Wray Executive Search – Restaurants: Pondering Earnings

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

Q4 Earnings to date…

We are in the middle of the Q4 earnings cycle and have had Darden, McDonald’s, YUM, Chili’s, Starbuck’s and Chipotle so far. The bulk of the casual diners and more QSRs and a few fast casuals will be this week and next.

As usual, one must work to see if the macro sector trends and results are brand specific. The one surprise to date is Chipotle SSS was weaker but still positive, with both negative mix and traffic. This is “a turn” as we analysts call it and CMG management said they didn’t see price resistance and that value scores were still very high.  More on this later. Food and labor costs are still inflationary and restaurants (especially casual diners, per the BLS) are taking substantial price increases. McDonald’s store margins will be lower and Chipotle is under the gun to get store margins up to 27%.

Interpreting Consumers is Difficult

There is an industry narrative underway in some parts that can’t be confirmed yet. That is that higher income guests frequenting casual dining, and fine dining are trading down to fast food. This narrative is driven by: (1) it happened before (2) the QSR operators are saying they are seeing an uptick in higher income guests (3) some casual diners like Chili’s and now Chipotle lost traffic. [1]

There is no evidence to date that the company-owned polished casual dining or fine dining concepts are in trouble at all.

I don’t buy this concept trade-down issue, at least not yet. For one, I know from 20 years of corporate staff and 20 years of my consulting firm experience, that restaurant brands and their vendors don’t have the budget or methodology to track guest migration from one brand to another over short periods. Over the longer term, this is possible, but costly. The mistake is assuming a higher mix of higher-income guests must be from casual or fine diners. It could just come from a higher frequency/mix. Time will tell and the numbers will lead the way to the truth.

Restaurant Analysis and M&A Calculations: What is the right base? 

Soon we will have 2023 Q1 financial results and the SEC P/L format dictates that 2022 is the year-ago base. On earnings calls, S-1s, and management analysis, companies can have further disclosure. The Pandemic certainly has made some prior year displays difficult. As a result, that has been a negative factor affecting franchise and nonfranchise restaurant market sales in 2022.  M&A professionals report that there is relatively nothing for sale right now.[2] Simply, the 2022 numbers look bad compared to 2021 due to the margin erosion seen everywhere.

Of course, this will change eventually; the restaurant business is cyclical. This business is always investable; there is always something to do to get ready for the inevitable future. Some latent IPOs are coming.

My suggestion in the management data display area: always show 2019 data and operating stats and then pick up the P/L with 2021, and forward. A discussion strand in the franchise M&A world is that a workable true EBITDA base is somewhere between 2019 on the low side and 2021 on the high side. [3]

McDonald’s US Franchise Relations: Hatfields v. McCoy’s Battle Conditions Persist

There is no doubt that McDonald’s (MCD) is a global restaurant powerhouse with worldwide brand recognition and strength and power. In the US, one of the most difficult markets now, AUVs have soared, marketing is right on point (IMO) and analysts believe franchisees are around $500K in store EBITDA, a good number, albeit down from the prior year.

The problem is that there has been a decade of documented bad relations between US franchisees and the US corporate staff. Somehow in my files, I wound up with some Mcdonald’s 2013 franchisee notes and I reread them. The tone of the conflicts is the same. The year-to-year catalysts change: in 2020-2021, US franchisee communication ceased for over 6 months with corporate over disputes about invoice billings, now the issue is the new contract McD is switching to and the new PACE inspection system.   The franchisees point to the inadequacy of the PACE system, and its additional costs and stress on employees. And that their store EBITDA was down $100K in 2022. MCD corporate responded that the PACE system provided benefits in European markets where it was first rolled out. [4]

What is immediately notable is the bad McDonald’s franchisor/franchisee culture, the Hatfields (Corporate) v. McCoys (Franchisees) battle is still present and not getting any better. Fixing this is a core responsibility of the franchisor in my view. McDonald’s operates only 3% of its US units. Going through a contracting effort and not being sure of your workforce is a terrible thing. I was on the restaurant corporate staff for 20 years, and after a while, without the proper cultural and people planning in place, one begins thinking about “us and them”. That is not right and it constricts the proper use of the franchise model.  A corporate staff invention is required.

The franchisees should recognize that everyone is down in EBITDA and most every brand would love to have $500K to cover CAPEX, taxes, new units, and the like. Also, in terms of inspections, I have seen some awful, embarrassing customer service in franchisee locations where no inspections have picked up. They should fight for useful inspections that focus on real QSC metrics.

Heard in the street… on the Subway/DAI sale, we read via Forbes that Dr. Buck’s will allocating his 50.01% of Subway/DAI proceeds to his charity could have unintended consequences in the DAI sale process which is just in its infancy. Does this mean that the Buck Charity director will get a vote on Subway/DAI restaurant matters?  Not good if so. We will see.

More on Subway operations… in late January, Subway network TV and digital began advertising a BOGO buy one-foot long sandwich, get one free. An underdetermined (but significant) number of franchisees don’t accept walk-in, paper, or digital Subway coupons, period. The reason they can’t afford it as the discount is too steep and they don’t get a sales bump. With DAI just reporting Subway US AUVs up 9% in 2022, why the need right now for such expensive discounting? A very reasoned guess could be they are looking to show good sales numbers for the investor’s book. The problem is the franchisees are paying personally for those sales gains.


