New York Post: Burger Rivals

Rivals are bringing the burger wars home to McDonald’s.

The world’s biggest hamburger chain posted its first monthly sales decline in nearly a decade as reinvigorated fast-food rivals fight back.

After years of battling each other for second place as they struggled to keep up with McDonald’s, Wendy’s and Burger King are starting to steal market share, analysts said.

With the backing of hedge-fund investors, both chains have undergone transformations in recent months that include revamping their menus, remodeling their stores and honing their marketing.

McDonald’s yesterday said October same-store sales in the US fell 2.2 percent, even more than the global 1.8 percent decline. It marked the first monthly decline since 2003.

The news sent the shares down nearly 2 percent, to $85.13.

“It seems both Wendy’s and Burger King are taking share,” said Sara Senatore, a senior analyst at Sanford C. Bernstein & Co.

Wendy’s, controlled by buyout kingpin Nelson Peltz, is quickly moving to higher price points and premium products, an effort that is paying off with sales gains.

Last quarter, Wendy’s dropped its low-price W Burger so customers would buy more expensive items such as the Bacon Portabella Melt and the Asiago Ranch chicken sandwich.

Yesterday, the chain reported a 2.7 percent increase in same-store sales in the latest quarter, its sixth straight quarter of gains.

Wendy’s CEO Emil Brolick, who came on board about a year ago, is making over the chain. The idea is to compete directly against Five Guys as Wendy’s remodels its stores, which still look like they did in the late 1970s.

Franchisees need to decide if they are willing to invest in the expensive renovations, according to Pacific Management Consulting Group Principal John Gordon.

Wendy’s also plans to push forward with a breakfast menu — a new offering for the chain.

Burger King’s launch of salads, wraps and smoothies helped boost sales, Santore said.

Burger King’s largest franchisee, Carolls Restaurant Group, last week reported same-store sales for the quarter jumped 6.2 percent.

The chain has started to invest again in the brand after going public in April. The moves follow an effort by Burger King’s hedge-fund owners to turn it around after it had languished for years with crippling debt. Bill Ackman, founder of hedge fund Pershing Square Capital Management, also took a 10 percent stake.

Meanwhile, McDonald’s has been shifting to lower price points and pushing its dollar menu, in an attempt to boost same-store sales.

It’s a big change from just last year. In 2011, McDonald’s saw a 5 percent rise in US store sales, Wendy’s grew 2 percent and Burger King fell 3 percent.

“I do see the risk to McDonald’s” as both competing chains get stronger and start to differentiate their offerings, Gordon said.

NPR: Quizno’s Gives Up Control to Stave Off Bankruptcy

Quiznos narrowly avoided bankruptcy this week when the sandwich chain shifted ownership to private equity firm Avenue Capital in exchange for erasing some debt.
The recession and poor management have hit the Denver-based sub-maker hard. The company once boasted more than 5,000 restaurants, but 40 percent of them have now shut their doors.
Andre Bonyadian owns nine Quiznos franchises in and around Los Angeles.
As one of his employees wraps a large roast beef sandwich to go, Bonyadian identifies a chief problem: He’s not going to make much profit on this sandwich. That’s because Quiznos’ corporate office in Denver is offering a “buy-one-get-one-free” deal.
“So they get [the] most expensive sandwich,” Bonyadian says of his customers. “Obviously, who wouldn’t? If you’re getting something free, you pick up the most expensive one.”
Franchiser Control
Quiznos — unlike some other fast-food retailers — owns the supply chain for its franchise restaurants. If a franchisee wants chicken or straws or bread, he has to buy them from the Quiznos corporate office.
So, Bonyadian says, the chain has an incentive to push higher volumes through deep coupon discounts — discounts that hit his bottom line.
“If the franchiser works with the franchisees, they both make money,” he says. “And once this is one-sided and the franchiser is only making money, then things go drastically wrong.”
That inability to work together plus higher supply-chain costs came at just the wrong time. As the recession started eating into the profits of most chains, Quiznos found itself locked in a price war with sandwich chain Subway — and its formidable advertising machine.
Falling Sales
Quiznos couldn’t keep up. Sales fell nearly a quarter from their peak in 2008, according to restaurant tracker Technomic.
Bonyadian, who is a director of the newly formed Quiznos Franchisee Association, says franchise owners — who in some cases invested up to $500,000 to open a store — were hit the hardest.
“There has been a lot of disappointment, and [a] lot of heartbreakings, and [a] lot of people who have gone bust,” Bonyadian says. “[I] personally know a couple of people who have become homeless.”
Mounting Debt
John Gordon, a restaurant analyst who runs Pacific Management Consulting Group, says, “It’s definitely one for the record books.”
In 2010 alone, 600 Quiznos stores closed. Gordon says the sudden loss of restaurants has left Quiznos without enough money to rebound with its own national advertising blitz.
“So unfortunately, you’ve gotten smaller, you can’t or you don’t advertise, you get smaller again,” he says. “It becomes a vicious circle.”
The smaller Quiznos got, the harder it became to pay off its massive debt; so on Tuesday, it gave control of the company to Avenue Capital, one of its largest creditors.
The deal eliminates $300 million in debt and adds $150 million in new funding.
Bonyadian says to turn Quiznos around, new owners will first need to open a meaningful dialogue with the franchisees.
“That’s where the success comes from,” he says. “And we are hoping that the new ownership will just do that — will work with us and listen to us, and it will be happily ever after.”
Bonyadian says that may be the chain’s last hope.

New York Post: Dunkin’ Debt May Rise

Dunkin’ Brands may take on more debt to buy back shares from its private-equity backers, including Bain Capital.

“The most likely use of cash would be a share repurchase, not a public float,” Dunkin’ CFO Neil Moses said yesterday said at a Morgan Stanley investor conference. “It might take the form of a share repurchase from our private-equity owners.”

Moses said the buyback would increase the company’s debt to more than five times earnings before interest, taxes, depreciation and amortization, or Ebidta, up from 4.2 times now.

By that calculation, the company would be taking on somewhere in the range of $200 million to $350 million in additional debt.

Dunkin’s PE owners — Bain, Carlyle Group and THL Partners — took the company public less than a year ago. Six of Dunkin’s 10 directors are from the PE firms.

The share repurchase would likely cut the PE firms’ combined equity stake from 30 percent to roughly 20 percent.

The move could be more fodder for attacks on the private-equity industry. Critics say the firms take money out in the form of dividends and buybacks, while saddling companies with burdensome debt.

Dunkin’ shares, whose shares are up 72 percent since it went public, rose 1.5 percent yesterday to close at $32.62.

“The risk to Dunkin’ shareholders is that Dunkin’ might not have the money to back up international growth” as planned, said John Gordon, a restaurant consultant from Pacific Management Consulting.

New York Post: Mickey D’s Feeling Heat from Rivals

McDonald’s, a darling of Wall Street over the past couple of years, could be looking at some less tasty returns in 2012, according to a report yesterday.

The fast-food chain, whose shares have come under pressure of late, could see its results — and share price — constrained for the rest of 2012 because of a weaker economy, said the report, from Sanford C. Bernstein.

The burger-and-fries joint will also see its balance sheet take a hit because it will be forced to maintain, and possibly expand, its value menu because rival Burger King has discovered value pricing.

McDonald’s CEO-elect, Don Thompson, met analysts in person for the first time late this week and said he would be stepping up its value-oriented menus (Dollar Menu and Extra Value Menu), said the report.

McDonald’s generally does not go out and provide guidance, but “this is part of Don’s strategy of getting out and building some relationships,” said Pacific Management Consulting analyst John Gordon.

Thompson noted some US softness in April and part of May where he said it would continue its focus on value products.

Angus/Premium-Chicken offerings and some McCafé product sales were weak, Thompson said.

Competitors are typically unable to sustain excessive levels of promotion, Thompson said, and added that he looked forward to grabbing market share when they pulled back from promotions, the report said.

“This [meeting] is a signal to manage expectations down,” Gordon said.

McDonald’s shares fell 2.9 percent yesterday to $86.71. Shares are down more than 15 percent from a $102 peak in January.

Nation’s Restaurant News: Why CKE Postponed Its IPO

Concerns on Wall Street over restaurant industry health, recently fueled by a sales miss from McDonald’s, may be to blame for CKE Restaurants’ decision to postpone its initial public offering, according to various sources.

The planned IPO that was set to begin trading on Friday was called off late Thursday “due to market conditions,” CKE said.

The Carpinteria, Calif.-based company operates or franchises 3,263 restaurants under the Carl’s Jr. and Hardee’s brand names. The company had hoped to raise more than $200 million with an offering of 13.3 million shares of common stock priced between $14 and $16 per share.

A report on Thursday by the International Franchising Review, an online publication of Thomson Reuters Capital Markets Publishing, said CKE owner Apollo Management turned down an offer presented by the underwriting banks because it was too low.

According to the report, which did not name sources, the offer by joint underwriters Morgan Stanley, Citigroup and Goldman Sachs was believed to be $10 per share. Earlier, the banks had communicated investor interest in the $10 to $11 range.

Two days before CKE’s IPO was scheduled, Outback Steakhouse parent Bloomin’ Brands Inc. went to market with stock priced at $11 — well below the previous target of $13 to $15 per share. The size of the offering was also reduced to 16 million from the 21 million initially stated, and, though the stock price climbed through the week, some saw the situation as an indicator that investor interest in the restaurant space was cooling.

“For it to be priced below [the target range] and for it to be undersubscribed, that tells you a lot about that market,” said Conrad Lyon, securities analyst with B. Riley & Co. in Los Angeles. “The appetite probably just wasn’t there.”

Observers disagree, however, about the “market conditions” that might be scaring investors off.

On the same day as Bloomin’ Brands’ IPO, McDonald’s reported that its global samestore sales in July were not positive for the first time in years. The quick-service leader reported that same-store sales fell 0.1 percent among U.S. locations, 0.6 percent in Europe and 1.5 percent in Asia Pacific, Middle East and Africa.

