Category: 2020

Fortune – Can Popeyes threaten KFC’s dominance in China? It’s going to try

BY 

LESLIE PATTON

AND

BLOOMBERG

 

Some 18 months after its chicken sandwich went viral, fast-food chain Popeyes is on a mission to take over the world.

It may not work, of course. Its parent, Restaurant Brands International Inc., has a spotty overseas record, at best. But the ambition alone underscores just how startling a transformation the once-sleepy brand has undergone since the summer of 2019, when the launch of a seemingly ordinary sandwich—a piece of fried meat with pickles and mayo—ignited a frenzy that sparked long lines, sellouts and even fisticuffs all across America.

Whatever the reasons are that it took off like it did—and it’s not clear that anyone truly knows—Restaurant Brands is aggressively seeking to cash in. Popeyes will debut in the U.K. this year, the company is expected to announce this week. That will expand its budding empire to about 30 countries, and Australia is also likely on the docket. Last week, it said a franchise partner would add hundreds of locations in Mexico.

The biggest prize, though, is China, where KFC is a cultural fixture as the country’s largest chain with more than 7,000 locations and three decades of experience. Popeyes opened its first restaurant there in May with a franchise partner and wants to reach 1,500 in a decade, which by itself would boost the chain’s locations by about 50%.

“Customers love chicken in that part of the world,” Restaurant Brands Chief Executive Officer Jose Cil said in a recent interview. “We think there’s a huge opportunity for us by providing an alternative” to “the biggest chicken player in the world.”

The stakes are high for Cil. The company’s other brands, Burger King and Tim Hortons, have tried all kinds of strategies to ignite sales over the past few years and little has worked. Those brands have also struggled in the U.S. during the pandemic. By contrast, Popeyes, which Restaurant Brands acquired in 2017, grew 15% last year.

Popeyes still has plenty of room to expand. Its 3,400 locations worldwide (KFC has seven times as many) generated $556 million in sales last year, just 11% of the company’s total revenue. And only a quarter of those eateries are outside America. Restaurant Brands mostly uses a franchise model that speeds up openings because it relies on finding partners, instead of building a local team. Since the chicken sandwich, Popeyes continues to be inundated by potential franchisees from “across the globe” said Cil, who got the CEO job in January 2019 after running Burger King for four years.

In today’s social-media age, consumer products regularly get caught up in memes and viral moments. Bernie Sanders’s coat, made by Burton Snowboards, grabbed attention at January’s presidential inauguration. Back in 2016, the “Damn, Daniel” craze boosted sales of white loafers from Vans, a brand owned by VF Corp.

But those sales gains were fleeting in many cases. Restaurant Brands is making the bet that the sandwich marks a permanent change in the trajectory of Popeyes. And it’s easy to see why. In the year after the sandwich debuted, the average Popeyes franchise in the U.S. saw sales increase by $400,000 to a total of $1.8 million—almost a 30% gain. That’s well above KFC, but not even half of what the average Chick-fil-A does, according to QSR Magazine, a trade publication. Foot traffic to Popeyes locations jumped by almost half in 2019 and then rose another 29% in the first half of 2020 despite the COVID-19 pandemic, according to Placer.ai.

Then add the chicken boom. Worldwide, people are eating more poultry than ever. Global per capita consumption has increased more than threefold since the mid 1960s, according to the Food and Agriculture Organization of the United Nations.

Looking back, many have credited what has to be one of the world’s most valuable social media posts for starting this. In August 2019, Popeyes debuted the sandwich to rave reviews. About a week later, Chick-fil-A touted its version on Twitter as the original. A simple “y’all good?” reply from Popeyes ignited what the media soon dubbed the “chicken sandwich wars.”

Popeyes locations got quickly overwhelmed, and sold out in two weeks. It restocked, and the frenzy returned. All the while, news stories on those long lines kept America interested for months.

The summer of 2019 proved to be a crossover moment for Popeyes, pushing a brand with a big following in the Black community into new parts of America. The craze birthed stories in no less than the New Yorker and hundreds, if not thousands, of YouTube chefs tried making their own version of the sandwich.

Popeyes, founded in New Orleans in 1972, is taking this unexpected gift and expanding—from the Philippines to Spain. Cil rattled off a list of locales, like South Africa, that he wants to go after next.

Taking on KFC in China won’t be easy. Owner Yum China Holdings Inc., which licenses the brand from U.S.-based Yum! Brands, added 600 KFC locations in the country just last year. Knocking off such an entrenched market leader will take a lot of advertising, according to John Gordon, principal at Pacific Management Consulting Group, a restaurant consultancy.

“It’s always more difficult to come in and take market share away from the incumbent,” Gordon said.

KFC was also the first U.S. fast-food chain to enter China, arriving in 1987, and over the years has loaded its menu with local favorites, like shrimp burgers and congee. It’s evolved into much more of a sit-down experience that many Chinese consumers have viewed as a premium offering.

Sami Siddiqui, president of Popeyes in the Americas, points out that the chain’s debut in Shanghai brought a line of 2,000 people. It’s mostly a digital restaurant with six kiosks. And to cater to local tastes, the company added roasted chicken and more wings to the menu. It also tweaked the sandwich, swapping out breast meat for thighs, which are preferred in China.

“The chicken sandwich changed the game for us,” Siddiqui said in an interview. “We want to take that success to the rest of the world.”

Bloomberg – Lenders Get Stuck With Busted Eateries After Bidders Get Scarce

By

and

  • California Pizza Kitchen canceled an auction to sell itself
  • Ruby Tuesday plans to hand over control to its lenders
Customers walk towards the entrance of a Ruby Tuesday restaurant in Bowling Green, Kentucky.
Customers walk towards the entrance of a Ruby Tuesday restaurant in Bowling Green, Kentucky.

Lenders are having a hard time unloading distressed and bankrupt restaurants, and it’s small wonder. After all, who wants to buy an eatery in the middle of a pandemic when you don’t know whether you can be open or how many people you can seat?

California Pizza Kitchen Inc. on Tuesday canceled an auction to sell itself after no buyers bid for the company, making its bankers the likely new owners. Ruby Tuesday Inc. went bankrupt Wednesday and plans to hand itself over to its lenders. With federal stimulus talks shelved and colder weather putting an end to outdoor dining, the industry’s pain may start to get even worse in the coming months.

“It is a difficult time to sell a casual dining brand,” said John Gordon, a longtime restaurant analyst with Pacific Management Consulting Group. Casual dining chains have been slammed this year both by government shutdowns and by consumer worries about catching Covid-19.

Restaurant dining rooms across the U.S. were temporarily shuttered by the pandemic earlier this year. While most have reopened, capacity limits have put a cap on how much revenue they can actually generate.

“This fear factor is material, it has an impact on the casual dining sales potential,” Gordon said in an interview. He added that locations that can’t reach annual sales of $4 million to $5 million won’t have the margins that entice investors.

Exceptions could be made, however, when a buyer is interested in the troubled chain’s real estate, he said.

‘Great Reckoning’

Casual dining has suffered for the past decade as consumer tastes diverged away from the sit-down experience of chains like Applebee’s and TGI Friday’s. Sales have instead flowed into local restaurants, fast-food chains like McDonald’s Corp., delivery focused companies like Domino’s Pizza Inc. and fast-casual concepts like Chipotle Mexican Grill Inc. and Shake Shack Inc.

“This is now the great reckoning for the casual-dining segment,” said Aaron Allen, chief strategist at restaurant consultancy Aaron Allen & Associates. “Those that are in the distressed asset zone will be going for pennies on the dollar.”

With many diners opting against eating in restaurants since March, casual restaurants have been forced to improvise to hold on to sales. TGI Friday’s, for example, has tried to lure customers with outdoor dining tents, while others are selling meal kits and bulk food.

Uncertainty over the future puts a damper on potential purchases, said Michael Halen, senior restaurant analyst at Bloomberg Intelligence, adding that raising money to buy distressed restaurants is likely tough right now. He said that casual dining traffic has been down in 65 out of the past 66 months, citing data from MillerPulse.

‘Risky Proposition’

“Now if you make a bid, you may lose all of that money. How long can you survive with limited dining room capacity?” said Halen. “A lot of casual dining chains were struggling headed into the pandemic, and now with all the uncertainty around the virus it makes any bid a risky proposition.”

Some larger casual dining chains, like Darden Restaurants Inc. and Bloomin’ Brands Inc., are weathering the storm thanks to sharp management teams and plentiful capital. But that doesn’t mean they’ll be interested in picking up a struggling portfolio of restaurants right now, said Lyle Margolis, a director at Fitch Ratings who focuses on restaurants.

USA Today – Businesses after coronavirus: Is it too late to go back to how it was?

Paul Wiseman and Anne D’Ínnocenzio
Associated Press

For years, personal trainer Amanda Tikalsky didn’t have to worry much about her job. The U.S. economy’s record-breaking 11-year expansion offered security to service workers like her.

Then came the coronavirus, which closed the Milwaukee athletic club where she worked for 15 years. She scrambled to organize online exercise sessions to keep money coming in. About 25% of her clients made the jump with her.