About the author: John A. Gordon is a long-term restaurant industry veteran and founding principal of Pacific Management Consulting Group. He works on complex restaurant operations, financial management, and strategy engagements for clients. He has 20 years of restaurant corporate staff experience, and 20 years via his consulting firm. Reach him at jgordon@pacificmanagementconsultinggroup.com, office 858 874 6626, mobile, 819 379 5561.

[1]   See Nations Restaurant News, Restaurant Tradedown, February 10, 2023.

[2]    Restaurant Finance M&A Panel, November 15 2022; and  Rick Ormbsy, Unbridled Capital, February 2023 EWebinar. https://unbridedcapital.com/resources/season-5-episode -5- the=2023-state-franchise=ma-/

[3]   Hat Tip: Rick Ormbsy,  2023, Season 5, Episode 5 Webinar.

[4]   Restaurant Business Online, “ Franchisee Fear, Anger, Mount as McDonald’s Intensifies Inspections”, Jonathan Maze, February 7 2023.

Wray Executive Search – Restaurants:  The 2023 New Year’s Look

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

Personnel and M&A Moves Now Abound

So, with the New Year upon us, some personnel and M&A moves are now upon us. Both McDonald’s and Wendy’s signaled people changes and new corporate reorganization charts, targeted at reducing the number of reporting pillars. It looks like the US  and International pillars will be targeted, at least at headquarters.  The CEOs indicate it will increase efficiency and improve time to market. As always the devil is in the details and we will see.

In M&A news, the earlier reported news about Darden (hat tip: Austin Fuller, Orlando Sentinel) came true: CEO Ric Cardenas noted at their ICR appearance that they were looking for a new brand acquisition. Darden itself is in fine shape, they seem to be looking for a brand to position the portfolio to changes in the consumer marketplace. So they will be looking for the best and this won’t be a rushed process.

Further, Andy Weiderhorn and FAT Brands confirmed the desire for a properly priced casual dining brand: multiples of 10X are too high.

As noted last month, there are several latent IPOs, waiting for the right market conditions.  One of the very first will be Fogo de Chao. They have desired a reentry ever since 2020 and have been waiting for market conditions. They are a strong company.

ICR 2023 Observations

I was delighted to get back to my 17th face-to-face conference attendance a the  ICR Conference, the midmarket investor, and M&A-themed gathering in Orlando. 24 publicly traded restaurants attended, with 19 pre-IPO or smaller restaurant companies presented briefly. Fitch, a ratings agency attended also. They are keen to monitor sales, free cash flow, and debt, but did not seem to have obvious restaurant sector worries.

Ric Cardenas of Darden was the obvious CEO star, who has a masterful command of the facts and the breakout room. And, GJ Hart is back and CEO at Red Robin and presented in dramatic style what went wrong there and his plan to fix it.

Operational themes noted: numerous operators are making equipment upgrades in 2023, all intended to boost BOH efficiency. Many of the smaller growth brands that presented had burger or taco themes. Third-party delivery has finally turned margin neutral, thanks to operator price increases. While dine-in sales generally are improving, fast casual companies like Café Rio and Shake Shack are working in drive-thrus where they can. [1]

What is hanging heavy over 2023 prospects is the impact of the real or supposed recession. That there has been inflation across the US consumer space is unquestioned; it’s just that it matters more to certain population groups than others. Restaurant full-service price inflation continued to be plus 9% in December’s report, while QSR was about 7%. Grocery store (food at home) pricing was still higher. [2] Via my research, I expect moderate and varied revenue results by brand and continued but deaccelerating cost pressures in 2023.  But there is more.

Interest cost  and new unit buildout cost increases are a concern to 2023 new unit development:  what to do about it

Beyond the P&L, there are other cash costs associated with new unit development and remodeling that the restaurant community needs to be concerned about. First, the supply chain has not been fixed in terms of providing new restaurant equipment. When senior McDonald’s franchisees are routinely speaking of it over time, you know there is a problem. Significantly, as confirmed at ICR and the recent Restaurant Finance and Development Conference, the cost of new unit builds is up some 10 to 15%.  And the absolute kick in the pants is that given general economic uncertainty is that the cost of funds is up nationally by 300 to 400 basis points.   This puts a strain on both company and franchisees trying to develop new units. The margin optics are poor if one compares to 2021 as a base, which had much better store results. Restaurant percentage margins are down app. 300 basis points in 2022 (versus 2021) because of the food and labor inflation that just could not be covered by more pricing or more sales.

What can franchisors do to encourage development?  

Franchisors will be challenged by this one-two punch to maintain development targets. However, there are proactive things that can be done. As Alicia Miller, Partner at Catalyst Insight Group and a true expert in franchise management optimization told me recently,

“Incentives to get a better enterprise valuation in 2024-2025 via IPOs or PE acquisitions require investments now. Franchisees need reasons to believe. Franchisors need to offer incentives to offset this additional development cost.  Otherwise, franchisees will delay, pursue lower-cost concepts, or possibly retire as options. Franchisee thirst for development is not a bottomless well.”

Some proactive moves have been untaken, such as smaller and variable-sized units (Wendy’s example), dedicated loan pools (Burger King example), and vigorous cost reduction task forces working (Jack in Box).  But I sense more will be needed to get through the 2023 squeeze.

All economic conditions change, and if the Fed and macro economy cooperates, I sense 2024 will be better.