Analysts blamed weakness in the global economy but also stiffer competition from competitors like Wendy’s, Burger King and Taco Bell, all of which have shown improving results.

Concerns about beef prices next year may also have been a factor in the postponement of CKE, according to International Franchising Review.

In earnings reports in recent weeks, several public companies said ground beef prices were expected to be favorable for the rest of this year as cattle are sent to slaughter because they are becoming too expensive to feed with the drought in the Midwest putting increasing pressure on corn prices. The long-term result, however, will be even higher beef prices next year, as it takes time to rebuild herd counts.

Others said investors may simply have had enough of restaurant IPOs after a busy year so far. “The client base only has so many bullets to shoot at restaurant investments, and those bullets have been fired already,” said Lyon.

CKE’s planned IPO would have been the fifth this year, following those from Bloomin’ Brands, Chuy’s Holdings Inc., Del Frisco’s Restaurant Group and Ignite Restaurant Group.

Dunkin’ Brands Group Inc. also on Friday announced a secondary offering of 21.7 million shares by stockholders. Last year, Dunkin netted about $423 million with an IPO, selling 22.25 million shares for $19 per share, which was higher than the range initially set at $16 to $18 per share.

John Gordon, principal of Pacific Management Consulting Group, said CKE’s large debt load may also have scared off potential investors. CKE was acquired in 2010 by Apollo Management in a $700 million deal. The company was planning to use income from the IPO in part to reduce net debt of $654 million to a projected $590 million.

Since going private, Carl’s Jr. and Hardee’s have not been able to show strong signs of turnaround, as competitors Wendy’s, Burger King and Taco Bell have shown. CKE’s blended same-store sales rose 2.6 percent in the first quarter, which was “okay, nothing exciting,” Gordon said.

CKE has a growth story to tell, Gordon noted, with plans to grow overseas and into the as-yet underpenetrated Northeast. However, those factors were not enough to overcome the changing outlook for restaurant stocks, which looks very different today than it did in May, when CKE first announced its IPO plans.

“There’s no doubt things are looking worse now than they were in the spring,” he said.

However, he added, investor outlooks are cyclical. “Investor sentiments tend to bounce back and forth between quick service and casual dining,” said Gordon. “And when the economy softens, investors start favoring QSR again.”

The question remains when, if at all, the IPO may still happen, if market conditions improve. Company officials said they could not comment on potential timing.

The planned IPO was based on first-quarter numbers, and the company will likely have to re-file based on second-quarter results, which won’t be released until mid to late September.

Nation’s Restaurant News: Chuy’s IPO

Chuy’s Holdings Inc.. the casual-dining Mexican restaurant operator, debuted on the public market Tuesday, bucking a down market to close up 15.9 percent.

The 36-unit Austin. Texas-based company offered 5.8 mf Ron shares at $13 each, the top end of its forecasted price offering between $11 and $13 per share. The stock closed Tuesday at $15 06, boding well for upcoming restaurant Public stock offerings, including Southlake. Texas-based Del Frisco ’s Restaurant Group, which is scheduled to debut on the market Friday.

In comparison to Chuy’s first-day spike Tuesday, the Dow fell 08 percent and Nasdaq fell 0.9 percent. Wall Street darlings Me Chipotle and McDonald’s were also hit hard by investors as the companies reported depressed sales and earnings news.

Proceeds from Chuy’s offering will be used to pay down debt and add new restaurants Steve Hislop, chief executive of Chuy’s, said in an interview with Nation’s Restaurant News after the chain debuted on the Nasdaq market.

Restaurants take to Walt Street

With Wall Street headed into the doldrums of August John A Gordon, principal of Pacific Management Consulting Group, said companies wanting to go public try to squeeze in public offerings ’before the usual summer street slowdown.”

Gordon cited Bain Capital, in the news now as presumptive GOP presidential candidate Mitt Romney’s former company, as doing its lPOs in late July, “The real market slowdown now couldn’t be anticipated 120 days ago, Gordon said in an email “so its all about the vacation break.

Market-wide, five IPOs went Lip last week and eight are scheduled this week, including two restaurant companies – Chuy’s Holdings and Del Frisco’s Restaurant Group

Del Frisco’s, which operates the Double Eagle Steak House brand as well as the Sullivan’s Steakhouse and the newer Del Frisco’s Grille, said it plans to sell 7 million shares at between $14 and $16 per share. Del Frisco’s plans to offer 4.3 million snares and parent company LSF5 Wagon Holdings LLC. which is owned by Lone Star Funds, will offer 2, 7 million shares.

The company, which tried to go public in 2007 but withdrew its application in December 2008, again tiled for an IPO of up to $100 million in January this year.

Other public offerings in the wings are those from Outback Steakhouse parent OSI Restaurants of Tampa, Fla,, which said in April that it will change its name to Bloomin’ Brands and seek a $345 million IPO. Cheddar’s Casual CafØ of Irving, Texas, which used a provision under the Jumpstart Our Business Startups Act to tile confidentially for its IPO in May, is also on the blocks. Dallas based Dave & Buster’s Entertainment Inc. filed for an IPO in 2011, but it has yet to come to market

CKE Inc., which operates the Carl’s Jr. and Hardee’s burger chains, had tiled for an initial public offering of up to $100 million in May and on Monday said it now expects to raise as much as $230 million. CKE was taken private by Apollo Management in a $700 million deal in 2010.

Shares in Ignite Restaurant Group of Houston, which owns the 127-unit Joe’s Crab Shack and the 16 unit Brick House Tavern + Tap, went public in a $83.8 million offering in May. The company’s stock lost more than 20 percent of its value last week when the company announced it would have to restate financial statements for 2009 to 2011, and the first quarter of 2012, because of accounting issues with fixed assets and depreciation expenses.

Chuy’s future as a public company

The casual-dining chain most recently opened a unit in Gainesville. Fla., and is looking to back fill markets in Texas and Oklahoma, as well to colonize new ones such as Atlanta, Birmingham, Ala., and Louisville, Ky.

Hislop said the company, founded in Austin in 1, 982, expects future units to follow the non-cookie-cutter approach “We’re going to follow our motto of ’If you’ve seen one Chuy’s, you’ve seen one Chuy’s, Hislop said.

Current units range from 7,000 to 12.000 square feet, and Hislop said the lower end is likely to be the target for future development

The chain’s menu of burritos, enchiladas and fajitas produces a per person check average of $12.99, Hislop said, “which makes us very affordable “The concept’s emphasis on rock n roil music and instore Elvis altars also positions Chuy’s differently than many Tex-Mex operations, Hislop said.

Nation’s Restaurant News: Dave and Buster’s IPO

With two recent planned initial public offerings being pulled back, the IPO market in the restaurant industry shows signs of cooling down.

Dallas-based Dave & Busters Entertainment Inc. on Thursday announced It was not proceeding with Its IPO scheduled for Friday, citing “continued volatility for new issuers in the equity market.” That followed CKE Restaurants’ decision in August to postpone its planned IPO.

“While we received significant interest from potential investors, current market conditions are not optimal for an IPO at this time,” said Steve King, Dave & Buster’s chief executive, in a statement. A representative said Friday the company would not comment further.

The operator of 60 restaurant-arcade locations originally filed IPO plans in July 2011. In September, the company said it expected an offering of 7.69 million shares to price between $12 and $14a share, or between $92.2 million and $107.7 million.

Carpinteria, Calif-based CKE, which operates and franchises 3,263 restaurants under the Carl’s Jr. and Hardee’s brand names, had hoped to raise more than $200 million with an offering of 13.3 million shares of common stock priced between $14 and $16 per share.

“There was a pent-up demand for restaurant IPOs earlier this year,” said John A. Gordon, principal at Pacific Management Consulting Group, on Friday.

Three IPO debuts have been successful: Austin, Texas-based Chuy’s Holdings Inc.; Southiake, Texas-based Del Frisco’s Restaurant Group; and Tampa, Fla.-based Bloomin’ Brands Inc. Less successful was Houston-based Ignite Restaurant Group’s offering, which has become mired in accounting problems.

“With CKE and Dave & Buster’s going down in flames, and the problems with Ignite’s accounting, the market is going Co react,” said Gordon. “It is going to cool things off.”

Unless a brand has particular strengths in the market, Gordon said, the likelihood of successful offerings has grown slimmer. “The perceived ’easy’ IPOs are going to have to go back into the oven,” he said. “The numbers are going to have to look better.”

Dave & Buster’s had swung to a profit of $687,000 in the second quarter ended July 29, from a loss of $3.1 million In the same quarter a year ago. Latest-quarter revenue increased 15 percent to $147.9 million in the second quarter compared with $128.7 million a year ago.

King said in a September conference call with analysts that newer stores in Braintree, Mass.; Nashville, Tenn.; Oklahoma City, Okla.; and Orlando, Fla., helped boost the most recent quarter’s revenues. “I’m especially excited about Oklahoma City,” said King, adding that it’s the first of the new 25,000- square-foot format stores.

Prior to the Oklahoma City store, the chain’s small-store format had been in the range of 15,000 to 17,000 square feet, he explained. “It’s very clear to us at this point that a 25,000-square-foot store is much more able to accommodate the volume that we see and the peak loads that we see in our business,” King said in the call.

Gordon said he was surprised that Dave & Buster’s in its Securities and Exchange Commission S-i filings and road show didn’t address international growth.

“There’s only so many 30,000 or 40,000-square-foot sites in the United States that they need,” Gordon said. “When I looked at the [S-i and other comments and I really feel they made the mistake of talking about growth in the United States. What about international? The United States is so crowded with restaurants. … They need to have great sites.”

In addition, Dave & Buster’s $400 million debt load raised investor eyebrows, Gordon said, adding that the current and prior private-equity owners “had each run a dividend through and added to the debt.”

