent quarters, it became clearer that Qdoba, once the financial darling of the company, was starting to be a drag on the overall financial performance of Jack in the Box.
During the second quarter ending April 16, same-store sales at Qdoba restaurants fell 3.2 percent, including a decline of 5.9 percent at company-owned locations, a sharp reversal from an overall 2.1 percent gain just a year earlier. By comparison, Jack in the Box same-store sales fell just 0.8 percent during the second quarter.
Looking ahead, company executives are forecasting a 1 percent growth in same-store sales within the Jack in the Box system restaurants but a decrease of as much as 2 percent at Qdoba outlets.
Given the company’s decision to reach out to Morgan Stanley for help, a sale is no doubt one route Jack in the Box could take to address investor concerns, said San Diego restaurant consultant John Gordon.
“Morgan Stanley is strictly an advisory firm that doesn’t make operational recommendations but essentially says if you want to sell it’s worth this and if you want to sell it, we can go out to our network and find a potential buyer,” Gordon said. “There is the potential no one may buy the brand.”
A little less than a year ago, Jack in the Box announced plans to relocate Qdoba offices from the Denver area to San Diego, where it could share space at its parent firm’s Kearny Mesa headquarters. Despite lagging sales, there are plans to open as many as 60 new Qdoba restaurants this fiscal year, the company noted in its current earnings release.
The move to reevaluate Qdoba comes at a time when the bloom is starting to come off the rose of a very successful fast casual market. In the fourth quarter last year, fast-casual chains’ same-store sales fell 1.1 percent on average, according to research by Nation’s Restaurant News.