About the author: John A Gordon is a long time (45 plus years) restaurant industry veteran. His management consulting firm, Pacific Management Consulting Group was founded in 2003 to work complex restaurant operations, managerial finance and strategy engagements. See more about him on his website, www.pacificmanagementconsultinggroup.com, call him at 619 379-5561 anytime.


[1]   Restaurant Business, 10 Takeaways from ICR, January 11, 2023.

[2]   https://www.bls.gov/news-release/pdf/cpi.pdf

Wray Executive Search – Restaurants: We Should be Looking Ahead, to 2024

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

Merry Christmas and Happy Holidays forthcoming!

So I am back from the Restaurant Finance and Development Conference. 3300 people attended, the most ever. There were two other major restaurant events in the world that week.  I had the high honor to moderate the M&A Panel: What Are Conditions Now and How to Close More Deals in 2023. The Four-panel members were outstanding and laid out that and more. Panel member Susan Miller laid out the highly anticipated current M&A multiple ranges for business types by maturity. [1]

Current View of the Business for 2023

To be clear, the restaurant business is dynamic and optimistic. It does go through cycles. A down cycle at one point in time is not permanent, history shows it will reverse soon!  Do not despair at a down point. There is always something to do, plan, strategize and improve current operations in the restaurant business.

2023 v 2024 business recovery was the question du jour throughout the conference.  My takeaway:  While there is latent deal activity (including IPOs) waiting for better conditions, 2022 M&A activity died off because of poor multiples and higher interest rates. And, QSR consumer activity weakened throughout the second half of 2022, while higher-end casual dining and above-sit-down segment consumer activity was more positive. 2024 will be better than a mixed 2023.

The overall view is that food and labor inflation will continue in 2023, albeit at lower levels. Interest rates and cost of new buildings will be a problem, and most of my consumer research friends feel sales demand won’t fully recover until 2024.

While QSR same-store sales were up around 5% in late 2022, that is nowhere near enough to cover the increasing food and labor costs. As a result, restaurant margins and profits have remained below their 2019 and 2021 thresholds. Managing pricing will be one of the company operator and franchisee’s biggest challenges. 2024 will be better once the mild recession ebbs.

After surveying 300 finance executives – including 60 consumer and retail leaders – accounting giant KPMG released its 2022 inflation report, which shows that retailers and consumer brands are taking a proactive approach to combat inflation.

“After months of passing on rising costs to resilient consumers, consumer and retail companies are looking to strike the right balance between pricing strategies and profit margins,” the report says. “To achieve cost efficiencies and optimize space, [consumer and retail] companies plan to evaluate their physical, office, and retail locations, seeking to reduce or restructure their real estate footprint. From a technology or digital transformation perspective, respondents expect investments in those initiatives to stay on track as they seek to extract actionable, data-driven insights.”

Company-owned fast casuals, meanwhile, are gobbling up available real estate to build or expand drive-thrus, even with volatility around customer traffic, and food and labor inflation. He notes that 2022 QSR traffic was modestly negative verses 2021 and 2019, and should remain so in 2023. Most of all sales gain, in roughly the 5-6% range, will come from price and mix. Many QSR guests are rather price-sensitive now, so adjustments must be made strategically. Creative marketing, new news, and digital expansion are essential. McDonald’s notably has made headway.

On the QSR margin side, many raw foodstuffs are now falling, with chicken completely lower. Experts say some food and paper items will remain inflationary in 2023, but less so than in 2022.  On the labor front, the average wage rate of a new employee hired increased from 5 to 10%. Depending on sales, check and inflation, the store EBITDA margin could drift 1 to 1.5 full points lower in 2023, he adds, but far less than the dramatic falloff in 2022.

While franchisors will continue to push for more store development, franchisees may feel emboldened to push back based on costs and ROI. Some franchisors have done an excellent job in putting new store prototypes out in circulation which will help. Loan underwriting will be tighter in 2023.

Labor Outlook Improving 

On a more positive note, the labor outlook for restaurants is improving. A late 2022 survey by Bank of America restaurant analyst Sara Senatore found that restaurants are in a better position to find employees, emphasizing “more staff means better service for customers and less of a need to raise wages, which in turn helps the bottom line.”

A December Restaurant Business Online article echoed that optimism. Highlighting data from the Bureau of Labor Statistics, which shows an upward trend in hiring among restaurants and bars, the article reported that 62,000 jobs were added in November versus 36,300 in October, “which itself was an upward revision from previous estimates,” the publication wrote.

Factors Muting 2023

Many attendees at this year’s Restaurant Finance and Development Conference were focused on how the industry will fare in 2023 and 2024, examining key aspects of doing business such as operating profits, sales outlook, cost of construction, cost of equipment, frequency of traffic, and average ticket targets. Virtually all analysts are convinced the average ticket will continue to be higher, and that customer traffic will be negative in 2023. Every tracking report shows some effect of a real or perceived slowdown or mild recession now hitting US consumers.

Positive signs for the future will be clear once food costs, commodity pressures, and labor pressures as we’ve seen in 2022 begin to reverse themselves, With the current inflationary pressures, our best guess is that consumer demand will be muted until later in 2023 and recover more fully in 2024.