“These are two lPOs in a row, both private-equity with high debt and fast public-market turnarounds. Maybe it just takes more time to fix these companies up,” Gordon said. “It just seems as if the market sees it as too fast of a flip.

Dave & Buster’s owns and operates stores in 25 states and Canada.

Nation’s Restaurant News: Yum’s New Menu Items

While the economies of its international growth markets, especially China, may be slowing down, Yum! Brands Inc. is going to market in the United States with new product news that may bolster the domestic portions of its earnings, which the company will report next Wednesday.

During the past several weeks, the company’s three brands — KFC, Taco Bell and Pizza Hut — have each rolled out new products that star in comprehensive marketing campaigns. The wave of menu innovation comes at a time when economists fear international markets, which generate 65 percent of Yum’s operating profit, could falter from recently reliable and robust growth.

China, Yum’s key market, could be a particular concern. An Associated Press story reported Thursday that the country’s economy might only grow an expected 7.3 percent. While it would be an enviable figure for the United States economy, a growth rate below 8 percent would mark one of the lowest quarterly expansions in several years and signal weakening demand and consumer confidence.

Austerity measures, a possible banking crisis and depressed consumer confidence also could hamper Yum’s outlook in its Yum Restaurants International division.

If Yum were to look to the United States to make up some of the sales slack, recent performance and new products could be reason for optimism. After same-store sales for its domestic system fell 1 percent for fiscal 2011, they rebounded with a 5- percent increase in the first quarter of 2012.

John Gordon, principal of San Diego-based Pacific Management Consulting Group, an analysis and advisory firm focused on restaurant chains, said Yum should be able to win back sales and trial with its new offerings, provided the company makes up for lost time in the United States and stays aggressive in its advertising.

“I don’t understand why their new-product development has been so slow in the United States,” he noted. “This business is fundamentally driven by new-product news. … I’m impressed they have this new news rolling ahead, but they’ve got to sustain that and have to support it with good media. You need to bang on that drum for at least a year to get people’s involvement with the products up.”

Take a look at some the most recent menu rollouts from KFC, Taco Bell and Pizza Hut, as well as analysis of how the offerings could affect Yum’s performance.

KFC: Original Recipe Bites

This week, KFC introduced Original Recipe Bites, a more portable, bite-size version of its chicken prepared with the same 11 herbs and spices of its original recipe. The item is available a la carte or in combo meals with either six or 10 pieces. The chain faces competition for chicken items at snack time not only from Chick-fil-A and Popeyes, but also from McDonald’s and Burger King, which currently are selling a Spicy McBites popcorn chicken item and Chicken Strips as part of a new menu, respectively. Gordon noted that the bite-size snack might be a defensive or reactionary play given that landscape, but the item leverages the strength of KFC’s recipe and still is on trend with how customers snack today. “I think the bites could be a nice transition point so that KFC takes some of the focus off of big chicken-onthe-bone items and can broaden its appeal,” he said. “They have to be a little careful with a combo at an introductory price of $3.99 because that begins to set expectations with what it should be priced at going forward.” One concern Gordon has — and which he said a friend who manages 45 franchised KFC locations shares — is that KFC did not include a large option for the Original Recipe Bites that could compete with a 20-piece order of McDonald’s Chicken McNuggets. “Why wouldn’t they have a 20-piece or larger order?” Gordon said. “This is something KFC could have done ages ago, so why did this take so long? Why wasn’t there a larger portion size sold in order to complement the larger purchases for families or groups that KFC was intended for?”

Pizza Hut: P’zolo and $10 Dinner Box

Yum’s Pizza Hut brand has been extremely prolific the past 12 months with new products, either in the form of a new bundle like the $10 Dinner Box or a new item like the P’zolo, a sandwich platform similar to its P’zone calzones. Initial consumer response to advertising for the P’zolo has been favorable, according to data from marketing research firm Ace Metrix. The ad for the sandwich not only garnered a high score for its effectiveness and persuasiveness, but it also positioned the P’zolo well against Subway’s sandwiches. Ace Metrix executive vice president Jonathan Symonds said that consumers’ comments on the ad mentioned Subway three percent of the time, a significant amount given that Pizza Hut did not name the rival for its new sandwich platform. Gordon said the P’zolo “looks like a great product” and is an effective way to use the restaurants’ resources during lunch hours when the units are open and have staff waiting to be utilized.

“The advertising was extremely well done, and I’m sure they’ll get some trial,” he said. “But it might not be so much to move the needle a tremendous amount. They may get more incremental traffic for a $5 sandwich versus a $10 pizza, so traffic could go up a little and the check could go down a little.” However, while the P’zolo is a nice daypart extension and the $10 Dinner Box can get some incremental traffic from the family portion of the customer base, “the customer would perceive a new pizza as more interesting and relevant,” Gordon said. “If we’re looking at different products for Pizza Hut, the P’zolo is something they should have done sooner and the $10 Dinner Box is interesting, but I would rate them fairly low among transformational traffic drivers,” he said. Among Gordon’s consulting clients is a large group of Domino’s franchisees, he disclosed.

Taco Bell: Cantina Bell menu and Doritos Locos Tacos

Gordon and the investment community are most bullish on Taco Bell’s prospects for a sales turnaround based on the strength of the recently introduced Cantina Bell menu and the Doritos Locos Tacos, which debuted back in March. In a research note, Mark Kalinowski of Janney Capital Markets projects Taco Bell’s same-store sales in the United States to be above 11 percent when Yum reports second-quarter earnings next week. Taco Bell chief executive Greg Creed said during an investor presentation in May that Doritos Locos Tacos in particular were a transformative product, as the chain sold 100 million of the item during its first 10 weeks in the system. Creed also noted that 90 million of those transactions were incremental. While Gordon is skeptical of the 90 million incremental-transaction figure without seeing data for point-of-sale and customer intercepts, he nonetheless expects a big quarter from Taco Bell based on menu innovation. “The average check component will be up more, and they’re definitely going to have more traffic and visibility with all the marketing they’re doing,” he said. Taco Bell officials said the Doritos Locos Tacos line would be ripe for future extensions, including a Cool Ranch flavor before year-end. As for the Cantina Bell menu, with a burrito or bowl made with higher-quality ingredients developed by celebrity chef Lorena Garcia, Gordon speculated that the effects may not last as long. “Cantina Bell can’t possibly hurt the business, but it’s folly to assume that Taco Bell would be competing any way with Chipotle or any of the fast-casual concepts,” he said. “It’s a completely different market and purchase occasion. I think they will have some trade-up from existing customers, and they’ll get some trial, but I see this more as a short-term benefit rather than repositioning the entire brand.” Louisville, Ky.-based Yum operates or franchises more than 37,000 restaurants worldwide.

LATimes.com: Carl’s Jr. Owner Postpones IPO

CKE Inc. scrapped plans to take the Carl’s Jr. and Hardee’s operator public this week as investors balked at the poor timing, shaky financials and harsh head winds against the fast-food industry.

The fast-food chain, which started as a hot dog stand 71 years ago in Los Angeles, was unable to persuade investors to buy into its initial public offering of stock. CKE postponed the deal at the last minute Thursday night, citing market conditions.

But analysts said the biggest reason CKE put off the IPO was that owner Apollo Management made a series of miscalculations that scared off investors. Critics said CKE, loaded with $1.5 billion in debt, was just not ready to go public.

“Apollo milked it and destroyed the balance sheet, as is typical of private equity firms,” said Francis Gaskins, editor of IPOdesktop.com in Marina del Rey. “It then takes awhile for the company to work itself back into profitability, and Apollo didn’t have enough time with CKE.”

This would have been the second time that CKE had gone public after founder Carl Karcher listed the company’s shares in a well-received IPO in 1981.

This time around, the Carpinteria fast-food giant is a drastically different company. Apollo bought CKE and took it private two years ago for $700 million, then began taking on massive amounts of debt.

Much of the money Apollo would have raised in the IPO was expected to pay down junk bonds that the firm used to acquire CKE. The company had expected to raise $200 million during the IPO, and Apollo would have remained its biggest shareholder.

In addition, Apollo paid itself $190 million in dividends from CKE last year, according to regulatory filings. That includes $13.8 million that CKE would hand over to Apollo to end a management services agreement.

The scenario is typical for private equity firms, which use debt to pay themselves earlier and then cash in again after an IPO. Most private equity takeover teams wait four or five years before releasing companies onto the public markets, giving them time to stabilize away from the public eye.

“They used CKE similarly to a credit card,” said John A. Gordon, a principal with Pacific Management Consulting Group, which advises restaurants. He said the IPO process was “an embarrassment and a total waste of time for Apollo and CKE.”

Another financial factor that weighed on investors is that CKE has not shown an annual profit for two years, and in 2011 suffered a $19.3-million loss. Although sales have grown modestly, much of the company’s cash has been used to pay interest on the debts it owes.

CKE, in an effort to cut costs, even stopped paying matching contributions to employees’ 401(k) retirement accounts.

“The company’s weak financials made the IPO as hard to digest as some of the fast-food it serves,” said IPO research firm PrivCo Chief Executive Sam Hamadeh, who added that he had spoken with investment managers who passed on CKE.

Another fumble for Apollo and CKE was the IPO’s timing, analysts said.

Early August has always been a slow period for such launches, with much of Wall Street on vacation and the remainder worn out by the debuts that tend to swarm the market earlier in the summer. CKE would have been the fifth restaurant company to go public since June.

The most recent, Outback Steakhouse owner Bloomin’ Brands Inc., launched Wednesday. But shrinking demand forced the company to price at $11 a share, below its originally expected $13 to $15 range, while also selling fewer shares than it had hoped.

Both CKE and Apollo planned to offer about 6.7 million shares. After Bloomin’ Brands’ subdued debut, analysts said investors probably balked at CKE’s price range of $14 to $16 a share.