“It’s an adjustment for everybody,” she said. “We are used to being face to face.”

But even when the virus threat is gone, Tikalsky predicts that many customers will continue to exercise from home. The shutdown is also likely to change her own shopping habits. She has a new appreciation for the ease of buying groceries online.

The pandemic is almost sure to leave a mark on the way people work, shop and socialize, perhaps permanently shifting the way many service industries operate. Consumers will think harder about the health implications of squeezing into crowded restaurants and movie theaters. More businesses will accept the effectiveness of employees who work from home, and the move to online shopping will accelerate.

“We’ve never had a crisis where we couldn’t socially gather with people,” said John Gordon, founder of Pacific Management Consulting Group in San Diego, which advises restaurants.

Martia Weaver waits for customers at the walk up window to her Freitas Cuban burgers restaurant as the city government takes steps to fight the coronavirus outbreak on March 25, 2020 in Key West, Fla. Most tourists have left Key West as the city closed hotels or short-term vacation rentals and asked restaurants to only serve take-out. Beaches and parks have been closed and starting Friday non-residents may not enter without proof of employment or property ownership in the Florida Keys as city officials attempt to contain COVID-19.

A hit to the industry

Until March, service workers – from dishwashers to real estate agents – had been enjoying a record winning streak in the job market. U.S. service jobs had risen for a decade.

The sector appeared almost immune to blips in the economy. Not even low-wage competition overseas or automation seemed to threaten service jobs that require direct contact with customers.

Then the virus arrived. It upended the service economy, which accounts for 84% of U.S. private-sector employment. It wiped out 659,000 service jobs in March – 94% of the jobs that vanished last month as the U.S. economy plunged into recession.

It is sure to claim many more. In an interview Monday on CNBC, former Fed Chair Janet Yellen predicted that unemployment rates could climb to Great Depression levels. But because the economy was in solid shape before the outbreak, she added, the return to normal employment could happen much faster than during the Depression or after the 2007-09 Great Recession.

When the economy goes into a nosedive, manufacturers, not services providers, are usually hit first and hardest.

Not this time. The virus has been a gut punch to businesses that depend on social gatherings – restaurants, cinemas, theaters, hotels, airlines, gyms, shopping centers. More than 250,000 stores are now temporarily closed, accounting for nearly 60% of retail square footage, according to Neil Saunders, managing director of GlobalData Retail, a research firm.

The situation is similar in many other countries. In Wuhan, China, where the viral outbreak began, consumers are still reluctant to go shopping as conditions slowly head back to normal.

Josh Rivas is among the millions of job casualties in the U.S. He works at a Subway at a rest stop in Connecticut where he and co-workers were laid off because of the virus amid dwindling traffic at the plaza. “We can’t afford for us to miss a day of pay because we have families that we need to take care of and bills we need to pay,” he said.

In recessions, factories are often the first to slash jobs, and they don’t always bring them back. American manufacturers still employ 918,000 fewer workers than they did before the Great Recession. Over the same period, service employment is up by nearly 14 million.

Economists are divided over whether service employees will face the kind of economic disruption factory workers have endured.

Much depends on the rescue efforts being put together by the U.S. government and the Federal Reserve. Congress and the White House are throwing at least $2.2 trillion at American businesses and households in a desperate attempt to keep them from going under before the health crisis is over.

“As long as we do the policy right, we should get a pretty strong recovery,” said Heidi Shierholz, senior economist at the liberal Economic Policy Institute and former chief economist at the Labor Department. “When the lockdown is over, I think we’ll get a pretty decent bounce back.”

Shierholz does not expect a “transformative” change to service sector jobs.

Still, some effects of the outbreak are likely to linger, analysts say.

Cooped up in their homes, Americans have discovered anew the convenience of shopping online – something that is likely to accelerate the decline of traditional retail stores, said Diane Swonk, chief economist at the accounting and consulting firm Grant Thornton.

Restaurants have closed their dining rooms and reduced service to takeout, delivery and curbside pickup. Swonk expects the trend toward grab-and-go dining to continue after the health crisis.

Restaurant consultant Gordon predicts that local governments will reduce restaurant seating capacity to keep diners from being on top of each other. “Some of the places we used to go (to) were just armpit to armpit. Can you see us doing that now?” he said.

Millions of Americans have spent weeks working from home, and the experience has been eye-opening for many, and for their bosses. Meetings and even virtual after-hours cocktail parties can be organized on Zoom, WhatsApp or other programs.

“We’re just discovering that we can have amazing seminars and conferences online much easier. We don’t have to travel anywhere,” said Arindrajit Dube, economist at the University of Massachusetts, Amherst. That’s troubling for airlines and hotels that depend on business travel, sometimes to subsidize discounts for leisure travelers.

The enhanced appeal of home offices could also have implications for real estate markets, giving more workers expanded housing options because they won’t need to travel to their jobs.

But there may be limits to Americans’ enthusiasm for isolating themselves at home.

Becky Ahlgren Bedics, 49, of Fishers, Indiana, has been working out via Zoom since her fitness club closed temporarily in mid-March. But she plans to trek over to the club when it reopens. She misses the camaraderie. “There’s such a connection that you have with people,” she added.

D’Ínnocenzio reported from New York. Contributing: Christopher Rugaber and Josh Hoffner, AP 

New York Post – McDonald’s adds pastries to breakfast menu as morning sales struggle

By Noah Manskar and Lisa Fickenscher

October 7, 2020 | 10:19am | Updated

McDonald’s is injecting some serious sugar into its menu in hopes of perking up its sluggish breakfast sales.

The Chicago-based fast-food chain will start selling apple fritters, blueberry muffins and cinnamon rolls on Oct. 28, it announced Wednesday. The so-called “McCafe Bakery” items, which will be available all day, are the first baked goods McDonald’s has added to its core menu in more than eight years.

McDonald’s hopes the new pastries will add some excitement to its breakfast offering, which has been a drag on sales in recent months because the coronavirus pandemic upended commuters’ morning routines. The company also temporarily scrapped its all-day breakfast menu to streamline its operations amid the virus crisis.

Enlarge ImageMcDonald's
Getty Images

“We know our customers deserve a break now more than ever, and are excited to give them another reason to visit their favorite breakfast destination by offering delicious flavors they crave, any time of the day,” Linda VanGosen, vice president of brand and menu strategy for McDonald’s USA, said in a statement.

Restaurant consultant John Gordon of Pacific Management Consulting Group says the pastries should pair well with the company’s line of coffees and coffee drinks. They can also be sold as snacks and desserts throughout the day.

“These are double dipping items” that serve multiple purposes, including drawing people in for breakfast and getting them to spend more during other meals, he said.

McDonald’s isn’t alone in its breakfast battle. Major restaurant chains saw transactions for morning meals fall 18 percent from last year’s levels in the week ending June 7, compared with an 11 percent drop for lunch and 12 percent for dinner, according to data from The NPD Group.

The Golden Arches have also faced increased competition from rivals such as Wendy’s, which launched a breakfast menu in March. But McDonald’s has said its breakfast market share has actually grown as chains struggle to pick up morning customers across the board.

“As we emerge out of this, I think, part of it is certainly going to be a rededication from a marketing and investment standpoint to go after breakfast,” McDonald’s CEO Chris Kempczinski said on the company’s July earnings call.

McDonald’s shares were up 0.5 percent in premarket trading at $225.37 as of 9:13 a.m.

Business Insider – Key takeaways from Thursday’s SPOTLIGHT featuring the CEOs of Raising Cane’s and Checkers and Rally’s

Irene Jiang
Apr 16, 2020, 12:58 PM
spotlight webinar 4 thumb 4x3
Thursday’s spotlight featured Checkers CEO Frances Allen, Raising Cane’s founder and CEO Todd Graves, and analyst John Gordon. 
Courtesy of Frances Allen, John Gordon, and Todd Graves; Samantha Lee/Business Insider
  • On Thursday, Business Insider’s hosted a SPOTLIGHT digital live event with restaurant industry leaders to discuss how restaurants are navigating the coronavirus pandemic.
  • Correspondent Kate Taylor was joined by Frances Allen, the CEO of Checkers & Rally’s, Todd Graves, the founder and CEO of Raising Cane’s Chicken Fingers, and John Gordon, a chain restaurant analyst with Pacific Management Consulting Group.
  • Visit Business Insider’s homepage for more stories.

On Thursday, Business Insider hosted a SPOTLIGHT digital live event with restaurant industry leaders and experts to discuss how restaurants are navigating the coronavirus pandemic.

Thursday’s SPOTLIGHT was hosted by retail correspondent Kate Taylor and featured Frances Allen, the CEO of Checkers & Rally’s, Todd Graves, the founder and CEO of Raising Cane’s Chicken Fingers, and John Gordon, a chain restaurant analyst with Pacific Management Consulting Group.