Management Notes: How to Take Advantage of the Ex-CEO

Reading in detail lately about the drama of the short-lived CEO tenure of Bob Chapek, the hand-picked CEO successor of Bob Iger at Disney there was one interesting background point: Iger after his retirement as CEO was NOT on the Disney (DIS) Board of Directors. The same circumstance was true in Howard Schultz’s most recent retirement before coming back to work at Starbucks (SBUX) for the third time in 2022. Odd board rotation practices leaving David Brandon still on the Dominos (DPZ) board after so many years were also seen in 2022.

The job of a CEO certainly isn’t easy these days. For any restaurant company, the flame out of a CEO has enormous significance. I discussed how firms might better utilize outgoing CEOs, with our own Bob Gershberg, CEO of Wray Search, who works restaurant board search and consulting engagements. “ No doubt, the skills, and knowledge of the former CEO are valuable”, said Gershberg. “A desirable outcome might be to name the Ex-CEO as Executive Board Chair, for a finite period.”

This could process the ex-CEO’s wisdom and opinions efficiently. Interestingly, one situation where this scenario did not work, perhaps because the ex-CEO was not named Executive Chairman, was McDonald’s. Jim Skinner, then CEO, retired to a regular board seat in 2014, only to have the next two CEOs, Don Thompson, rotated out after a few years and Steve Easterbrook terminated in a spectacular scandal.

Heard and Seen:

Through the end of Q3 earnings, I am seeing little evidence of the long-anticipated “trade down” of fine dining and casual dining guests to fast food in the numbers. We do hear discussion of less frequency and trade down of mix within the $75K income cohort within a brand, which is two different things. In fact, the “the sit-down space” has gradually strengthened the last few months per the data I’ve seen.

Jack in the Box (JACK) posted very difficult earnings in November, for both  Jack in Box and Del Taco, with margin pressures. I traced back through the original documents that JACK actually paid 15X EBITDA for Del Taco versus their “7.6X synergy adjusted EBITDA number”. So they goofed. Worse, the Del Taco synergies won’t arrive mostly until 2024. Now they have to refranchise quickly. Is there franchisee demand? CNBC said it: “Jack in the Box is indeed in a Box”[2]

McDonald’s Franchisees in the Know point out continuing equipment acquisition and quality problems, including buying fryers and grills, and failures of compressors. (Hat Tip: McFranchisee (McDTruth). The long effect of supply chain problems continue.

Interesting to see only Starbucks (SBUX), and YUM (YUM) on the WSJ/Drucker Institute Management 2022 Top 250, published on December 12. Drucker has a whole series of weighting factors, including customer satisfaction, employee engagement, innovation, social responsibility, and financial strength. The cutoff value was 55.5 points. There was one restaurant holding company that should have been close in my opinion, Darden (DRI).             


About the author: John A. Gordon is a long-time restaurant industry veteran, with experience in financial planning and analysis corporate staff roles (20 years, QSR and steakhouse chain ) and 20 years via his own niche consulting firm, Pacific Management Consulting Group. He does complex operations, financial assessment and feasibility and strategy engagements for clients. His website is www.pacificmanagementconsultinggroup.com, office 858 874-6626.

[1]   Email us for the numbers !  jgordon@pacificmanagementconsultinggroup.com and smiller@morgankingston.com

[2]   JACK Earnings Day CNBC Video, November 22 2022


The Bottom Line: Executives argued that “synergies” made the deal more palatable. But it’s taking a while for those cost savings to take hold. Investors have responded accordingly.

Link to article below:




The two-pronged approach has been gaining steam amid an economy of haves and have-nots.

Barbell pricing

Barbell pricing allows restaurants to appeal to two types of consumers. / Photo illustration: Nico Heins/Shutterstock

As inflation continues to cast a shadow over the economy, restaurants are turning to an age-old marketing tactic to keep customers coming in the door.

Barbell pricing—the practice of simultaneously promoting both high- and low-priced menu items—has made a comeback this year as operators look to appeal to two sets of customers: those who are hurting from inflation and those who aren’t.

“It’s a way of being able to talk out of both sides of one’s mouth,” said John Gordon, restaurant analyst with Pacific Management Consulting Group.

Mentions of “barbell” have spiked on earnings calls this year. Executives of at least eight publicly traded chains uttered the term during the most recent round of quarterly updates, according to data from financial services site Sentio. Between 2018 and the start of this year, “barbell” had surfaced just a handful of times, a sign that the strategy is gaining steam.

Barbell buzz

Sentieo chartRestaurant executives have been talking about barbells quite a bit this year. Source: Sentieo transcripts of 14 publicly traded restaurant chains

It comes as restaurants try to strike a difficult balance between generating traffic and protecting margins. By offering traffic-driving deals alongside pricier items, restaurants hope to capture customers on both ends of the spending spectrum while also encouraging trade-up.

Red Robin, for instance, is currently offering a $10 Gourmet Meal Deal while also pushing a limited-time Cheese Lovers menu featuring a pair of cheesy burgers for $15.99. The chain said the barbell arrangement gives customers more choice.

“How do they want to spend whatever discretionary income they have?” former CEO Paul Murphy said in June.

The two-pronged approach mirrors the tale of two consumers that has emerged this year. Lower-income Americans have been most impacted by inflation, while higher earners are behaving normally or even spending more: New data from OpenTable found that sales of restaurant meals over $50 are up 8% this year compared to 2019.

In that environment, more traditional discounting can be counterproductive.

“You don’t want to surrender the average check,” Gordon said. “If you only talk about discounts, then ultimately you’re going to have a big mix shift down, and you’re going to take it in the shorts on average ticket, and that would be disastrous.”