“Investors are so jittery right now that expectations going forward are conservative,” said Nick Setyan, a restaurant analyst with Wedbush Securities. “Appetite for these types of IPOs, particularly for these old, mature stalwarts, has gone away.”

Indeed, there’s heavy competition from younger brands such as Smashburger and Five Guys Burgers and Fries, which have ambitious expansion plans and more buzz. Although CKE has been pushing its store remodeling efforts and international development, its existing base of more than 3,000 locations makes analysts skeptical that it is capable of a major growth spurt.

CKE has also struggled to distinguish itself in recent years, according to research.

Hardee’s and Carl’s Jr. sales are outranked by chains such as Wendy’s, Jack in the Box and Dairy Queen, according to QSR magazine. Carl’s market share of the burger segment fell below 2% last year for the first time since at least 2005, compared with Burger King’s 12% and McDonald’s 49.6%, according to research group Technomic.

“They’re average for speed, average for value, average for food quality,” said Mark Kotkin, director of survey research for Consumer Reports. “They don’t stand out particularly.”

It was not known if Apollo will revive the IPO at a later date.

But if CKE does list its shares on the New York Stock Exchange, it would be a far cry from the first time the Southern California native debuted publicly in 1981. Back then, a heady sense of optimism pervaded the $1 5-million-a-year enterprise, said Loren Pannier, who was then serving as chief financial officer.

“We were going from a small little regional chain to something bigger,” said Pannier, now a retiree in Newport Beach. “It was like going from the minor leagues to the big leagues.”

KnoxNews.com: Darden Exec at Ruby Tuesday

After a five-month search for a new chief executive, Maryville-based Ruby Tuesday has turned to the nation’s largest full-service restaurant chain to fill its top job.

James “J.J.” Buettgen resigned Monday from his position as senior vice president and chief marketing officer at Darden Restaurants to become president and CEO of Ruby Tuesday.

Buettgen, 52, will begin his new roles effective Dec. 1, when he takes over for Ruby Tuesday founder Sandy Beall, who announced in June that he was stepping down after 40 years. Beall previously said he hoped a replacement would be named before Thanksgiving.

Meanwhile, lead director Matthew Drapkin, a partner in the investment firm Becker Drapkin Management, will take over as chairman of the board, also effective Dec. 1.

John Gordon, principal at San Diego-based chain restaurant consulting firm Pacific Management Consulting Group, said Buettgen’s hire appeared to be a good one.

“It will give a bit of aura to Ruby Tuesday to take a high-level executive out of Darden to join them,” he said.

While Darden is facing its own challenges, Ruby Tuesday is in far worse shape, he added.

However, Darden has multiple distinct brands, including Red Lobster, Olive Garden and LongHorn Steakhouse. Experience operating those could help Ruby Tuesday, which has recently been expanding its own portfolio to include its in-house seafood concept, Marlin & Ray’s, and Lime Fresh Mexican Grill, which it acquired in April.

“If there’s any shot at all at making a go of the multiple brands Ruby Tuesday has kicked off, J.J. and his team might be able to assess it,” Gordon said.

In a statement posted on its website, Darden indicated that Buettgen had an interest in leading a company.

Before his most recent role at Darden, Buettgen served as Darden’s senior vice president of business development and as president of Smokey Bones Barbeque & Grill. He has more than 20 years of experience in the restaurant and consumer industries, including roles at Disneyland Resorts, Brinker International and General Mills.

“It is an honor to lead Ruby Tuesday, and I am excited to join the company and work with the seasoned management team and dedicated team members to create value for our shareholders. I believe this will be an exciting period of growth for the company and I am eager to begin,” he said in a news release.

Buettgen holds a bachelor’s degree in finance from Miami University in Oxford, Ohio, and a masters in business administration in marketing management from the University of California at Los Angeles.

The Globe and Mail: Burger King’s Unappetizing IPO

It only seems like Bill Ackman spends every waking moment haranguing Canadian Pacific Railway’s management. Instead, in his spare time, the activist investor has been preparing the iconic U.S. fast-food chain Burger King Corp. for a public offering, with shares set to trade in June.

At this time, we offer no comment about Mr. Ackman’s plans for CP. But a look at his Burger King presentation, coupled with the disclosure of the proposed stock offering, makes us wonder, in the words of Burger King competitor Wendy’s: Where’s the beef?

Indeed, the success of Wendy’s Co. highlights how Burger King’s return to the public markets its second IPO since 2006 – comes at a suboptimal time for the chain. Wendy’s overtook Burger King in U.S. sales in 2011 for the first time, dropping the chain to third place (the mighty McDonald’s is first).

Per Mr. Ackman’s own presentation, Burger King’s average sales per restaurant in North America sit at $1.15-million (U.S.), with Wendy’s at $1.46-million and McDonald’s at $2.43-million. Closing the sales gap with Wendy’s, Mr. Ackman says, would increase “EBITDA minus capex,” or earnings before interest, taxes, depreciation and amortization minus capital expenditures, by about $200-million, or 40 per cent of the company’s 2011 figure.

Is Burger King poised to do that? Clearly unclear. Mr. Ackman is only able to tout four consecutive months – from December through March – in which Burger King’s North American same-store sales increased. The numbers were profoundly negative for much of 2011; the company’s securities filings say it closed out 2011 with a decline of 3.4 per cent in same-store sales. (Its international locations, where growth was better, weren’t enough to make the companywide number positive for 2011.)

When a buyout firm affiliated with Mr. Ackman took Burger King private in October, 2010, it was widely assumed the tough turnaround decisions would be made out of the public’s eye. One of the presumed fixes was a significant investment in restaurant remodelling and upgrades: John Gordon, principal of California-based restaurant consultancy Pacific Management Consulting Group, wrote in a blog post on Seeking Alpha that at the time of the 2010 going-private transaction, Burger King had a capitalinvestment backlog of at least $2-billion.

Well, Mr. Ackman has a plan for that: Get the Burger King franchisees to pay for it. Various media reports have suggested the franchisees haven’t bought into the idea, and Mr. Ackman’s own numbers make clear why.

He suggests a franchisee who selects a $250,000 “low cost remodel” can achieve a 10-per-cent sales uplift and generate extra EBITDA of $28,000.

But, says Mr. Gordon, the restaurant consultant: “The problem is no one in the quick-serve restaurant space has achieved that. McDonald’s gets double-digit same-store sales bumps with a scrape and rebuild, but that is not what we’re talking [about]. Jack in the Box has done a nice job of remodelling, but reported low/minimal lifts in 2010-11, for example. The norm is single digits.”

Substitute a 5-per-cent sales lift in Mr. Ackman’s model, and the EBITDA is around $14,000 – barely more than the $12,000 in interest costs a franchisee incurs by borrowing 80 per cent of the remodelling project at 6 per cent annually (again, Mr. Ackman’s example.)

Much of the Burger King case is based on similar beef-patty-in-the-sky projections; Mr. Ackman says that while the company currently has just over 5,000 locations worldwide, it has the potential for more than 23,000, based on the U.S. rate of penetration of one restaurant for every $2-billion in gross domestic product.

The “reasonable” multiple for a newly public Burger King, Mr. Ackman believes, is 13 to 16 times EBITDA minus capex, a metric likely chosen because the company spends barely any money at all on capital expenditures. At the top end of that range, Burger King would trade above McDonald’s, which has already executed on nearly everything Mr. Ackrnan hopes Burger King can do.

At some point soon, someone may suggest to you that buying Burger King shares gets you a piece of a top -flight fast food company. That, I submit to you, would be a Whopper.

Franchise Times: Company Stores

Some franchisors like their restaurants so much, they buy them back from the franchisees and convert to company owned. What’s behind the so-called de-franchising trend? Cash reserves and good unit economics.

Frisch’s Restaurants had a deal in March to sell its 28 Midwestern Golden Corral units to Aziz Hashim, the multiple-concept franchisee. But the chain’s franchisor saw the price tag and took an unusual step—Golden Corral swooped in to buy the restaurants itself.

Golden Corral was armed with a contractual option granting first right of refusal. “It just made sense for us to take this opportunity to add to our portfolio,” said Bob McDevitt, senior vice president of franchising for the 485- unit chain, based in Raleigh, North Carolina. “As we say to our franchisees, we like to eat our own cooking.”

One of the trends in franchising in recent years has been re-franchising, or the sale of company- owned units to franchisees. Numerous concepts, including Yum! Brands, Burger King, Jack in the Box and Jamba Juice, are unloading company-owned units as fast as they can. They believe they’ll do a better job if they concentrate on franchising, and franchisees typically outshine corporate when operating the restaurants.

Now a counter-trend is emerging—some call it de-franchising—in which a number of concepts seek to buy franchise units and grow company operations. Panera Bread, Buffalo Wild Wings, Ruby Tuesday, Texas Roadhouse and Chuck E. Cheese, among others, have been focusing on running more company-owned units.

For franchisees, this might actually be a good thing—a sign that the franchisor is bullish about the system and its future. While each system has different motivations, and some are “de-franchising” more than others, those chains buying franchisee-owned units are more likely to have better unit economics than are those systems selling company stores.

De-franchising can be seen as a “bull signal,” said John Gordon, a restaurant analyst with Pacific Management Consulting Group in San Diego. Refranchising, on the other hand, is more of a bear signal, an indication that the franchisor believes it would be more profitable franchising the system than running its own restaurants.

But there is a downside for franchisees. Franchisors that buy up units often get them at a low price, because they either get involved in the sale early in the process or, more likely, they have the right of first refusal to buy those restaurants. Chains that exercise that right tend to drive off potential buyers, which keeps prices low.

Right markets, right price

Two of the most successful publicly traded franchises in the country, Panera Bread and Buffalo Wild Wings, are both acquiring franchisees, albeit at a pace the chains call “opportunistic,” which means they buy franchisees that are in the right markets, at the right price.