Watch the webinar below:

 

Key takeaways

  • Customers’ priorities have changed to value food safety over taste.
  • Customers are also one-stop-shopping more, meaning they’re buying larger orders, but less frequently.
  • The two most successful changes restaurants have made during the pandemic are offering family meals and curbside pickup.
  • Also key is maintaining a relationship with customers and employees in whatever way possible.
  • The pandemic has accelerated the adoption of contactless payment.
  • The late-night period has been the hardest-hit and will likely see lasting foot traffic losses.
  • The QSR sector is faring much better than the casual dining sector, with an average 35% revenue decrease compared to an average 60-90% revenue decrease.
  • Activity will gradually shift back to normal instead of a sudden switch, so many of the changes implemented during the pandemic will likely need to remain in place for the long term.
  • Visual indicators of sanitization will be paramount for customer comfort even after the pandemic.
  • Many restaurants will close permanently due to the pandemic, but that may lower rents for restaurants that make it through as well as increase traffic and bring some price wars to an end.

Notable Quotes

  • Graves: “If you haven’t applied for PPP, better get ready. It has run out. I believe they will do a second traunch.”
  • Graves: “Let people know you’re open, assure them you’re going to serve them a food-safe product.”
  • Gordon: “Maintain some kind of relationship to your employees so at least some of them have jobs and keep at least some lights on for your customers who are going to come by.”
  • Gordon: “It’s vitally important for restauranteurs to start thinking about what conditions are going to be like going ahead. It is silly to think that there is going to be a grand switch that is gonna come on and everything is going to go back to normal.”
  • Allen: “We’ve started to think about, how many different ways can we reduce the points of contact between staff and customers?”
  • Allen: “Restaurants that focus on visible signs of sanitation — hand sanitizer, hand wipes, masks, etc. — are going to do better than ones that don’t.”
  • Gordon: “There will be fewer front doors. That’s bound to happen. That doesn’t mean a permanent loss of jobs.”
  • Allen: “Selfishly, I believe people are going to want to return to comfort foods as a relief we’ve survived.”
  • Graves: “As a whole, I think people are going to trust restaurants more than before the pandemic.”

Marketplace – Wendy’s looks to flip nearly 400 restaurants with bid to buy them from bankrupt NPC

Andy UhlerNov 20, 2020
Heard on:
A vehicle pulls into the drive-thru lane at a Wendy’s restaurant in Alhambra, California, on May 5, 2020. Frederic J. Brown/AFP via Getty Images

Burger chain Wendy’s has submitted a bid to buy nearly 400 restaurants under its own name that are currently operated by bankrupt franchisee NPC International Inc.

Of all the businesses in the restaurant industry, fast food has done relatively well in the pandemic, which means scooping up these franchises might make sense.

In its filing with the SEC, Wendy’s says it doesn’t necessarily want to run all of the nearly 400 new restaurants. It just wants to make sure a new owner doesn’t turn the property into something else. That’s what restaurant analyst John Gordon with Pacific Management Consulting calls a hold-and-sell strategy.

“What Wendy’s wants to do is to buy a couple of markets and then hold them for a small period of time, and then find the best franchisee to sell them to,” he said.

Wendy’s said it remains committed to keeping ownership of about 5% of the total Wendy’s system.

Restaurant franchisee Flynn Restaurant Group had reportedly agreed to buy the properties, but Wendy’s objected to the sale because Flynn owns franchises of direct competitors.

RJ Hottovy at Morningstar says for Wendy’s, this is about controlling as much as possible.

“I think the idea is trying to maintain as consistent operations as anything, and probably improve on the operations,” Hottovy said.

He said one of the reasons these franchises are on the market is that the former owner didn’t invest a lot in upkeep and technology.

 

The Atlanta Journal – Constitution – Dunkin’ deal? How a metro Atlanta fast-food giant keeps feasting

Georgia-based Inspire Brands, the parent of Arby's, has purchased a string of well-known restaurant brands over the last three years. Now, it's in discussions for what would be its biggest acquisition deal: Dunkin' Brands, the parent of Dunkin' Donuts and Baskin Robbins.
GEORGIA NEWS| Oct 27, 2020
By Matt Kempner, The Atlanta Journal-Constitution
Inspire Brands has bulked up through rapid-fire restaurant deals

A little less than three years ago, the CEO of Sandy Springs-based Arby’s laid out a dreamy plan: Grow beyond the We-Have-The-Meats fast-food brand to gobble up other restaurant chains, a move that he said would bring more corporate jobs to metro Atlanta.

Since then, under the company name Inspire Brands, Paul Brown has acquired makers of food that Georgia stomachs know well, from Sonic to Buffalo Wild Wings and Jimmy John’s. But his latest target — Dunkin’ Brands, the parent of Dunkin’ Donuts and Baskin-Robbins — exceeds even the lofty goals he initially described.

Dunkin’ Donuts alone is ranked as the nation’s eighth-largest quick service chain, based on more than $9 billion in U.S. revenue last year at its restaurants, all of which are operated by franchisees. Arby’s was 15th.

The donut chain’s system sales are twice as high as the upper range of what Brown initially had said he was seeking when he unveiled plans for Inspire Brands in early 2018.

“We are very patient,” Brown told The Atlanta Journal-Constitution back then.

But in the midst of a pandemic, getting Dunkin’ would be Inspire’s fourth major takeover and its most widely known brand to date.

Dunkin’, a public company, on Sunday confirmed media reports that it is in preliminary discussions to be acquired by privately held Inspire, though it said “there is no certainty that any agreement will be reached.” Inspire declined to comment.

Inspire’s growth has already paid off with jobs in metro Atlanta. It has jumped from 375 headquarters jobs when it was just Arby’s to about 1,000 today.

Inspire has consolidated some back office functions in Georgia. But it has kept the images and menus of the chains distinct. And it has retained “support centers” where the brands it acquired were based. Dunkin’, which had about 1,100 employees as of the end of last year, is headquartered in the Boston area, where the donut chain has deep roots.

Inspire’s chains already have a total of more than 11,000 restaurants, many operated by franchisees, and $14.6 billion in sales.

Brown told the AJC in an earlier interview that Inspire’s moves would “continue to solidify Atlanta as the restaurant capital of the country.”

Chick-fil-A, Waffle House, Zaxby’s, Church’s Chicken and Krystal are all based in Georgia.

So are a host of brands that have ties to Inspire’s majority owner, Atlanta-based private equity firm Roark Capital. Among Roark’s $19 billion in assets under management are investments in Focus Brands (Moe’s Southwest Grill, Carvel Ice Cream, Cinnabon, Auntie Anne’s Pretzels, McAlister’s Deli, Schlotzsky’s and Jamba), CKE Restaurants (Carl’s Jr and Hardee’s), Miller’s Ale House, Culver’s, The Cheesecake Factory, Corner Bakery, Jim ‘N Nick’s BBQ and Naf Naf Middle Eastern Grill.

Roark was founded in 2001 by Neal Aronson, who named his company after the fiercely independent protagonist in Ayn Rand’s book The Fountainhead. The book has been embraced by some conservative political leaders and libertarians. Roark, the company, states on its website that “as a firm of diverse viewpoints,” the name “does not signify adherence to any particular political philosophy.”

Brown, meanwhile, is a former leader at Hilton Worldwide who switched to the restaurant business. He won kudos for an image makeover at Arby’s, including its meat-loving ads and quick-witted social media moves. Inspire likes to highlight interest in “maverick” qualities for both its employees and brands, “each with their own distinct positioning, guest experience and product offering,” according to a company website.

John Gordon of Pacific Management Consulting Group, a restaurant consulting firm, said he has worked with Dunkin’s franchisees and that the Inspire CEO is well thought of in the industry. Roark, Gordon added, is viewed as a long-term investor intent on building up brands rather than loading them up with debt and aiming at a quick sale.

The pandemic has scrambled much of the nation’s restaurant business. But fast-food chains with drive-through options are seen as having a strategic advantage for the times.

Dunkin’ saw sharp declines in the first several months of the pandemic, but in its last quarterly release it said improvements were underway. Its donut shop business was already in the midst of shifting its focus to sell more hot and cold drinks, Gordon said.

The donut chain has more than 13,000 locations, though it said it expects to shed a number of units. Baskin-Robbins has another 8,000 locations.

Wray Executive Search – Peering Ahead

[1] In trying to peer our way forward coming out of the COVID fog and the impact upon our industry, some findings now can be seen. It is like walking through a dark tunnel, with patches of ground and daylight, that each is longer in turn, but then patches of darkness again. You know slowly you are getting to the other side.

The great news is that in the last two days we have news of a 90% successful Pfizer test and 95% successful Moderna test vaccine. We always knew it was coming. The unknown is now the final testing and the distribution, and the later improvement of the drug. For example, Dr. Fauci noted that we do not know yet for how long these vaccines will protect before a booster is needed. This does not solve all of our problems; the devil is always in the details. It does not prevent the need for corrective store CAPEX for better HVAC systems and pickup windows or more drive-thrus for example. It does not decrease government regulation.