Papa John’s echoed that philosophy on its recent earnings call while noting that inflation has been weighing on demand. In response, the chain rolled out a $6.99 mix-and-match deal geared toward price-sensitive guests.

“While we saw competitors undertake aggressive discounting, we continue to take a balanced approach, providing the right promotions to our value-oriented customers without risking the erosion of our brand or pricing integrity on our more premium offerings,” CEO Rob Lynch told analysts earlier this month, according to a transcript on Sentieo.

The same dynamic has been on display at Chili’s, which has actually cut back on discounts recently to help build sales. And while it continues to promote a 3 for Me value menu starting at $10.99, it has tightened it up to entice guests to jump into higher tiers (like a $15.99 sirloin steak) or onto the full-price menu.

CFO Joe Taylor admitted that the approach has hurt traffic, but it has added profitable sales.

“We think that’s worth the tradeoff,” he said.

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

An evening or two of watching cable television ads gives you some sense of what is happening and will be affecting consumers going forward. You see endless QSR 2 for $5 or 2 for $3 themes returning, along with ads for vacations, cruises, and exotic vacations. The 40/60 economy seems clear:    Consumers with household income over $100K seem to be OK but under that are varying degrees of price and frequency struggle. Cutting back on restaurant visits is that old standby; but I’d bet with all the time and waste of shopping and cooking factored in, cooking on every occasion is more costly in the long run. But it has hard to dislodge conventional wisdom. Going into the fall, the conventional wisdom was that the 40%–the better-off component of the consumer base was relatively unaffected. Turns out that may be wishful thinking.

Inflation’s rising toll

Listening to the publicly traded chain restaurant earnings calls, one develops a sixth sense about what the CEO or CFO is trying to politely say honestly, without being too dramatic. Early this year, there was discussion of no impact or little impact via menu mix trade down by lower income guests challenged by gasoline or other forms of inflation that were starting up. Some brands, like Chipotle, said they had no lower-income consumers.

Non-aligned consumer research company reports are now reporting that inflation sensitivity is spreading. On October 25, Morning Consult reported “ higher-income adults are also now facing budgetary tradeoffs, which are coinciding with a period of rising core inflation and dwindling real incomes. Looking ahead, Morning Consult’s Purchasing Power Barometer “points to the likelihood that real consumer spending growth is going to slow further. Consumers at all income levels reigned in spending in September.”[1]    

On the positive side, the price change in restaurant meals—menu board price changes, or food away from home has been less than grocery store inflation by a wide margin every month as we have pointed out. We just wish there was more creative agency marketing to enhance this message.

Implications of rapid changes to planning and profit execution: What Walking between the raindrops means at the concept level

“Walking between the raindrops” is a corollary to Mayor Mike Bloomberg’s post-2000 business planning philosophy: be flexible and lean. Be thoughtful about potential outcomes beforehand and ready to move out of issues quickly. Have one backup plan.  Don’t get caught in red tape.

Looking ahead, for us, none of these restaurant challenges or outcomes are all that shocking, frankly. We are always going to be challenged by food and labor cost increases and how to pass on our costs effectively so as not to shock guests.  We will always struggle to some degree to attract and retain staff. We will have competitors to beat and too expensive buildings and investments to amortize. We know or should know our base customers, our aspirational guests, and with whom we’d like to increase frequency.  We are always going to struggle to make money.

If we don’t know the proforma profitability between dine-in, delivery, and take-out channels, that is a quick must-do fix. If we don’t know how much our digital guests over-index in frequency or ticket versus other guests, that must be documented to make the marketing plan more effective.  [I’m mentioning this because I just discovered one of my most analytical clients still did not have these metrics in place].

Read the Chipotle, Mcdonald’s, Starbucks, and Darden earnings calls and investor day presentations and transcripts for a good sense of strategy.

And a standard marketing concept that hasn’t been discussed much for some time: “the high low concept”. The brand varies preplanned price media themes aligned for the time of year and the established average check tolerance. Working on loyalty, digital, and delivery programs of course.

Earnings notesintelligence is that MCD US same-store sales are still rising, up mid-double digits in October. This is on the strength of Halloween premiums and the 2-for $3 platform, as well as adult toy premiums from early October. Placier AI indicated the Adult Happy Meal got a mid to high teens traffic uplift post rollout in mid-October.  Chili’s (EAT) company restaurant margin, unfortunately, hit a new low in its Q4 report, at a 6% EBITDA margin. Chili’s has been battered all year with food and labor cost problems.  While many are waiting for trade down guests from full-service restaurants to fast casual and QSR concepts, it does not appear to have happened yet.

2023 Forecasting….. I’m doing a worldwide benchmarking review for a client, and broadly speaking, peer companies sort out into several groupings: (a) good SSS momentum, moderate food, and labor cost inflation (b) flat sales, moderate food and labor cost inflation (c) negative sales, moderate inflation.  Some US brands and several Old Continent brands are in category C, with a harsher recession expected there. In the US. With a hat tip to my friend David Maloni, a longtime industry expert, foodstuffs themselves are coming down (as we have noted in these pages) but the problem is freight, diesel, wages, and other transportation and indirect costs are still inflationary. Therefore food will still be up in 2023, just less so. Labor wage rates will be up again, likely a bit less so (hat hit: Sara Senatore, B of A Restaurant Analyst, staffing model).