In 2008, Panera Bread had 725 franchise units, 58 percent of its 1,252 total unit count. Today that percentage is down to 52 percent. The number of company-owned Panera Bread operations grew from 527 in 2008 to 740 last year.

“Panera continues to want to be a franchise company,” a Panera spokesman said, but will move to buy when the return is right. “Some of our franchisees are in a different place in life, whether retirement or simply stepping down. When a franchisee does want to sell, we evaluate the opportunity and will move forward on an acquisition if we believe we will earn an acceptable rate of return.”

Similarly, Buffalo Wild Wings saw its percentage of franchisee-owned units fall from 64. 6 percent in 2010 to 60.1 percent last year. On the company’s most recent quarterly conference call, CEO Sally Smith said the company is “open to acquiring attractive franchise restaurants.”

Both chains boast store-level operating profits of 20 percent or more. And that’s the point. When stores are running strong and making good cash, franchisors have a greater incentive to run their own stores. “If you’re really optimistic about your ability to create value and grow profit dollars, you’re less likely to share that,” said Sara Senatore, analyst with Bernstein Research in New York.

She cited healthy store-level profit margins at Chipotle, which does not franchise any units. “A great poster child for somebody that doesn’t want to share with anybody is Chipotle. They like their margins of 25 to 26 percent. They don’t need to franchise.”

Other chains are aggressive about buying out franchisees. Chuck E. Cheese, the Texas based pizza and games chain, is down to 36 domestic franchised units as the company looks to operate all of its units in the United States. The company is franchising in international markets, however. Like the other concepts, its restaurant margins run in excess of 20 percent, thanks to its high-margin video games business. Similarly, the steak chain Texas Roadhouse has stopped franchising and will buy up franchisees as they come for sale.

“If you have a restaurant with a couple million” in average unit volume “and get a margin exceeding 20 percent, that’s a likely candidate with de-franchising,” Gordon said.

Life cycle matters

At least part of the reason is due to life cycle. Chains on a growth trajectory feel no need to franchise because their sales are booming and their profits are strong and they have the cash to add units. As chains age, sales stumble and margins shrink, pressure mounts for them to sell off company stores and focus on franchising. Companies sacrifice the cash restaurant operations can bring in for lower overhead and capital costs. In many cases, franchisees can do a better job operating those stores.

“It’s a function of unit economics, and where they are in the growth cycle,” Senatore said. Mature companies sell a large annuity (profits from restaurants) for a smaller annuity (royalty payments from franchisees) and less risk. Thus, older chains have been more likely to re-franchise, such as Yum! Brands’ chains KFC, Pizza Hut and Taco Bell, and Miami-based Burger King, which is quickly selling company units to franchisees worldwide.

There are certain exceptions. Jamba Juice is a relatively young brand and it has been refranchising, or selling company stores to franchisees. Ruby Tuesday is an older brand with weaker economics and it has been de-franchising, or buying up franchisee-owned stores, largely because it sees itself as an operator.

There’s one company that’s actually doing both. Jack in the Box has been refranchising units in that chain for years in an effort to become 80 percent franchisee-owned. But the company has been more likely to develop units under its high-growth fast-casual brand, Qdoba, which has been moving in the opposite direction—toward more company-owned units in markets where it prefers to run company- owned stores.

Dow Jones Newswires: Yum Selling Franchise Units

Yum Brands Inc. (YUM), the parent company of KFC, Pizza Hut and Taco Bell, is selling hundreds of its U.S. restaurants to franchisees in an effort to further distance itself from the volatility of the owner-operated restaurant business.

The Louisville, Ky.-based company, which now earns the majority of its profits internationally, plans to reinvest the money from sales of its domestic restaurants in building new ones in countries such as China and India, where economic growth is stronger.

The so-called refranchising of its U.S. restaurants will help the company boost its profit margin at home. But there are risks to relinquishing corporate control of a brand’s image, and it’s tough to find restaurant operators who are willing to expand in the current economic environment.

In the U.S., Yum plans to reduce its ownership of Taco Bell restaurants to 16% from 22%, and its Pizza Hut and KFC stakes to 5% from 7% and 9%, respectively.

We tend to reduce our ownership of highly-penetrated, low-growth or lower-performing businesses, and we increase our ownership in lower-developed, higher-growth businesses, where we think we can get better returns,” Chief Financial Officer Rick Carucci said during a recent investor presentation. Yum says its returns on invested capital, reaching more than 22%, are some of the highest in the industry.

Five years ago, less than one-third of Yum’s company-owned stores were in emerging markets. Because of refranchising in developed countries, and increased equity stakes in China and elsewhere, now about 60% of company-owned stores are in emerging markets, and Yum expects that figure to reach 70% by 2014.

Refranchising is fairly common among mature restaurant chains because it insulates the parent company from the impact of external factors like unemployment and commodity costs. It also relieves them of many capital expenses associated with keeping stores’ kitchens, technology and decor updated, says John Gordon, a principal at Pacific Management Consulting Group, an advisory firm for chain restaurants.

McDonald’s Corp. (MCD), which often serves as a best-practice model for the fast-food industry, maintains about 10% ownership of its restaurants in the U.S.

“Older brands refranchise because return on invested capital becomes so important, and so mathematically, it makes sense for them to do so in mature markets and develop in places like China,” Gordon said.

With the latest refranchising, Yum says it has achieved about one percentage point of margin expansion in the U.S., most recently reporting a profit margin of 14.4%.

“If franchisees have access to capital and are good operators, then sure, go for it,” Gordon said. ’But at the same time, you can’t just ignore the U.S.; it’s still largest economy in world.”

Yum is in the midst of attempting to turn around its U.S. business, after seeing sales at established locations slip last year. Gordon says stepping further away from the ground floor of restaurant operations can make a revamp like that all the more difficult.

“But restaurant companies divesting of their locations doesn’t mean they’re abandoning brand; it just means they don’t think they’re good operators,” says Adam Hanft, a brand strategist and CEO of Hanft Projects. “Yum has been aggressive in refranchising, so it’s clear strategically that they don’t want to operate in the U.S.”

Still, the struggling U.S. economy is limiting the number of franchise operators who have the money and desire, to expand– especially in brands that aren’t doing so hot.

Adding to the hurdles, the U.S. market is heavily saturated with fast-food competition and banks are especially tight on loans. Franchisees don’t always have the access to cash that the parent company would for fixing up older units or investing in new products and marketing, necessary to orchestrate a resurgence of a chain.

Yum remains optimistic about its recent progress in the U.S. and the potential for its brands under a more franchised model. “We realize there Is much work to be done,” said Chief Executive David Novak. “And we expect more consistent performance going forward.”

 

Bloomberg: Taco Bell Shares Recouped

For Yum! Brands Inc. (YUM)’s Taco Bell, thinking outside the bun means going gourmet.

The chain that once used a talking chihuahua to sell chalupas is working with Miami chef Lorena Garcia to win back eaters who have become accustomed to Chipotle Mexican Grill Inc.’s (CMG) style of Mexican fare. Menu items will include Chipotle staples such as black beans, cilantro rice and corn salsa, Greg Creed, Taco Bell’s president, said last month.

Taco Bell could use a boost. The chain has shrunk by more than 1,000 stores since 2000 and has been left behind as Yum expanded its KFC and Pizza Hut chains overseas. Chipotle, in the meantime, has been a stock market star, its shares tripling since the end of 2009.

“They have a tough road ahead to really reposition themselves as a direct competitor to Chipotle or Qdoba,” Mike Brumagin, a former Yum Brands senior project manager and Taco Bell store owner, said in an interview. Taco Bell has “always been about value.”

Taco Bell scored the lowest in food quality and atmosphere among limited-service Mexican eateries, including Chipotle and Jack in the Box Inc.’s Qdoba Mexican Grill, according to a September survey from Nation’s Restaurant News and consultant WD Partners.

Slow Growth

Taco Bell is also in a market that is growing slowly. Sales at so-called limited-service restaurants increased 1.9 percent to $195 billion in 2010 and Taco Bell was behind McDonald’s Corp. (MCD), Subway, Burger King Holdings Inc. and Wendy’s Co. in market share that year, according to Technomic Inc. The Chicago- based researcher hasn’t released 2011 figures.

Almost half a century old, Taco Bell was started by Glen Bell in Downey, California. PepsiCo Inc. (PEP) bought the taco restaurant in 1978, a year after acquiring Pizza Hut. Pepsi later bought the KFC fried chicken chain and spun off all three to become Tricon Global Restaurants Inc. in 1997. In 2002, Tricon became Yum Brands (YUM), now based in Louisville, Kentucky.

During the past decade, the brand has positioned itself as an affordable option for the young guy who “loves the lower price points,” said Peter Saleh, a restaurant analyst at Telsey Advisory Group in New York. Taco Bell has touted value meals with its “Why Pay More!” slogan and recently advertised a 12- pack of crunchy tacos for $10.

‘Younger Crowd’

Last year, the chain received negative publicity when Beasley Allen, a Montgomery, Alabama-based law firm, filed a class action lawsuit claiming Taco Bell didn’t use enough real beef in its food to label it as such. Chief Executive Officer David Novak called the claim “absolutely false” and said the restaurant’s seasoned meat is 88 percent real beef. Beasley Allen dropped the suit.

For a chain that made its name peddling cheap eats in the wee hours of the morning, a higher-priced menu may not appeal to the restaurant’s primary customer. The Taco Bell frequenter is an 18- to 24-year-old, value-conscious male, says Jeff Bernstein, an analyst at Barclays Capital in New York.

“It’s definitely targeted to a younger crowd,” he said.

Former franchisee Brumagin also is skeptical and says introducing somewhat fancier, higher-priced food could go the way of a healthy menu experiment in the mid-’90s that he called an “abysmal failure.”