More news is the stable recovery pattern seen to date in the US fast food and sit down restaurants to date. The data analysis firm Facteus reported last week that fast food consumer spending was up 16% in the week ending November 8, while sit down restaurant consumer spending was up 6% year over year. [2]  Note that this is tracking consumers and does not relate directly to same store sales. This is factoring in cooler weather in many markets and some COVID surge, but both factors going forward are of great concern. The global QSR brands have generally recovered, with the US now showing more stores open and with higher drive thru store mix, a center of strength. This is a reversal from prior years where supra levels of the competition held down US progress and where international trends were stronger.

The eagerness of investors for quick service restaurant brands, with global expansion potential is not a surprise. Dunkin Brands has been on the “to be snapped up “ list for quite some time. Inspire’s deal at $11.3 billion, including debt is now pending, at an app. 25 times trailing EBITDA valuation. The 25X is unreal and will put stress on Dunkin going forward to get international and marketing synergies in place. Fortunately, Inspire is private and they will not have to report numbers but they will have loan covenants. The real surprise is that this transaction happened so quickly after COVID temporarily froze lending markets earlier this year.

As the consultants at WraySearch can tell you, the demand for transformative corporate staff personnel remains brisk. I watched one global QSR operator extremely closely wherein certain functions—Marketing, IT, and Product Development—some two years ago that a wave of turnover developed. It showed up in their delayed execution later, as some competitors caught up.

Diagnosing people problems both at HQ and the field, including in the franchisee community is more important in a post COVID environment because the risks and requirements are higher.

Some restaurant environmental circumstances have changed.

For one, restaurant business conditions in center city locations will not improve for some considerable time, and chains have begun to adjust portfolio strategy. Starbucks, Potbelly, and Dunkin Brands are in a location thinning mode; Dunkin Brands noted cash assistance was provided to Boston and NYC center city franchisees. Fast casuals Sweetgreen and Pret have closed units among others. With urban office markets, traffic collapsed, a pillar for fast casual units has eroded, especially newer brands requiring a sales ramp. Also, until business travel and expense account business return sometime in the future, center city fine dining sites will continue to be impacted.

A near term opportunity is that the industry might not for long be operating without the benefit of the social energy, and sales, and higher margins that the bar provides. While table service was unaffected through COVID restrictions, the bar was impacted in most jurisdictions due to proximity restrictions. However, 30 states and territories have provided for “carry out” premixed liquor servings, for beer, wine, and spirits, and will be a sales and profit partial offset. The NRA estimated sales mix of the to-go items is “up to 10%.[3]  This number still has to be validated per publicly traded chain restaurant earnings commentary. In any event, the application of a near term vaccine will help motivate this population quickly. [4]Internally sourcing bar and entertainment expertise to re-energize bar zones could have a fast ROI and beat competitors.

 

John A. Gordon is a long time restaurant veteran with 45 years of restaurant operations, corporate staff, and management consulting experience. He founded Pacific Management Consulting Group in 2003 to do complex restaurant operations, financial analysis, and strategic review projects for clients.  He is a certified Master Analyst of Financial Forensics (MAFF). He can be reached anytime at (858) 874-6626, email, jgordon@pacificmanagementconsultinggroup.com.

 

[1]   New York Times, November 16, 2020.

[2]   Facteus FIRST report, November 11 2020.  See www.facteus.com, and @facteus post, November 12 2020.

[3]   Per interview, Sean Kennedy, VP, Public Affairs, NRA, Mashed, June 16 2020.

[4]   Civic Science polling consistently notes a segment of population ready to eat and drink in a social setting, now.

The San Diego Union Tribune – Jack in the Box settles its dispute with franchisees

A Jack in the Box restaurant.
The National Jack in the Box Franchisee Association settled a lawsuit against the San Diego fast-food chain over its spending on marketing and advertising to drive customers to restaurants.
( Jack in the Box)

San Diego company agrees to share more information with franchisees around marketing and advertising to drive traffic to restaurants

By MIKE FREEMAN

Jack in the Box franchise owners have settled a lawsuit against the San Diego fast-food chain over marketing strategy — five months after new Chief Executive Darin Harris officially took the helm of the company.

The settlement announced Wednesday ends a contentious two-year battle in which the National Jack in the Box Franchisee Association publicly called for the ouster of former CEO Lenny Comma.

Terms of the settlement are confidential. But Jack in the Box agreed to provide greater transparency around its spending for marketing and advertising to drive customers to its 2,220 franchise and company-owned restaurants.

It also will establish a new Leadership Advisory Council to further improve communication with franchise owners.

“The franchisees are very happy with a resolution that they believe is mutually beneficial and favorable to them, and the company is happy to know it can move with a positive foot forward in its relationship with franchisees,” said Robert Zarco, founding partner of Zarco, Einhorn, Salkowski, & Brito, the legal team representing franchise owners.

The franchise group, which represents about 1,700 of the chain’s restaurants, complained for years about spending cuts under Comma that it claimed contributed to flat or declining sales that failed to keep pace with rising costs.

The dispute came to a head in 2018 following the departure of Chief Marketing Officer Iwona Alter, who had been with the company for 13 years. She is now with Habit Burger.

At the time, activist investor Jana Partners had taken a stake in Jack in the Box and was driving the company to improve its financial performance, including adopting an “asset light” business model.

“Franchisees were complaining, in general, about the fact that because private equity got their hands on the company, that forced many staff cuts,” said John Gordon, head of San Diego-based restaurant industry advisory firm Pacific Management Consulting Group. “Franchisees felt that they were the ones left out in the dark.”

Under terms of a 1999 settlement, the company was required to be transparent with franchisees about its marketing and advertising spending, including disclosure of accounting and other back-up information.

The latest legal action filed in 2018 alleged Jack in the Box failed to live up to those terms. It highlighted how strained the relationship between the company and its franchisees had become.

“We believe that played a huge role in making sure there was a management change where Lenny Comma, the former CEO, in essence, resigned and was removed from the board,” said Zarco.

Comma announced his retirement in April. When Harris arrived in June, the tone changed, according to franchisees. He immediately began talks that paved the way for the settlement.

“With a new CEO coming on board — and some new board members — that new CEO very much wants to put the litigation from the prior CEO and the prior team to rest,” said Gordon. “He wants a fresh start.”

Gordon called the settlement “positive.” He noted that marketing fund transparency is not uncommon among franchise restaurant chains.

“Some brands do it as a matter of course,” he said. “Some have been doing it for 20 years.”

Rabi Viswanath, president of the Jack in the Box franchisee association, said in a statement that Harris “understands the value that maintaining a healthy and happy franchise community can bring. We are grateful for his leadership and are excited to unite behind him as he stewards this brand to its fullest potential.”

Jack in the Box did not respond to a request for comment. In a statement, Harris said both sides are committed to having a good relationship that contributes to the growth of Jack in the Box.

“We are very excited for what is ahead for this brand,” he said. “We could not do it without the support of all our franchisee partners, especially those within the National (Jack in the Box) Franchisee Association.”

Jack in the Box is expected to report quarterly financial results on Nov. 18. The company’s shares ended trading Wednesday up 1.3 percent at $84.96 on the Nasdaq exchange.

The Economist – Takeaways from McDonald’s remarkable comeback

CHRIS KEMPCZINSKI It’s not oversized. One year after his tenure, CEO of McDonald’s is a lean 52 year old who runs a marathon. So it’s hard to believe he eats McDonald’s meals twice a day, five days a week. “Some days I spoil it, some days I’m careful about what I eat, but I eat a lot of McDonald’s,” he admits in an interview. Certainly he is ashamed of many of his best customers. On average, the top 10% of Big Mac Binger visits restaurants one-fifth as often as he does.

Perhaps he is making up for the lost time. Unusual for a McDonald’s boss, he is not a business person. He attended 2015 when McDonald’s was hired by his predecessor Steve Easterbrook when he was on the verge of meltdown. It was plagued by attempts to compete with innovative American startups such as Chipotle and Shake Shack. The site was shabby, despite offering hundreds of items on the menu that many customers couldn’t get. Critics called it a social parasite, paying low wages and promoting obesity. Kempchinsky admits that it suffered from arrogance. His mission under Mr. Easter Brook in 2015 was to shake it off from complacency.

What followed was the lesson of corporate revitalization that could have made Easter Brook a megastar. CEO He wasn’t fired last year because he had a consensual relationship with an employee. (McDonald’s recently sued him for concealing other sexual relationships and wants to regain great rewards.) Still, Kempchinsky is sticking to the program. Unlike many new bosses who are keen to destroy the legacy of their shameful predecessors, on November 9, he announced a new strategy based on work that has recently begun. In the midst of a pandemic, it offers its own valuable lessons. Don’t waste the crisis.

The seeds of McDonald’s resurrection began with a surprisingly simple decision that was easy to make a mistake. Go back to basics. Since 2015, the company has reduced the array of menus it offers, focusing on price and quality. Re-committed to Ray Kroc’s beloved business model, increasing its franchise share last year from 82% in 2015 to 93% (about 39,000 restaurants). Streamlined its vast international business and sold control of restaurants in China and Hong Kong. The result was impressive. McDonald’s overall sales exceeded $ 100 billion last year. The operating margin was thinner than most restaurant patties, swelling to 43%. And the stock price soared. Since 2015, its market value has almost doubled to $ 160 billion.