Looking forward to seeing you…. At Restaurant Finance and Development Conference, November 14-16, at the Wynn Hotel in Las Vegas. I’ll be moderating the M&A Panel on Tuesday at 130p. Please stop by!


About the author:  John A. Gordon is a long-time industry analyst and expert, with 45 plus years, in unit operations, 20 years in restaurant corporate staff roles (financial planning and analysis), and 20 years via his founded consulting firm, Pacific Management Consulting Group. He works with complex restaurant investors, operations and economics review, and litigation engagements among others for clients. He is always reachable at 858 874 6626, or jgordon@pacificmanagementconsultinggroup.com.


[1]   Morning Consult, October 25 2022, Measuring the Impact of Inflation on US Consumer Spending.


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

So, being a restaurant operator, and allied industry member, such as employee, investor, vendors, analysts, consultants and others, it has been a wild ride since February 2020. Two black swans since then: the Pandemic itself in March 2020 and then the War in Ukraine in late 2021 have affected global society and business. These factors are still kicking us every day.

I’m afraid we will soon have another bad swan upon us, the FED, which is bound and determined to raise interest rates to lower an artificially constructed index that may not be correct. That may cause a recession. [1]Another thing we operators, investors, employees, suppliers and analysts can’t control.


In preparing a recent project for a client, I looked at industry pricing and food cost percentage changes all the way back to the 1980s. There were a couple of irregular periods, but generally pricing as measured by both ticket and BLS survey rose about 3 to 3.5% from 1981 to 2019. Food cost percentage and BLS inflation—food away from home also typically rose around 3%. There were some tight spots, but restaurants acted liked a machine, spitting out price increases. In fact many chain restaurants, preferred not to price for labor, leaving that to volume efficiencies to cover. The problem was, labor costs in both QSR and full service rose in the 00s.

Doubts about the restaurant model

Lately several operators and investors have mentioned that in this current environment, little is actually controlled by the restaurant brand operator.  I disagree. In the post pandemic world all of the challenges can be reacted to. The challenges, while overwhelming are really nothing new other than the dual food and labor cost inflation we have seen in late 2021-2022. There are many business functions restaurant brands and operators still do control.  Here’s two:

Pricing actions in this new world are controlled by Restaurants

Restaurants now have to look through their total product mix and store mix creatively to cover all costs. Every restaurant brand controls its pricing. Franchisors provide reviews and recommendations to franchisees who set their own pricing, except for two QSR brands who insist on predetermined prices. [2]   But yet, we have reports from polling agencies  that consumers are blown away by high restaurant prices. Many analytical questions remain: what type of customers? On what type of offers? Where? There is growing evidence that there is a gap of retail and restaurant acceptability between upper income guests and lower income guests.[3] That will produce challenges for Marketing staff and agencies.  But this is what segmentation studies were invented for. Get them.

We will know progress is being made when we see reports of and implementation of unit by unit pricing variation. With 60 years of POS and management technology, we know a lot about our units.

Brands control CAPEX and remodeling/new unit design, too.  

We all know that store level operating profit dollars after tax and G&A; the CAPEX, the actual size of the investment buildout over time; and the interest rate charged by the lender are among the most important financial variables defining success of the restaurant investment. While we are struggling to control Pandemic problems, this CAPEX factor is under our control whether we are franchised or not.

Starbucks, Wendy’s, Outback, Darden, and many other brands have moved out smartly post pandemic with transformative store prototypes. Starbucks for example is still in the middle of a massive store base transformation.

Having watched ROI by remodel class and brand over the years, I can say that remodels and upgrades typically get a sales lift for some time thereafter. Usually, not always. The length of time varies, but year one and two are typically greatest. Once the entire market is done there is a uplift effect on brand ratings. Of course, QSR and full service units get different uplifts. It is interesting to note that exterior remodels scored  ROIs in both QSR and full service, supporting the notion that one value of the remodel is to advertise the value of the brand to the outside community via the look of the unit.

Franchisors are often going to have issues “selling” the value of the new unit or remodel to its franchisees quickly. That is what company units and good proformas are for.

Lately, its been difficult to get all the parts necessary for remodel completion. Hopefully, the external remodel portion can be completed first to get those benefits.

Heard and Seen in the Restaurant World

M&A and the Restaurant Finance Conference: I’m honored to be moderating the M&A Session at the RFDC in Las Vegas on November 15 at 130p at the Wynn Hotel. We will have 4 great industry experts to discuss trends and outlook. So there is latent M&A demand waiting for conditions to improve but conditions are depressed right now. Please attend to hear more for your 2023 planning.

The Starbucks ($1B plus) and Burger King ($500M) OPEX and CAPEX investments  were huge and will require multi year tracking to see the ROI. In the Burger King US case , the brand was behind its peers to say the least. For a client, I recently found that BK US and one other brand were the only two major US burger brands that had flat AUVs for 9 years, 2012-2020.

Food Commodities have peaked when looking at the very beginning of the US food supply chain. See BLS tracking However, the issue looking ahead is there are manufacturer issues, distributor issues etc. Driver wages, fuel, distributor outages and errors than drive up costs. Sysco just had a strike imposed. 2023 will be less inflationary than 2022 by half, many are estimating.

On the more positive side, casual dining staffing levels are returning to a somewhat more normalized pre-2000 level. Hopefully this will improve service levels and moderate wage growth. Hat hip: Sara Senatore, Bof A Restaurant Analyst.