Taco Bell is clearly taking cues from its higher-end rival.

“Chipotle is an opportunity because what it’s done has expanded the trial and usage of Mexican food,” Creed said at the investor meeting in New York Dec. 7. “It’s got people to believe they can pay $8 for a bowl or a burrito.”

Taco Bell can make food “every bit as good as Chipotle,” he said, and instead charge less than $5.

Hot Fritos

While Chipotle’s $7 or $8 burritos include ingredients such as naturally raised pork seasoned with thyme and juniper berries, Taco Bell’s menu now features the 99-cent Beefy Crunch Burrito that’s topped with Flamin’ Hot Fritos.

Steve Ells, a classically trained chef opened the first Chipotle in 1993. Since then, the company has grown to more than 1,100 U.S. locations while the menu has stayed relatively simple and consistent. Taco Bell has about 5,600 U.S. stores. While Chipotle’s shares more than tripled from the end of 2009 through last year, Yum gained 69 percent during the same time and the Standard & Poor’s 500 Restaurants Index rose 67 percent.

Yum advanced 2 percent to a record close of $60.92 in New York today. The shares rose 20 percent in 2011.

Other fast-food chains have successfully remade themselves. Oak Brook, Illinois-based McDonald’s gradually changed into a somewhat more adult and upscale restaurant by introducing McCafe espresso drinks and splashing its stores with earth tones, said John Kokoska, a managing director at BDO Consulting Corporate Advisors LLC in Atlanta who advises restaurants.

KFC Focus

Such an undertaking hasn’t been a priority at Yum, which has been more focused on expanding its KFC and Pizza Hut chains in China.

Since 2005, when Yum began reporting its China division separately, it has more than tripled revenue there while increasing store count more than 80 percent to about 4,200, topping McDonald’s 1,300 locations in the nation.

“Investors are in the stock as a play on China,” Jack Russo, an analyst at Edward Jones & Co. in St. Louis, said in an interview. Instead of a place for a quick, cheap meal, Yum restaurants in China are considered a nicer place for a family to go out for dinner, he said.

Taco Bell, meanwhile, hasn’t expanded much overseas. Yum has said it plans to sell hundreds of its U.S. stores to franchise owners. While the chain has stores in 21 countries, the U.S. accounts for 96 percent of its locations.

“It’s the tale of two cities,” John Gordon, principal at Pacific Management Consulting Group, a restaurant adviser in San Diego, said in an interview. Yum has “lost the capability to be able to run and work U.S. stores.”

Strategy Details

In the coming months Taco Bell will “be announcing further details” about the menu and strategy, Rob Poetsch, a Taco Bell spokesman, said in an interview.

Taco Bell in 2010 generated about $400 million in operating profit, about 60 percent of the company’s U.S. total and 23 percent of its global earnings by that measure.

Yum has sought to sell franchises back to U.S. store owners, in part to minimize its risk from rising raw-ingredient prices, Gordon said. In the quarter ended Sept. 3, U.S. restaurant margin narrowed to 12.1 percent from 14.4 percent last year, Yum said in a filing.

Turning around a fast-food chain with fancy new menu items can be pricey, especially for franchised store owners, said Kokoska, the BDO consultant.

“It might mean kitchen equipment where the franchisee has to cough up the cash,” he said. “It isn’t just a matter of buying better ingredients.”

Asbury Park Press: Chain Restaurants Battle

Bob Watson has his eyes on New Jersey.

And why not? Watson, the chief executive officer of 5 & Diner, a restaurant company, sees the Garden State as ground zero for diners, and diners are what his company is all about.

“I know you’re crowded there,” Watson said. “You go to Red Bank, you can hit a diner in 10 miles in any direction. … But the fact of the matter is, we think our diners are a little bit different in that we think they’re kind of cool.”

So different that Watson hopes to open up 30 franchised diners, which in the 5 & Diner model are vintage 1950s retro, over the next five years around New Jersey, in areas such as Toms River, Freehold, Edison and Somerville. The family restaurants don’t serve alcohol.

He’s looking for franchisee candidates and locations in New Jersey, a state that many chain restaurants have shied away from over the years.

Sure, you know there’s a Ruby Tuesday’s, Five Guys or Subway nearby. But as a percentage of its overall restaurant base everything from delis and pizza joints to casual and fine dining, New Jersey has among the lowest concentrations of chain restaurants in the United States.

Of the state’s 20,339 restaurants, only 4,932, or 24.49 percent, are chains, restaurant companies with 10 or more locations, according to CHD Expert, a food service consulting firm based in Chicago. As a percentage, that’s fourth lowest in the U.S. Washington, D.C., is third, New York is second and Vermont is the lowest.

It’s different from other parts of the country where chain restaurants followed the construction of the interstate highway system and expanded from the 1950s through the 1970s, said John A. Gordon, principal and founder of Pacific Management Consulting Group in San Diego.

For one thing, New Jersey has a strong base of independent restaurants, including diners and those preparing Italian and ethnic food, Gordon said.

“We all know to get really good Italian food, that’s where you’ve got to go, really truthfully,” Gordon said.

As land became available for restaurants, local entrepreneurs picked up prime spots and developed a brand and loyalty, Gordon said. Chains such as McDonald’s grew. Casual dining restaurants such as Applebee’s followed, but they didn’t come in as many numbers as they did in other parts of the country, he said.

Costs are a major factor behind that, experts said. Rents and the price tag to build out a restaurant – filling it with a kitchen, tables, chairs and decorations – to get it ready to open are high, said Chuck Lanyard, president of the Goldstein Group, a commercial real estate brokerage in Paramus.

The cost of a liquor license, a scarce commodity in many towns because they are issued based on the size of the local population, can cost $250,000 to $1 million.

“When you take all those expenses in, people are less likely to look to open up in Jersey if they can look to open up in other areas where it’s less expensive,” Lanyard said.

The high costs are an added pressure to stay in business.

Franchisees have to pay a portion of its sales to a chain restaurant’s franchisor, said Stacy Gilbert, a partner at Citrin Cooperman in Springfield.

“You really have to have enough margin in the company to be able to do this and yet still walk away with a profit for yourself,” Gilbert said. “You can basically be running your business at a loss and still have to pay royalties.”

It leaves companies to wait for the right location to open.

“In New Jersey, there is just a lot of red tape when it comes to developing and getting stores open,” said Jack Koumbis, chairman of the New Jersey Restaurant Association. “The cost of it is almost prohibitive.”

For example, an Applebee’s may cost $2 million to $2.5 million to build, said Koumbis, chef and proprietor at The Assembly Steakhouse in Englewood Cliffs.

“If they are not doing $2 (million) to $3 million in that location a year, it doesn’t make any sense for them to do.”

It’s expensive to run or open a chain restaurant even without the expense of a liquor license.

The Five Guys chain first came to Parsippany in 2007, and it recently relocated from its storefront in the Pathmark Shopping Center in Lake Hiawatha to nearby Route 46 in Arlington Plaza. The restaurant is owned by Genco Development, a partnership of five local guys with exclusive franchise rights to Morris, Passaic and Sussex counties.

The move has given the crew a larger exhibition kitchen. Customers can place their order and walk down the line to watch it being assembled, or grab a table and enjoy unlimited free peanuts while they wait for their number to be called.

“Same Five Guys, new vibe,” says Brian McHugh, director of operations for Genco.

Part of the success of the company is the franchises are community-oriented, McHugh said. So when they made the move, “We wanted to make sure the move worked for our team,” he said. “Liliana Luna is one of our original crew members, and we found out that now it’s a little farther for her to walk to work.”

Chip Ohisson, Genco managing partner, added: “So we bought her a bike. She’s one of our key employees and we take care of our crew.”

Since the first location, Genco has opened franchises in Denville and Madison, and on March 28, they opened Five Guys’ 997th location at 246 Route 10 West in East Hanover, near Marshall’s and Dick’s Sporting Goods.

Bucking Holiday Tradition, Chains Put Deals on Menus – The Wall Street Journal

Bucking Holiday Tradition, Chains Put Deals on Menus

NEW YORK—It’s not the season for restaurant discounts, but this year, casual dining chains are pushing price promotions throughout the holidays.

With consumers traditionally in the mood to splurge for Christmas and New Year’s, both on calories and cost, restaurants have pulled back on their discounts around this time.

But this year, with shoppers cherry-picking their stores based on deals, restaurants fear they’ll choose dinner outings the same way. Chains like Brinker International Inc.’sEAT -0.99% Chili’s Grill & Bar and DineEquity Inc.’s DIN -0.16% Applebee’s are using more discounts and advertising than in past years, catering to the cost-conscious consumer at a time when inhibitions should be lower.

In November, 61% of Americans said they plan to spend less on eating out in the next six months, according to Harris Poll survey, which is similar to the survey’s results from May, despite restaurant operators’ early predictions that business would pick up with the new year.

Customers leave an Applebee's restaurant in Redwood City, Calif. earlier this year.

Customers leave an Applebee’s restaurant in Redwood City, Calif. earlier this year. BLOOMBERG NEWS

With jobless claims remaining stubbornly high and commodity inflation continuing, restaurants can’t afford a slow start to 2012. Technomic, a food industry consulting and research firm, said it has seen a large increase in holiday promotions this year, with November promotions nearly double for casual dining chains versus last year, according to Technomic’s MenuMonitor.

Applebee’s has been running heavy television advertising for its “Sizzling Entrees,” noting prices as low as $8.99. Chili’s is pushing major discounts on its website, with a “30 Days Of Daily Deals” promotion around Christmas, offering a coupon a day for things like a free kids meal or “Chips and Queso” appetizer, each with the purchase of an entree.

DineEquity’s IHOP is promoting four new kinds of “Holiday Hotcakes” for $4.99, which it hopes will jibe better with customers than some of its past efforts, like all-you-can-eat pancakes, which proved ineffective at driving traffic or profits.