As the financial base recovered, we turned to investing in the future. But, contrary to intuition, I probably benefited from not being in a hurry. According to San Diego-based restaurant consultant John Gordon, franchise models make it difficult to move quickly and it’s important to build consensus. Test new ideas in the local market before proposing to franchisees around the world. Ownership of the land beneath the franchisee’s restaurant has given joint interest to the franchisee and co-investment in technology upgrades. Not only does this help attract customers by strengthening the brand, but it also supports the value of the land. In recent years, McDonald’s and its franchisees have invested heavily in the installation of kiosks for touchscreen orders and other improvements such as two-lane drive-through. Last year, the company acquired a technology company that helps personalize drive-through experiences, making the largest acquisition in a few years. The overhaul may have cost the franchisee a lot. However, in the process of the covid-19 pandemic, they began to benefit.

This is due to the surge in sales in recent months, especially in the United States, as McDonald’s took advantage of the crisis to accelerate the pace of change. Due to the closure of many restaurant interiors, we have relied on the development of digital, drive-through and delivery initiatives. All of these facilitate a more “contactless” experience, which we believe will last longer than a pandemic. I recall Croc’s saying, “We are not a hamburger business.” We are in show business, “said Travis Scott and other superstar rappers with customized menus that captivated customers. In addition, old-fashioned favorites such as Big Mac and Quarter Pounder are at the center of the menu, simplifying the kitchen and speeding up customer service. Over the next two years, we expect the long-awaited digital loyalty program to drive sales growth and maintain margins at high levels in 2019.

Kempchinsky has many challenges left. When it comes to food, McDonald’s lags behind when it comes to chicken sandwiches and plant-based products. Soon we promise a crispy chicken sandwich and a non-meat Mac plant. The former is essential to catch up with competitors such as Chick-fil-A.A.. According to the company, marketing is shifting from sales to promoting as a community-centric brand, but not everyone likes a pious tone. “Social Justice Warriors currently runs McDonald’s Corporation, which has nothing to do with the sale of Big Macs,” said one franchisee quoted in an analyst report. McDonald’s faces two proceedings from former and current black franchisees, alleging racism by pushing them into poorer areas. It refutes the accusations.

From Big Mac to Big Data

Its ubiquity means that McDonald’s is often in the news for the wrong reasons. But as a corporate turnaround, it’s a compelling story. Instead of suffering a technical onslaught like many physical store chains, it has become a digital pioneer. Instead of crouching in the middle of a pandemic, it embraced a new way to do business. Despite Mr. Kemptinsky’s baptism by fire, even the transition of leadership was the best the industry has seen in the last few years, says investment firm Bernstein’s Sara Senatore. He should not be scrutinized about his frequency at the lunch counter. So far, he has won all the quarter pounders he can eat.

Orlando Sentinel – Red Lobster faces its ‘most challenging time,’ as big loan payment looms amid pandemic

By

ORLANDO SENTINEL 
AUG 13, 2020  8:50 AM

Orlando-based Red Lobster is facing the “most challenging time” in its history during the coronavirus pandemic, CEO Kim Lopdrup says, at the same time that outside analysts worry about a looming $355 million loan the company has due next summer.

The privately held seafood chain of more than 700 restaurants has a $380 million term loan, with more than $355 million outstanding, reaching maturity next July, according to a June report from Moody’s, which earlier in the year cut the company’s credit rating to Caa1, defined as “poor.”

Upcoming financial events mean it is “critical to repair the balance sheet,” said John Gordon, a San Diego-based restaurant analyst.

“Most of the casual dining restaurant operations have had a very difficult time and most will have a difficult time for some considerable time going forward,” Gordon said. “I hope that Red Lobster is doubling down wherever and however they can in terms of takeout and delivery business.”

Lopdrup said in a statement that this is “the most challenging time Red Lobster has faced in our 52 years of operation.”

He noted the mandatory shutdown of the restaurants in March prompted by the virus and restrictions such as limited capacity in place even after most of the company’s locations have reopened their dining rooms.

“Our priority is to make sure Red Lobster is one of the survivors of this crisis,” Lopdrup said. “While there are many unknowns, I am optimistic about Red Lobster’s future. We have a great team, and I’m proud of how nimbly they reacted to a fast-changing situation.”

Red Lobster is offering free delivery on orders larger than $30 placed on the company’s website or app Monday through Thursday, Lopdrup said.

Inside restaurants, Lopdrup said employees are wearing masks and have their temperatures checked when coming into work. Other safety measures include hand sanitizer stations, single-use menus and pay-at-the-table technology.

Moody’s also gave Red Lobster a negative outlook.

“Over the next 12 to 18 months we think that things can get more challenging,” said Bill Fahy, vice president and senior credit officer for Moody’s.

Refinancing the loan that is reaching maturity next summer is an option for the company, Fahy said, but that won’t necessarily be easy.

“The ability to refinance things post-COVID, particularly in the casual dining world, is much more challenging,” he said.

Red Lobster, which has generated about $2.4 billion in annual revenue in recent years, had about $216 million in unrestricted cash in February, the Moody’s report said.

But it’s unclear how much the pandemic has affected Red Lobster, as privately held companies aren’t required to publicly release financial information.

“We expect a further deterioration in both earnings and credit metrics as the various restrictions placed on in-restaurant dining across Red Lobster’s entire restaurant base in an effort to control the spread of the coronavirus pandemic persist,” Moody’s said in its report on Red Lobster.

Orlando’s Darden Restaurants sold Red Lobster in 2014 to San Francisco’s Golden Gate Capital for $2.1 billion. Thai Union bought a stake in Red Lobster in 2016.

A representative for Golden Gate Capital said the firm declined to comment for this story.

Another restaurant chain, California Pizza Kitchen, which was acquired by Golden Gate in 2011, filed for Chapter 11 bankruptcy protection in July, according to a story from Yahoo! Finance and other news reports.

Contact Austin Fuller at afuller@orlandosentinel.com or 407-420-5664; Twitter @afullerreporter

Wray Executive Search – Knocking Down Restaurant Industry Problems One by One

We are now almost six months into the COVID era which has affected restaurants like no other in the post World War Two period. The most advanced national mitigation strategy at the moment is to avoid people at any cost. There is no doubt the US will eventually have a vaccine but science and distribution thru the supply chain —and easing of lapsed guest fears—will take time.

There is more restaurant restructuring to come. One day last week, we were greeted with the news of the California Pizza Kitchen Chapter 11 and Pret closing up the Chicago and Boston markets. More will follow. On the independent restaurant side, estimates run from 30% to 70% of sites that will ultimately go dark. While painful, these actions will contribute to eventual industry improvement.

To be sure, there are some good things underway. On the positive side, we should have a pretty good idea now what is going on. US restaurant sales are driven by fear right now. There is some excellent free research[1] that is documenting consumer sentiment. We didn’t have this level of knowledge so quickly in prior years. Also, the initial shock of COVID has been absorbed and some instances of very good management underway can be seen.

Rent and Debt Leverage Must be Improved For A Solid Recovery 

Restaurant rents and debt service (principal and interest) were a problem for many restaurant operators pre COVID-19.  Rent cost per square foot and some brand and many franchisee debts to EBITDA ratios steadily crept up year after year after the 2008 great recession. No expenses are as fixed as these are in the restaurant cost structure.  I’m convinced that the restaurant industry must improve the rent and debt cost ratios for a sustainable recovery platform to be built post-COVID-19.

Some operators owned their real estate and were protected from rent increases. But most brands did not enjoy legacy rents. Rent/CAMS expense of 12-15% of sales for many units of these brands was common in 2019. The problem over time, in lease strategy, is that landlords asked for a fixed dollar amount plus rent overages. As some landlord reps mentioned during the Restaurant Finance Monitor’s Zoom webinars this summer: “our investors don’t expect us to invest in our restaurant tenant’s variability. That why we need fixed rent.” This has become a very difficult situation, with restaurants and landlords at an impasse in many situations.

How to Solve this impasse? Let supply and demand take its course. These days there is no shame in closing restaurants. Last quarter, both McDonalds and Dunkin Brands announced store closings, 200 in McDonald’s US, and 800 in US Dunkin Brands (450 unit closings were preannounced as part of the Speedway gas station kiosk turnover). This took guts by both CEOs who are at risk of getting hammered by investors who seem to only understand the growth of “stores open” counts. Another situation playing out this week is the Matchbox casual dining chain Chapter   11 playing out in DC, with the strategy to renegotiate leases or close units if an agreement with landlords cannot be reached.  [2]

Timing is everything. If a brand is over-stored, this might be the time to “de-store” with customer demand weak anyway for a time. Kudos go to Dunkin CEO Dave Hoffmann and team who worked with franchisees to prune the system to allow for more efficient economics in support of future growth.