MCD US sales momentum in October appears to be brisk due to premiums moved and marketing activity. Franchisee intelligence and in store visits point to the success.


About the author: John A. Gordon is a restaurant analyst with 46 years in the industry. He had early experience in restaurant operations, 20 years at restaurant corporate staff roles (Finance Planning and Analysis) and the last twenty years via his founded restaurant management consultancy,  Pacific Management Consulting Group. Pacific works complex analysis and investigative projects for operators, investors, franchisors, franchisees, litigation support engagements, attorneys and others. Call him with questions or business issues at 858 874 6626, or 619 379-5561, email, jgordon@pacificmanagementconsultingroup.com.


[1]   See https://www.cnbc.com/video/2022/2022/10/13/short-if-the-fed-waits-for-core-inflation-to-hit-2 percent-itll-drive-economy-into-depression-says-jeremy-siegel-htm

[2]   Neither of these two brands have had positive SSS results in the last four year. Source: their 10Ks.

[3]   The weakness in lower in guests has been discussed in the last Brinker and McDonld’s (EAT and MCD) earnings calls. In addition, Bank of America credit card data showed $125K as the critical toggle point where luxury sales increased 10% and fell 13% in Q3 2022.

Wray Executive Search – Restaurants: Always Challenges, But We Persevere…

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

The longer one spends in the restaurant space, veterans should be less shocked when adverse actions happen. After all, the restaurant industry is a versatile industry, surviving, World War II, desegregation, multiple gas shocks limitations and lines, 9-11, overbuilding, 23% interest rates, the Great Recession, and other periodic turns, and the effect of them, the Pandemic, which is still biting us years later. But this last week governmental actions took center stage.

The California AB257 Mess… Will cause confusion and trouble and likely will raise wages. Let’s face it,  politics in government regulatory matters a lot in the 50/50 Blue/ Red state America we are set in. While CA Governor Newsom greatly improved an awful original bill written solely by an SEIU lobbyist, he signed a recast bill called the FAST Act. New is a Committee composed of 10 unelected restaurant, union, franchisee, and franchisor reps, to review and recommend wages, wage theft, and needed work conditions improvements. This process subverts the will of franchisor companies and contract/budget requirements. Yes, the legislature can strike the Committee work later, and the Committee needs to be authorized by voter signatures.

And yes, in 2023 wages can be increased to a max of $22/hour. And 2024 higher on the 2023 base. Could happen. Not will happen. The current CA min wage maximum is $16, with surely some employers starting employees higher. The problem of course is restaurant margins have fallen off 300-400 bpts since 2020/2021. The CA politicians didn’t check for that. Several wickets have to fall before the wage increases, namely the committee work.

So, the discussion in CA is there will certainly be wage compression costs but in some urban markets starting wages at $20 anyway. There will be litigation (such as… I’m not a fast food operation). I think in terms of financial impact, a pretty good QSR operation might now be $3M AUV vs. $2.5M. More on this later.

New Federal Joint Employer Regulations Are Out.  The doomsday heralded by the IFA for years. But, did you know that…   Practically speaking, the Joint employer regs will change every time the party in power changes. The NLRB regs ARE NOT federal law, federal judges and the states are free and do ignore NLRB language all the time. The US Labor Code and FLSA can only be changed by Congress! State and Federal circuits have already taken pro and con joint employer positions over the years which are binding precedents in court decisions. NLRB rulings affect only a small percentage of total labor issues. So investors and employers, use common sense, but this is not the end of the world.

Restaurant M&A Sightings:  I am honored to moderate the M&A Panel: What Will It Take to get a Transaction Done in 2023 at the Restaurant Finance and Development Conference in Las Vegas on November 15, 2022, at 130p. You are invited via the Conference! So I am watching the M&A market very closely as usual. So M&A has really fallen off in 2022 what with general inflation, uncertainty with the FED, and lower restaurant margins. It is not dead, however. Last week, there was an 8-unit restaurant IPO, a ramen operator, Yoshiharu, YOSH, on NASDAQ.  In addition, Darden (DRI) seems to be slowly looking for a great acquisition, and another holding company is soon to announce a two-brand acquisition.   So M&A is not dead, and more to come.

Industry Notables: The announcement that RBI Burger King Corp. is putting $400 million of its own money to upgrade the Burger King brand in the US is a positive sign and testimony to new BK leadership. That BK is historically weak in the US goes back decades and scores of CEOs. It also indicates that nothing good happens in a brand unless store-level sales and cash flow (EBITDA less taxes and capital spending) is positive and growing…Private equity…in discussions with franchisees with brands that have been acquired by private equity funds, the number one complaint is that rolling CEO turnover exists—every 1.5 years or less destroys morale and momentum. On my part, I can see the difference in exit multiples with companies with higher CEO turnover.

Starbucks Investor Day:  Like everyone else, we look forward to seeing the grand plan for the future. From an investment standpoint, I wonder how much all these investments have added to the shop’s annual breakeven levels. Howard and Co. are convinced investing in partners equals improved sales and ROI. It should.    