“December is traditionally one of the higher sales months because of Christmas dinners and gatherings, all the shopping, not to mention people drink a little more, so normal restaurant theory was always to pause on TV and low-end deals until January,” said John Gordon, a principal at Pacific Management Consulting Group, an advisory firm for chain restaurants.

However, times have changed. Because the industry is so much more competitive these days, restaurants are worried if they “go dramatically dark” from advertising or offering price-promotions, another chain will take advantage of that, he added.

Darden Restaurants Inc., DRI -0.90% which held back from margin-pressuring deals throughout the recession, said last week on a conference call that now it’s starting to feel the pain of guest traffic declines as a result of the continued heavy discounting among competitors and the new mentality of consumers coming out of t he economic crisis.

The company says that going forward, it plans to focus more on value in its advertising, especially at its lately struggling Olive Garden chain. Analysts note Olive Garden appears to be running more television ads than it usually does this time of year. But even still, it’s holding off from posting prices on the commercials for its new baked pastas.

“During the holiday season, the marketing team at Olive Garden thought, a little more celebratory, a little bit less emphasis on value, a dish that was more distinctive, and they were comfortable…that this was an appropriate offer for the season,” said Drew Madsen, chief operating officer at Darden.

Write to Annie Gasparro at annie.gasparro@dowjones.com

Restaurant Research LLC Think Piece – Private Equity Firms, Corporate Management and Franchisees: A Cultural Stew

ChainRestaurantData.com – Restaurant Research LLC Think Piece

Contact: Phil Mangieri, Partner

Phone: 203-938-4703

February 23, 2011

Private Equity Firms, Corporate Management and Franchisees: A Cultural Stew

• Last week, we asked Trinity Capital for some color on current return benchmarks for private equity investments in the restaurant space. Please read Trinity’s comments here which we believe are particularly timely for all restaurant industry players.

• This week, we asked Pacific Management Consulting Group to add further insight into the cultural impact of private equity acquisitions in the restaurant space.

• According to Pacific Management, private equity firms, chain restaurant company management and involved franchisees have complex, mutually dependent relationships, and differences in business focus and economics that make for a complex cultural stew. All three groups must be engaged and work together for brand success, which is hard won.

• The private equity firm promotes operational improvement; and synergies via a “buy to sell” mentality to get their investment back and realize a trading profit. With a 4 to 7 year term focus, they utilize both operational value creation and leverage and financial engineering. The balance depends on the PE firm’s own expertise and focus. PE firm ownership doesn’t guarantee success, however.

• More conservative and risk adverse while publicly held, company management post purchase is relieved to be rid of the day to day sales comps pressure and perhaps that of impending refinancing hurdles. It now has the opportunity to think more broadly. But it typically must adjust to faster reaction mode, more frequent and vibrant oversight by the PE Board, and often higher debt service. Management stands to benefit from the PE ownership philosophy.

• Franchisees are initially hopeful at ownership change but generally in the dark otherwise on the potential risks and rewards of PE firm ownership. They are not part of the deal team and get no vote. Their culture remains individually focused, with margin, debt, and unit development concerns foremost. Their outlook is the longest term of all, the length of the franchise agreement. And they often have the vast majority of the invested capital. And they do almost 100% of the customer execution. Many have personal debt guarantees, thus view matters personally, but also stand to gain size efficiencies as they grow. Franchisees can benefit greatly if the brand’s chemistry, plan and execution comes together.

• About the Contributing Firm: Pacific Management Consulting Group is an analytically focused management consultancy, 100% focused on restaurants. The firm performs detailed sales, profitability, earnings and related economics projects work, and works for those who need deep business intelligence about the restaurant sector. The firm provides publicly traded chain restaurant financial and earnings analysis for investors, franchisees, other management consulting and earnings research firms; litigation support and new business startup planning. The firm passionately avoids conflicts of interest, to provide independent, creative and detailed perspective.

• FIRM CONTACT: John A. Gordon, Pacific Management Consulting Group, 5980 Mission Center Road, Unit A, San Diego, CA 92123, (619) 379-5561 www.pacificmanagementconsultinggroup.com

An Arby’s Comeback: Insight Points to the Awakening of a Giant [Analysis] – QuickServeLeader.com

Published on Quick Serve Leader (http://quickserveleader.com)

An Arby’s Comeback: Insight Points to the Awakening of a Giant [Analysis]  

The recent acquisition of Arby’s by Atlanta-based Roark Capital has a flurry of pundits chomping at the bit. What does it mean to the QSR landscape? What are its next moves in its brand positioning?

Having spent the past couple of decades refreshing its look and revising its messaging, Arby’s, with more than 3,600 stores globally, appears poised to be the comeback kid. Same store sales posted a moderately strong increase of 4.4 percent in its most recent quarter, but the two-year blended results showed an approximate 3.5 percent decrease.

In the fast food category, the Wall Street darling has been McDonald’s, with its focus on beverages and the McCafé experience. Its results have been impressive. In its most recent quarter, the quick serve giant posted a surge in sales of 5.6 percent, on top of a 4.8 percent spurt last year, and EPS growth of 11 percent.

Competitors like Hardee’s and Carl’s Jr. have been on a tear and posting strong results. Same store sales at Hardee’s, a large sandwich competitor also offering roast beef, burgers and sandwiches, surged 9.6 percent for the most recent quarter. (The two-year quarter-over-quarter blended rate was approximately 4 percent.)

Hardee’s, with about half as many QSR units and once known for its own roast beef offering, has focused on premium burger experiences and a menu revamp of its own, as of late: A wider array of healthy options, including tirmmer and low-carb wraps, revamped design, and elements of its sister brand (Carl’s Jr.) in the lucky star.

Other competitors are in the national roast beef category, including Roy Rogers, Buona Beef, and Al’s Beef, to mention a few. Additionally, sandwich chains, such as Quiznos, Jimmy Johns and even Subway, also compete in the space, according to data from Technomic, a Chicago-based research and consulting firm [2].

Roark Capital Provides Opportunity, but Challenges Prevail

Roark Capital’s expertise in franchising will breed new life into Arby’s. The deleveraging of its related debt along with a contingent commitment from Roark for an additional $50 million in operating capital, according to the terms of its 81.5 percent purchase, will help Arby’s cash flow.

Along with Focus brand portfolio companies like Schlotzky’s and Cinnabon’s, Roark owns the McAlister Deli, Il Fornaio, and fast casual Corner Bakery concepts [3].

“Last year Arby’s renovated 100 restaurants,” says Arby’s Restaurant Group President Hala Moddelmog. “We’ll determine how to move forward with integrating ‘Arby’s It’s Good Mood Food™’ elements into the buildings,” she says.

According to an Arby’s representative, over half of the stores have been remodeled in the revised Pinnacle design. However, challenges loom for the brand when compared to Hardee’s and Carl’s Jr., both undergoing An Arby’s Comeback: Insight Points to the Awakening of a Giant [Analysis] http://quickserveleader.com/print/article/arbys-comeback-insight-points-… 1 of 4 1/19/2012 9:37 PM an integrated messaging and design overhaul. Burger King, another fast food competitor entrenched in its own redesign and experimentation with its hip ‘Whopper Bar,’ has combined elements of the messaging into its exterior. The burger chain, most known for its iconic Whopper, and recent ad campaigns spotlighting its ‘King’ and ‘Subservient Chicken,’ retained Interbrand Design Forum, a retail brand consultancy [4] based in Dayton, Ohio.

Interbrand’s clients include Au Bon Pain [5], Pollo Campero, Panda Express, and Papa John’s.

“The program related to the ‘Have it Your Way’ brand promise, which was focused on the product and the irreverent ad campaign that created an emotional connection with the brand’s target audience,” says Justin Wartell, Director, Brand Strategy, Interbrand Design Forum.

Wartell notes that remodel efforts need to be paired with broader updates to the complete brand experience. When all of the expressions of the brand communicate the same powerful message, a redesigned restaurant can serve as the “crescendo” of the brand experience when current or new visitors walk through the door.

He offers up lessons from the Burger King experience, saying there needs to be a willingness to be bold “not just in terms of what you do and say, but in how you rethink the history and heritage of your brand.”

“A big lesson is a willingness to be bold ─ not just in terms of what you do and say, but in how you rethink the history and heritage of your brand.” Justin Wartell, Interbrand Design Forum.

Franchise Engagement

Aside from growth opportunities, expertise in engaging the franchising community for an accelerated pace in its refresh program may come sooner rather than later. Franchising is what Roark Capital does best, along with bringing administrative efficiencies and cost savings to bear.

“Roark is well known for their expertise in franchising, restaurants, and brand building,” says Moddelmog. “We look forward to benefiting from their strategic view of our brand.”

But grow Arby’s will. Moddelmog notes that domestically, the concept will add 30 units before the year is out, and she’s pursuing the military trade channel aggressively. She points to Arby’s relationship with the Army and Air Force Exchange Services. “Through AAFES, we’re now reaching a strong consumer group—that of the military and their families,” says Moddelmog.

Internationally, a deal in Turkey with Tab Gida will see the opening of 100 stores, with 20 already open. After an integrated redesign and remodel effort, the sky is the limit.

Additional data from Technomic shows a dearth of stores in New England with only five in Massachusetts, and a lack of presence in the states further north.

For many foodservice franchisors, there has never been a better time to sell franchises,” says Mark Siebert, CEO of IFranchise Group [6], based in Illinois. He adds that the real estate landscape is much improved and has seen an increase in more open and flexible landlords.

In a recent interview with Quick Serve Leader, Jim Vinz, President of Corner Bakery, another portfolio company [7], noted that Roark has a way of ramping up growth for its restaurant companies and doing it with dignity. Most would bet on Roark.