Debt: another foundational issue that has to be solved     

In the area of heavy debt, the real risk for some brands and franchisees exists where store economics have collapsed and efforts to build take out sales or utilize drive-thru sales units aren’t possible. Some brands with declining store margins were hit by dual requirements to build new units and remodel at the same time. This is best seen in the July Chapter 11 filing of NPC, the 1700 unit Pizza Hut and 380 unit Wendy’s franchisee.  [3]  The NPC Pizza Hut units were in decline as was the brand in the US since 2011.  NPC went through multiple leveraged buyouts which added debt. NPC funded its Wendy’s acquisition with more debt over the 2013-2017 timeframe. Two private equity firms bought NPC in 2018 with more debt.

One side benefit from COVID is that restaurant M&A deals will likely be of lower dollar value, with lower base EBITDA dollar values going forward. That will produce less strain on acquisition debt and debt service.

One franchise space solution is that the franchisor must assume more control over franchisee’s M&A actions. This standard is expressly or implied in virtually all franchise agreements. YUM would have had several opportunities to weigh in. The other is for the franchisor to ease up on requiring both remodeling and new units at the same time. To be sure, the franchisee should provide annual business plans, with cash flow and new unit/remodel actual ROI results for analysis and learning.

Management Bright Spots

In listening to the publicly traded company earning calls, there were many instances noted of very appropriate management tactics and attitudes noted. For example, many restaurants have put a halt to new company units and required new franchisee unit development, preferring instead to focus on maintenance CAPEX, curbside, and pickup lane projects. Almost universally, share buyback projects were suspended. Some brands, like Shake Shak, have conceptualized their first drive-thru renderings.  These are all positive developments.

 

About the author:  John A. Gordon has 47 years in chain restaurant operations, financial analysis, and management consulting roles. He founded Pacific Management Consulting Group in 2003 to work restaurant operations, financial analysis, and strategy consulting engagements. He is a Master Analyst, Financial Forensics (MAFF), who specializes in brand financial analysis reviews, and dispute resolution. He can be reached anytime at 858 874 6626 (office) or email, jgordon@pacificmanagementconsultinggroup.com.

          

 

[1]   See for example, www.morningconsult.com and www.civicscience.com.

[2]   Matchbox Food Group Declares Bankruptcy, Restaurant Business Online, August 3 2020.

[3]   NPC International’s Bankruptcy Should Be a Wake Up Call for Franchises, Restaurant Business Online, Jonathan Maze, July 1 2020.

Civic Science – 46% of Remote Workers Aren’t Comfortable Returning to Offices Before Vaccine is Available

Working from home has become the new normal for many office workers during the coronavirus pandemic. CivicScience data found that working Americans have varying opinions toward remote work and comfort returning to the traditional office setting, depending on their income, gender, and age.

About half of U.S. adults who are working remotely have very strong feelings of comfort or discomfort toward returning to the office before a vaccine is available, but it is interestingly split with 26% being very comfortable and 25% being very uncomfortable. Overall though, slightly more remote workers report being uncomfortable (46%) with returning to the workplace pre-vaccine than comfortable (44%).

 

U.S. adults with low annual incomes, $50k or less, are the most likely to be very uncomfortable returning to the office before a COVID-19 vaccine is available. Those with high incomes, $150k+, are the most likely to be very comfortable.

 

Additionally, men are 20% more likely than women to prefer returning to in-person work whereas women are most likely to prefer staying remote. It is notable to add that both men and women value some combination of returning to the office and staying remote.

 

Younger adults ages 18 – 24 are the most likely to prefer returning to the office, with 42% responding that they would prefer returning rather than staying remote or even having a combination of both options. However, with 32% preferring to return to the office, adults ages 55+ are also more likely to prefer returning to the office compared to those ages 25 – 54.

 

It is unsurprising that people who would most prefer returning to the office are those who feel an office setting is very important for collaboration and innovation, two key attributes for successful work. Only 11% of people who feel that an office setting is not at all important would prefer to return to the office.

 

Productivity

Almost half of U.S. adults working remotely say they have been just as productive working remotely as in the office, but this seems to differ depending on the breakdown of people.

 

Although 48% of U.S. adults working remotely during the pandemic say they have been just as productive as usual, 44% of 18 – 24 year olds report being significantly less productive than usual. Interestingly, this age group is both the most likely to report being both less productive and the most likely to report being more productive. Those aged 25 – 34 come in a close second though with 40% reporting being less productive and 20% more productive.

 

Since changing to remote work, women report being more productive — 30% more than men. This is consistent with the earlier observations of men being more likely than women to prefer returning to the office, as a change in productivity could influence these preferences.

 

It seems that all U.S. adults (remote or not) are divided on their opinions about the economy returning to pre-COVID-19 levels. Forty-two percent responded that they believe this is possible if companies continue to work remotely, but a close 35% and 22% responded “no” and “I’m not sure”, respectively.

 

A surprising 42% of both men and women responded “yes”, they believe America’s economy can return to pre-COVID-19 levels if companies continue to work remotely. However, women were significantly less confident and responded “I’m not sure” about 35% more than males.

 

As states and localities continue to pivot regulations for public safety, CivicScience will continue to monitor Americans’ sentiment and daily behavior.

Wray Executive Search – Flexibility

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

We are all hoping now to get to “the other side” of this brutal pandemic that has impacted us all so unfavorably. While confusion and the “fog of war” are still present, there are some encouraging signs.

For one, medical theory and technology are at the foremost point of development in mankind to allow for the development of an antiviral vaccine. We can reasonably assume a drug will be developed to beat this virus.[1]  Not surprisingly, such drug development was the number one wish list factor cited by a series of full-service restaurant concept CEOs panels recently. In another critical dimension, the momentum of same store sales has improved week by week through April. Sales bottomed out in late March and early April in the US and have recovered from there. And many states have begun to reopen to varying degrees.

The issue, of course, is all this will take time. As you will see below, if there ever was a time for restaurant operators to be “flexible” in all things management related, this is it.

The end of the beginning?

The industry’s initial mitigation actions continue. A period of adjustment and workout will continue for some considerable time. Much action continues now on negotiating rent deferrals (an easier sell with landlords) or abatements (a much more difficult sell). Virtually all companies caught with too low cash are trying to get more. The global chain restaurants with strong concepts and historical economics and credit profiles can get additional funds and terms.  Others have found new investors via stock offerings. Smaller start-up companies have not found additional funding and are closing.

A few chain restaurants are totally “dark”, that is, no store management, no key hourly employees on duty in the stores. Thankfully, however, most restaurants have skeletal staff present, working take out and delivery. In my opinion, that is smart for several reasons: (1) take out and pick up business has exploded and has become a high average ticket business that customers prefer. It is now often expanded into curbside or even pop up drive-thrus for both casual dining and fast casual operators. (2) This keeps store managers and key hourly employees working. (3). Some offer meals to furloughed hourly associates, as this is another way to keep a connection with that workforce that will be valuable when it is time to recall them.

New unit development has been put on hold and most companies have either slashed or suspended capital spending except for maintenance capital spending. Franchisors have suspended new store development and/or remodeling requirements typically. Advertising has been redirected away from TV to less costly digital. Franchisors are “working” with their franchisees to differing degrees on deferring royalties, ad funds, and rents. Franchisees properly point out that a deferral is not forgiveness but rather a postponement of a cash outlay.

Beware of the Fog of War

As states begin to reopen keep in mind that there will be a mixture of service formats, locations, evolving customer reactions. On the reopening side, all of the reopening states to date have different table density and reopening geographical standards for example. That is especially true reading the Georgia, Florida, and Tennessee restaurant reopens.  On the consumer side, consider we are only about 11 weeks into this reaction, given the early March sales weakness that emerged. Humans change their opinions only gradually over time.

We are seeing conflicting consumer data. In a webinar, Dataessential recently highlighted that “dining at my favorite sit down restaurant” lead among proposed post lockdown activities that most excited responders in a March 29-April 27 survey.[2] That factor grew from 41% to 45% over that period. On the other hand, there is am immense amount of consumer research that indicates that consumers will return to eating out in the future when they feel safe. A CBS News Poll in mid April showed 29% of survey responders would be comfortable going to a restaurant or bar, while 71% would not.[3]

So there is a lot of conflicting data. Polling in the US has an implicit Red v. Blue, Trump v. Non-Trump bias baked in it, so be cautious.

I strongly recommend that you pull up a lot of data and look at sales, ticket, transaction, per person data, and the usual store level profitability data versus both current periods, prior period/quarter and prior year. Myself, I’m more of a year to year analysis fan but this is one time the trend movement is more important. In addition to your business data, paid data sets are available via Restaurant Research, Black Box, Technomic, NPD, and others,  Miller Pulse has free overall segment data monthly. As you recall from my past columns, I always advise being careful about making decisions without applying relevant semi-fixed costs, including G&A to the store level model. The same is true with leases or capital spending. You have to be very certain of those cash outlays in good times, in periods of declining demand, even more so.

To look ahead, one also has to look behind 

We are almost through Quarter One earnings. It was a mixed quarter, with very good trends, almost perfect in many brands, until early March. March results wound up very poor and bottomed out in early April. Pizza and wings operators had very good sales, traffic, and profitability results. YUM US company and franchisee results were not reportable. Most company-owned and franchised brands expect Quarter 2 to be worse because all three months will have some COVID-19 impact.

One line of success seen is that of pick up and drive-thru sales activity, primarily driven by average ticket. Some casual dining brands have replaced 30 to 35% of their pre-COVID-19 sales with takeout.

A global strategy management consulting firm I know well recently circulated some recent learnings from consumer research that apply to restaurant traffic drivers:

Restaurant Traffic Drivers

Positive Factors Negative Factors
Drive Thru NorthEast, Urban Core locations
Rural, Exurban Locations Airport Locations

 

We will learn more as we go, but we will have to stay flexible.

About the author: John A. Gordon is a long time restaurant industry veteran with 45 years of restaurant operations, corporate staff and management consulting experience. He founded Pacific Management Consulting Group in 2002 to do complex restaurant analysis and advisory projects. He can be reached anytime at (858) 874 6626 (office) and jgordon@pacificmanagementconsultinggroup.com (email).

[1]   Dr. Fauci supported this notion in Senate testimony, May 12, 2020.

[2]   Nation’s Restaurant News, “Pent Up Demand Grows…”, Ron Ruggless, May 11 2020.

[3]   CBS News Screen Shot, Josh Jordan @NumbersMuncher April 23, 2020.

New York Post – Chick-fil-A surpasses Burger King, Taco Bell on best-selling list

By Nicolas Vega

May 14, 2020 | 2:37pm | Updated

Chick-fil-A is now the second-highest-grossing restaurant chain in the US — despite not being open on Sundays.

Thanks to sales growth in 2019 of 13 percent to $11.3 billion, the chicken slinger leapfrogged over Taco Bell and Burger King to second place behind McDonald’s, according to Restaurant Business Magazine’s annual list of top 500 restaurants.

The Atlanta-based chain’s dominance is even more impressive considering it has only 2,470 locations in the United States. McDonald’s, by comparison, raked in $40.4 billion in gross sales with its 13,846 American locations.

Taco Bell, meanwhile, brought in $11.29 billion with 6,766 restaurants while Burger King’s 7,346 locations raked in $10.2 billion.

Last year, Chick-fil-A was 7th on the list, behind Burger King and Taco Bell, as well as Wendy’s and Subway.

“They have the highest quick service restaurant sales in the industry,” John Gordon of Pacific Management Consulting Group told The Post. “It’s higher than Shake Shack. It’s higher than many steakhouses with bars.”

As the coronavirus has hammered the fast food industry, Chick-fil-A is poised to weather the storm better than most because it has yet to build a sizable footprint in urban areas known for their high rents, Gordon added.

That, combined with fast food consumers’ growing appetites for chicken, suggests Chick-Fil-A’s reign might last for some time.

“They are growing when the other brands are not; they have much more development potential,” he said. “I don’t see any of the other peers leapfrogging back.”

Restaurant Business – With Survival on the Line, Restaurants May Rethink Financing

Companies that make it through a near-death experience may be more conservative financially, but don’t expect them to abandon risks altogether.
By Jonathan Maze on Apr. 23, 2020
This is the fifth story in a five-part series examining the long-term impact of the coronavirus pandemic on the restaurant industry.

As Cousins Subs devises its annual plans each year, company executives consider its risk tolerance and plan for the prospect of an unexpectedly large decline in same-store sales—maybe 5% or 10%. “But never 30%,” said Christine Specht, CEO of the 100-unit Milwaukee-based sandwich chain.

Expect that to change across the industry.

Wounded by the coronavirus shutdown, restaurant companies appear likely to get more conservative in their financial structures. Cash reserves will become more important than ever. Lending seems likely to get stingy. Franchisors will be stricter on the financial risk of their franchisees, while avoiding the megafranchisees that have become commonplace over the past decade.

In short, the industry could make sure it’s better prepared the next time around.

“I would imagine businesses or restaurants will have a greater amount of cash reserves,” Specht said. “In the event something like this happens and sales take a nosedive, eating into cash, businesses that have an excess amount of debt and little cash flow will find themselves in real trouble.”

Brands get conservative

For much of the past two decades, restaurant companies driven by financiers have taken on an increasing amount of risk.

Many restaurants have shed assets, selling off real estate and leasing it back while loading up on debt to pay dividends or, if they are publicly traded, to buy back shares.

Private equity-owned chains in particular have lived on the edge this way, using readily available cheap debt to load up companies with leverage.

That left many companies with weak balance sheets even before the coronavirus began: Well over a dozen full-service restaurant chains had been operating under the cloud of bankruptcy as of mid-March.

Many of these companies will go away or be badly stripped of underperforming locations. Already, a number of casual-dining chains have had to take drastic steps: CraftWorks Holdings, the owner of Logan’s Roadhouse and Old Chicago operating in bankruptcy, has shuttered its locations and may struggle to emerge.

FoodFirst Global Restaurants, the owner of Bravo Fresh Italian and Brio Italian Mediterranean, filed for debt protection and is working to decide whether it can sell itself or simply liquidate.

In a recent survey by the National Bureau of Economic Research, operators only gave themselves a 15% chance of survival in a six-month crisis. They gave themselves a 30% chance in a three-month crisis.

On the other hand, there are some examples of cash-rich businesses that could expect to thrive coming out of the shutdown. One such company: Chipotle Mexican Grill, which has no debt and $900 million, even though it only recently emerged from a multiyear sales collapse brought about by food safety concerns.

To be sure, few expected anything like the coronavirus shutdown. That could reduce operators’ appetite for risk, certainly for a while.

“Generally, there’s a wide spectrum of folks more aggressive and less aggressive than others,” said Ashish Seth, who heads restaurant investment banking with BMO Capital Markets. “Nobody was planning for a multimonth, complete shutdown of restaurants. They just never thought this would be possible.”

Certainly in the short-term, restaurants will have little choice but to operate more conservatively. Many are draining cash reserves, after all, and they will need to preserve their funds as the specter of the coronavirus and a potential resurgence loom.

“I think they’re going to have to be more conservative,” said Jim Ilaria, president and CEO of Uno Restaurants. “We could have a flare-up a year from now. We’re not out of the woods yet. Anyone taking on a significant amount of debt besides [Paycheck Protection Program] loans does do at great risk.”

How long do restaurateurs expect to survive?

Source: National Bureau of Economic Research

Expect franchisors to change their strategies

The franchise sector in particular could be up for massive changes as franchisors rethink their strategies.

Many financially aggressive companies are franchisees, which over the past decade have amassed large numbers of restaurants and heavy capital cost requirements, using huge amounts of debt.

That might have been on its way toward changing even before this happened, given growing challenges with some large-scale franchisees. NPC International, the largest franchisee for Pizza Hut and Wendy’s, has been teetering on the edge of bankruptcy.

Big Burger King operator Carrols Restaurants, meanwhile, was facing debt problems of its own. It cut costs to pay down debt only to be dealt a massive blow to its cash flow when the coronavirus hit.

John Gordon, a restaurant consultant out of San Diego, believes franchisors are far more likely to limit franchisees in the post-coronavirus world. The days of the massive single-brand franchisee are likely gone.

He noted that Taco Bell tries to keep its franchisees to fewer than 250 locations. “Expect to see more of that, and directly proportional to the amount of blood on the floor,” Gordon said. “They have gotten too big.”

That could force other changes. Franchisees themselves may shift to more brands with fewer locations apiece. But brands may be less likely to sell corporate stores to franchisees, period—at least those that hadn’t already taken this step.

That’s because many brands are left with little ability to support their own stores after years of selling them to franchisees. Those that didn’t may look at that and adopt a different strategy, Gordon said.

“Franchisors don’t have the capability to solve problems anymore because of asset-light [strategies],” he said. “They have no staff. They couldn’t take over a cluster of franchisees that have problems.”

“EXPECT TO SEE MORE [FRANCHISORS LIMITING THE SIZE OF FRANCHISEES], AND DIRECTLY PROPORTIONAL TO THE AMOUNT OF BLOOD ON THE FLOOR. THEY HAVE GOTTEN TOO BIG.” —JOHN GORDON, RESTAURANT CONSULTANT

But risk won’t completely vanish

To be sure, it may be naive to suggest that restaurants will abandon the strategies they used to grow rapidly after the Great Recession. And private-equity firms in particular seem unlikely to get religion on their financial strategies, even after a massive shutdown like this.

Operating a business, after all, requires some risk-taking. That will never go away. “We’re never not going to take risks or invest,” Specht of Cousins said. “We need to do that for a lot of reasons.”

Much will depend on private equity. Such firms typically operate with the riskiest of credit profiles, bingeing on debt, pushing out expansion and remodels and keeping declining restaurants alive.

Many of these firms see opportunity in a weakened industry and could pick up chains on the cheap and return to those riskier strategies.

Or they could decide that it’s too risky in the near term and largely avoid such investments. “It will be interesting to see what private equity does,” Ilaria of Uno said. “Cheap debt and private equity fueled a lot of the expansion of chains over the last 10 years.”