Most franchisees want to see what is on the horizon and they felt that the direction previously did not demonstrate that Arby’s was up to the task,” says John A. Gordon, Principal at Pacific Management Group, a consultancy firm based in San Diego [8] that specializes in earnings, economic, and financial advisory services.

“Distressed franchisees must be coached upon and shown a viable exit plan. Smaller viable franchisees need to get bigger. Some underperforming markets should be closed,” he says. Gordon suggests that cash be invested in incremental advertising that is broad in reach, site review/selection, and the assessment of franchisee presence in select underperforming markets.

“A Roark-backed CAPEX (capital expenditures) and recapitalization funding pool seems necessary,” says Gordon.

Arby’s in a Good Mood

Brands should focus on understanding customers and what they desire, identifying key touch points and how they should be deployed, and using resources to help deliver against organizational business goals.

The current campaign of ‘Good Mood Food™’ for Arby’s may be the dealmaker. How the brand integrates its messaging into its design and roots through a commitment from top leadership will make all the difference with consumers.

“Burger King is a great example of moving in that direction,” says Interbrand’s Wartell. He says, “Restaurants, uniforms, packaging, web, mobile—they all delivered a new aesthetic that tied back to the heritage elements of the brand.”

Beyond the messaging, all bets are on the new design and how much Moddelmog can revitalize the brand with Roark’s perspectives and insight.

“You can spend a lot of money. Clearly, you don’t have to,” says Tom Kowalski, VP of Design for Interbrand Design Forum.

The exterior pinnacle design sends overwhelming fast food cues that are a turnoff to customers looking for a more up-scale fast-casual environment. Red window mullions, red canopies, and red plastic signs tell customers this is more of the same old slick plastic fast food experience, notes Kowalski.

The interior is actually more in line with what consumers are looking for. The palette is reminiscent of Panera, but lacks any distinctive personality. There is not much that expresses the unique qualities or brand attitude of Arby’s inside or outside the space. This is not another burger chain. Arby’s has a somewhat differentiated offer, but the experience is not cohesive or aligned with who they are.

But Arby’s strides are significant thus far under Moddelmog, and few QSRs have been this well positioned to succeed. The average check is higher than most because the brand doesn’t reflect a national all-day part strategy.

Hardee’s positioning with a late night menu, drive-thrus that are often 24 hours, and a cohesive breakfast strategy may be fine points to mimic as Arby’s comes out of its 1980’s cocoon and continues feeding off the momentum from its president’s initiatives.

Several of the initiatives contributing to positive sales and transactions include Arby’s new advertising campaign, ‘Arby’s. It’s Good Mood Food.™’, says Moddelmog. The Angus line of sandwiches and the value meal are additional boosters, she adds.

Copyright: Kandessa Media [9]. All rights reserved. Franchise & Licensing Copyright Kandessa Media. ©2012. All works published here except for shared media, licensed material or advertisements, are protected intellectual property of the publisher. All rights reserved. Kandessa Media, founded in 2009, is based in Boston. Source URL: http://quickserveleader.com/article/arbys-comeback-insight-points-awakening-giant-analysis Links: [1] http://quickserveleader.com/sites/default/files/arbys_pinnacle_2_-_kandessa_media_0.jpg [2] http://quickserveleader.com/technomic [3] http://quickserveleader.com/article/corner-bakery-cafes-double-heels-roark-acquisition-chaineyes-northeast [4] http://www.interbranddesignforum.com/portfolio/burger-king/ [5] http://quickserveleader.com/article/au-bon-pain-expands-cafe-remodel-program-strategizes-nationalmakeover [6] http://www.ifranchisegroup.com/ [7] http://quickserveleader.com/article/qa-corner-bakerys-president-vinz-brand-building-and-deliveringconsistency [8] http://www.pacificmanagementconsultinggroup.com/aboutus.html [9] http://quickserveleader.com/kandessa An Arby’s Comeback: Insight Points to the Awakening of a Giant [Analysis] http://quickserveleader.com/print/article/arbys-comeback-insight-points-… 4 of 4 1/19/2012 9:37 PM

Pie Fives All Around – QSR Magazine

Pie Fives All Around

Pizza Inn is rolling out a new fast-casual concept, Pie Five Pizza Co., to appeal to an upscale, urban demographic by creating fresh, made-to-order pies in less than five minutes.

Company executives are hoping that Pie Five, which debuted in Fort Worth, Texas, in June and joins Pizza Inn Express as another Pizza Inn spin-off, will have the company poised to roll in more than one type of dough.

“We wanted to find a way to get a customer good pizza very fast,” says Charlie Morrison, president and CEO of Pizza Inn. “We believe our Pizza Inn product, when made fresh, gives people the best quality, but in the Express it’s not always controlled the best and there’s not a lot of choice.”

John Gordon, chain restaurant analyst at Pacific Management Consulting Group, says that even though pizza may seem like a saturated market, Pie Five could fill a void between the more upscale B.J.’s and California Pizza Kitchen concepts and quick serves like Domino’s and Pizza Hut. Pie Five is “somewhere in the middle in what is hopefully fertile ground,” Gordon says.

Similar to Chipotle or Subway, pizzas at Pie Five are assembled as customers walk through the line. Customers can order from the menu of 10 gourmet pies or customize their own nine-inch pizza.

“We’ve individualized the occasion and given the customer choice, so they get exactly what they want,” Morrison says, noting that Pie Five was in development for roughly nine months. After they move through the line, customers can also add a packaged salad or drink at the register, wrapping the five-minute-or-less experience.

High-speed ovens make the Pie Five experience possible, Morrison says. The restaurant stacks two conveyer-belt convection ovens that can run eight pizzas at one time, baking two pizzas every 20 seconds.

The combination of this technology with customer choice in the fast-casual space is “transformational in the pizza category,” Morrison says. He says the edgy red, white, and black design accents, balanced by the stark industrial décor of corrugated metal and exposed ductwork, turn Pie Five into a destination for the fast-paced urban clientele.

Morrison says Pie Five’s performance has so far exceeded expectations, which fares well for his plan to grow it by 100 restaurants in a year.

“For an unknown brand, it would be impossible,” Gordon says, “but with a corporate parent, a captive franchise base, and an alternate concept, they should be able to make it work.”

By Lori Zanteson

News and information presented in this release has not been corroborated by QSR, Food News Media, or Journalistic, Inc.

Soul Daddy: A $3 Million Failure – Portfolio.com

Home > Business News > Chipotle Sec Filing Spells Out Some Soul Daddy Financials

Soul Daddy: A $3 Million Failure

by Coeli Carr Jul 05 2011

No one at NBC nor anyone involved with “America’s Next Great Restaurant” has wanted to talk about how much money went into opening (and then abruptly closing) three outposts of Soul Daddy. But a paragraph in an SEC filing by Chipotle helps to answer that question.

Failure to L(a)unch

In early May the four culinary professional judge-investors from NBC’s America’s Next Great Restaurant bet their own money on the winning contestant’s “Soul Daddy” concept. Less than two months later, all three restaurants they opened are shuttered. What went wrong?

Soul Daddy Serves Up the Competition

With a dash of baked chicken, a hint of fresh veggies, and a whole lot of respect, Jamawn Woods proved he had the right recipe to win the title of America’s Next Great Restaurant with his take on healthy comfort food SEC papers tell the story of Soul Daddy’s failure.

We know that the three Soul Daddy restaurants—the top prize on NBC’s America’s Next Great Restaurant food-reality show—have shut down. The question that remains, like an aftertaste following a meal that didn’t quite sit right, is about the financials.

No one at NBC nor any of the four judge-investors nor anyone else tied to the now-canceled show wanted to reveal. On Friday, in a story about the sudden failure of the restaurants, I spoke with an expert who ballparked the cost to open and operate restaurants in three cities at about $2 million. Turns out that estimate was 50 percent too small.

In a filing with the Securities and Exchange Commission, Chipotle Corp.—the “fast casual” chain of Mexican fare that was founded by Steve Ells, one of the four judge-investors—detailed its connection with ANGR Holdings, the company set up to operate the show winner’s restaurants.

The SEC proxy statement said Chipotle had invested $2.3 million in the holding company. It also said Ells personally contributed another $220,000 to the effort an amount Chipotle intended to reimburse Ells. Here’s the key section in the proxy statement:

Agreements with ANGR Holdings, LLC: We have agreed to be the prize sponsor for the network television program “America’s Next Great Restaurant.” In that capacity we have made agreed to make cash contributions totaling $2.3 million to ANGR Holdings, LLC, the entity that will operate the restaurants to be awarded as a prize on the program, in exchange for an equity interest in the entity. We have also agreed to provide a variety of corporate and administrative services to the entity in connection with its operations. Our founder, Chairman and Co-Chief Executive Officer, Steve Ells, serves as a judge on the America’s Next Great Restaurant program, and as part of the terms of his involvement with the program is a co-investor in ANGR Holdings. We intend to purchase Mr. Ells’s interest in ANGR Holdings from Mr. Ells during 2011 for $220 thousand, the amount of the cash contribution originally made by Mr. Ells.

A source close to the the show said the judges’ never revealed the level of their investments to the contestants, but this person said everyone was led to believe the four judges-investors—besides Ells, they were chef-entrepreneurs Bobby Flay, Lorena Garcia and Curtis Stone—had each contributed the same amount. So if Ells’ $220,000 is multiplied by four, that means quartet collectively ponied up $880K to launch the trio of Soul Daddy restaurants in New York, Los Angeles and the Mall of America in Minnesota. Chipotle’s contribution upped that amount to slightly over $3 mil.

These numbers generate more questions. If, as many experts in the industry agree that a minimum of $2 mil could have kept three Soul Daddy’s operating for about six months—and ANGR Holdings had about $3 mil at its disposal—then undercapitalization may not have been an underlying problem.

So if money wasn’t an issue in keeping the enterprise afloat, then what factors led to the closings? So far, none of the principals are talking.