That cheap debt will still be around. The lenders? Maybe not. Some banks had been slowing their lending to restaurants heading into the shutdown, which could intensify that exodus, meaning financing will be harder to come by. Loan terms seem likely to get stricter, which in and of itself would make for a financially conservative industry.

“WE’RE NEVER NOT GOING TO TAKE RISKS OR INVEST. WE NEED TO DO THAT FOR A LOT OF REASONS.” —CHRISTINE SPECHT, COUSINS SUBS

And landlords might take a second look at their prospective tenants, too, even as they grow eager to fill empty spaces.

“We could be more reticent to take a flyer on a restaurant that didn’t have a track record already,” said Jeff Brand, founder of Brand Partners, a small, Dallas-based landlord for a handful of shopping centers and a real estate broker. “After having gone through this, it does make you want to look at how much they’re carrying on the balance sheet in terms of cash on hand.”

To be sure, the restaurant industry itself is not going away. It will always feature a lot of risk. Yet many believe that the shakeout that results from the pandemic shutdown could be good for the industry long term, promoting better balance sheets and financial strategies. Those that are left will be in a stronger position.

It’s just going to take a while to get there.

“I am hopeful that with all this pain and anguish we’re going through that this is one of the good things that come out of it,” Gordon said. “We’ll have a more rational perspective.”

Orlando Sentinel – ‘A commanding position to survive.’ Darden Restaurants raises money and cuts cash loss during coronavirus

By Austin Fuller, Orlando Sentinel
Orlando-based Darden Restaurants is raising up to $526.5 million during the coronavirus pandemic through a new offering of shares of its common stock.

a car parked on a city street: An Olive Garden employee brings a takeout order to a customer at the Orlando Fashion Square location in Orlando, Fla., Friday March 20, 2020. Darden Restaurants, the parent company of Olive Garden, closed all their dining rooms nationwide as of Friday, but will continue to serve take-out at the same time Florida Governor Ron DeSantis all restaurant dining rooms closed in the state in response to the coronavirus pandemic.© Joe Burbank/Orlando Sentinel/Orlando Sentinel/TNS 

An Olive Garden employee brings a takeout order to a customer at the Orlando Fashion Square location in Orlando, Fla., Friday March 20, 2020. Darden Restaurants, the parent company of Olive Garden, closed all their dining rooms nationwide as of Friday, but will continue to serve take-out at the same time Florida Governor Ron DeSantis all restaurant dining rooms closed in the state in response to the coronavirus pandemic.
 

The owner of Olive Garden and LongHorn Steakhouse announced the underwritten public offering, expected to close Thursday, of 7,826,087 shares Monday at a price of $58.50 per share. The company is also giving the underwriters an option to buy up to another 1,173,913 shares, it said in a news release.

The move creates additional cash, but ran the risk of upsetting their existing common stockholders as it could have diluted their shares, restaurant analyst John Gordon said. However, the company’s stock price was up nearly 2.5% Tuesday at close to $63.32.

“The market has voted on this, and they’re saying that ‘we’re not really concerned,’” Gordon said.

The company’s ongoing, weekly cash loss is about $20 million, based on how it performed over the last two weeks. That number is an improvement from an April 7 update when it was at about $25 million.

Darden — which also owns Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze and Eddie V’s — has already added additional cash by entering into a $270 million term loan credit agreement to supplement a $750 million credit facility.

This week’s offering further strengthened the company’s balance sheet, CFO Rick Cardenas said in a statement Tuesday.

“This will enable us to get back to delivering sustained, long-term shareholder returns,” Cardenas said. “It was a successful offering with strong demand from current and new shareholders, and we are pleased with the results.”

Given the amount of money Darden has and its public offering, the company should be suited for at least well over a year, Gordon said. But he added reopening restaurants will cost money and they won’t be instantly profitable.

“Darden is in a commanding position to survive,” Gordon said.

Same-restaurant sales across the company were down 60% for the week that ended April 19, 65.2% for the week ending April 12, 71.2% for the week ending April 5, 74.9% for the week ending March 29 and 75.2% for the week ending March 22.

“As they are able to get more and more to-go business into Olive Garden and into LongHorn, to a lesser degree, then they’re able to generate some additional revenue for those stores,” Gordon said.

Darden, which has closed its more than 1,800 dining rooms and transitioned to takeout, has also furloughed 20% of about 1,000 people at its Orlando headquarters.

CEO Gene Lee is forgoing his $1 million annual salary and senior executives are also taking a 50% pay reduction. The company also initiated pay cuts on a sliding scale for its remaining corporate staffers.

As for its hourly workers, Darden previously rolled out an emergency pay program for those losing work during the pandemic and a new sick leave policy.

Contact Austin Fuller at afuller@orlandosentinel.com or 407-420-5664; Twitter @afullerreporter

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©2020 The Orlando Sentinel (Orlando, Fla.)

Visit The Orlando Sentinel (Orlando, Fla.) at www.OrlandoSentinel.com

Wray Search – What’s New in 2020? Well….

The calendar now says that is it 2020, and too many of us remember 1980, 1990, 2000 and 2010. One of the nice things about being a veteran of any line of business, like restaurants, is that your perspective deepens with the additional years. We know what we know now. Sometimes it prohibits expensive mistakes later.

The need to take down competitors to build sales

In the case of 2020, all of the restaurant space’s issues from the 2010 decade have rolled over. Nothing has changed. Exactly the same issues to start the year. That leads to the first restaurant observation noted once again at the 2020 ICR Exchange Conference that just concluded this week where a good number of public and smaller restaurant chains who hope to be public chains one day come to present. When it really comes down to it, this industry is powered by promises of growth, whether it be in the US or US and in international markets. But how is this growth going to materialize? Maturing and growing chains of all sorts need to identity and test their differentiators and competitor take down tactics. In our highly competitive economy, they have to compete not only for guests, but also employees, sites, funding, real estate and suppliers, naming just the most obvious.

This is the key factor that investors should look for: not just unit growth projections, but how will the brand capture market share and take down competitors.

We all hope things will get easier as time goes on of course but our over loaded marketplace produces great stress on startups and smaller players. Jay Sonner, partner at North Point Advisors recently penned a fantastic note[1] that identified  that despite the massive closing of stores in US retail and restaurants, some “new guard” brands are working.  These operations are clearly different and are targeted. The point is that market share has to be taken away from others. Some cited examples:

  • Local alignment : Mendocino Farms and Snooze AM aligning with local farms and purveyors. Dig Inn as investor with upstate NY farms.
  • Alignment to community: Cooper’s Hawk, with its 400,000 member wine club
  • Memory Creation: Torchy’s Taco’s hotter tacos through the month; Punch Bowl Social with fun and approachability driven back into the driving range/golf experience.
  • Photogenic/Instagram connection: are important traffic drivers and high ROI brand impression engines. Examples are Velvet Taco and Snooze high plate sharing rates.
  • Giving respect to Kids and Pets: is important given societal shifts, especially urbanization. Many brands have had kids’ corners; several kid-safe and pet-outdoor space small brands have emerged.

Labor problems, $100,000 general managers in the QSR space? 

The second issue to rolled over from 2019 like a rock was ongoing labor availability problems. At an ICR 2020 Exchange special Piper Sandler luncheon, additional thoughts were presented by  Luke Fryer, CEO of the labor analytics and technology consultancy Harri reminded us that on the hourly associate side, a vast amount of turnover occurs in the first 60 days. This seems to me to be selection or scheduling or orientation issues. It is sometimes not setting out what the career ladders are, or even over promising the number of work hours. The point is that while wage rates might be uncontrollable, there are other ways to work at the labor control issue.

Bloomberg recently reported [2] that Taco Bell was considering paying $100,000 wages for restaurant general managers as the need was so severe. It turns out that this is being done on the company store side. We don’t know if this is some mix of salary and bonus potential, but most likely so. Some analysis is in order. First, Taco Bell has 462 company stores in the US, versus 6446 franchised locations.[3] I’m glad they have company locations and it is typical that the AUV and restaurant margins are higher at the company stores versus the franchisee stores in terms of profit dollars. Company stores do not have the burden of a royalty, and franchisor interest expense is lower or practically zero for these stores, unlike franchisees. However, it is typically true that franchisees run tighter labor cost percentages—they have royalties to pay, after all.

So, franchisees are not going to be able to afford $100,000 GM salaries. This $100,000 tactic might bring some incremental staffing relief to the company store side but will generally be unworkable on the franchisee side. In my view, labor relief has to come from anywhere other than labor rates.

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John A. Gordon is a veteran restaurant industry veteran who can count a lot of new decades in this business. His restaurant consultancy, Pacific Management Consulting Group, works complex restaurant analysis engagements focusing on operations, financial management and strategy topics. He is reachable always at jgordon@pacificmanagementconsultinggroup.com, office 858 874-6626, and website, https://www.pacificmanagementconsultinggroup.com

[1]   https://www.linkedin.com/pulse/six-ways-us-retail-thriving-jay-sonner

[2]   https://www.bloomberg.com/news/articles/2020/-01/09/taco-bell-offering-100-000-salary-amid-mounting-worker-shortage

[3]   2019 Taco Bell Franchise Disclosure Document.