Seen and Heard: While in Phoenix lately for a franchising conference, I toured a Portillo’s (PTLO) unit as well as a deep dive at a Dutch Bros (BROS) unit with an investor friend.  The Portillo’s unit is a big buildout (watch that) but the most amazing variety of food types under one restaurant roof. The realistic average ticket per person was $12-15. It has some beer and wine, and a drive-thru of course.  I had a burger and entrée salad, and both were high quality. The staff was beyond friendly and helpful. The investment question I have is how effective can digital and local store marketing be to drive awareness in those new markets so far from Chicago to drive sales and profits.

The Dutch Bros unit was in the heart of the ASU campus on the main road. It got tremendous walk-up and drive-thru traffic. The DT traffic drifting into the main road is a major problem of course. It is on a lot with parking, fortunately. The staff, about 5 on board at 6p, were friendly. They indicated they loved working there, with casual dress and atmosphere. Its pathway is solid and will compete with Starbucks, indies, and Dunkin to a lesser degree. Especially for sites and employees.  Their guests are young and price sensitive, but the drink profile is targeted.


About the author: John A. Gordon is a long-time restaurant industry veteran, with 46 plus years of experience in restaurant operations, corporate staff (Finance FP&A, 20 years), and 20 years via his restaurant analysis consultancy, Pacific Management Consulting Group. He works complex operational and financial analysis projects for operators, investors, attorneys, and others. Contact him at 619 379-5561 or jgordon@pacificmanagementconsultinggroup.com.

Orlando Sentinel – Another top Red Lobster leader leaves, this time to run Keke’s


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


Plenty. We restaurant types live and die by numbers all the time.

For example, in the restaurant M&A business, the calendar and numbers matter a lot in plotting the attractiveness of a transaction. In 2020-2021, QSR brands in particular were coming off of an early 2020 sales recovery, run-up of average ticket per transaction, closed dining rooms, higher drive through, and higher digital (think: higher average ticket as a result). Food and labor inflation had not yet hit.

Contrast to now, where restaurant level margins (of both QSR and sit-down restaurants) continue to be hit by rising food, paper, and labor rates. Restaurant operators everywhere are griping about margins 400-500 bpts lower than last year. Since the current year EBITDA base (adjusted or not) is now down, operators are finding their businesses are worth less, using the traditional earnings multiples and the current year EBITDA dollar base. That has caused selling to freeze up. Some small acquisitions have been noted. IPOs and the really big acquisitions are affected by interest rate declines, fear of a recession, prior deals, and intraday stock volatility.

What to do? I strongly recommend in your presentations you focus on multi-years (to not get caught in a downturn year) and also move away from EBITDA! EBITDA even as adjusted is awful, move it to free cash flow, which is a far more meaningful economic measure. Otherwise, wait, do due diligence, and strengthen your business.


One thing that is happening in the QSR space is that there is a reversion of product mix as we have gotten further away from the Pandemic. Recall then that digital traffic rose, dining rooms were closed, people ordered en masse for several days and average baskets—number of food items per transaction—grew. That is now slightly reverting to normal as we heard from Starbucks (SBUX), Chipotle (CMG), and McDonald’s (MCD)[1] just this week. So is this bad or good for us?

I recall being asked this question by investors during the Pandemic who were coming at from the context that eventually consumers can’t afford those big baskets of purchases forever. I told them then, and now, that I didn’t think affordability was the issue as the purchase was being spread out over a mass of people.

I believe this is mostly bad for us but we should be able to tolerate the normal mix moves guests make. Anytime we get our revenue more efficiently we like it but that is the joy of serving guests. They do what they do.


Looking for what we have all been waiting for, and yes, many world commodities have begun to shift downward. My friends at Restaurant Research recently published a chart in their weekly newsletter that showed downward producer price index costs noted for most of the vital food commodities, along with fuel oil and gasoline. That is great news!

However, it is going to take some considerable time for the shifts at the top of the supply chain to make their way through to the restaurant FOB back door pricing. One issue is that all the other costs in the supply chain have to be applied….manufacturing, driver wages, storage, transportation, markup, etc. And then the most important…all of the older, more costly inventory has to be used before the full effects of the less costly new inventory are used.

For restaurant chains who “contract out and lock in a price” this can be problematic when raw material costs finally fall. Restaurants need the assured product at a good cost. Experienced supply chain professionals know when there is a hint the cost begins to weaken, they will ease off on the contract amounts. But it is a dual-edged sword as you can see. Expect food commodity costs restaurant backdoor to fall later. McDonald’s is still talking about continued cost inflation for example, but later easing in the US.    Restaurant analysts often ask the question “ are you contracted out” but in reality, the proper question is, “are you contracted out for the proper amount of inventory on contract and where do you think the cost market is headed”?


I saw that family office Nierenberg Investment Management Company has taken a 10% ownership stake in Potbelly (PBPB) the 450-unit sandwich chain.  Potbelly has had difficult times and several CEOs and at least one activist battle that I can recall in the past. Current management is better but unfortunately mentioned the “hockey stick” development goal, e,g, we can be at 2000 franchisee units in 10 years. That is very difficult. The number of franchisees is down to about 46 system-wide and store-level margins are sub-par. That is where management must devote its priority.

IMO, it is just so critical for “activists” like Nierenberg to understand how the restaurant business really works before another inevitable cycle of management change is forced.  New franchisees want strong concepts before they join, with store-level margins 18% plus with royalty embedded.


About the author: John A. Gordon is a long-time restaurant industry veteran, with 45 plus years of experience in operations, restaurant corporate staff roles (FP&A), and management consulting. He is an IU graduate and a Master Analyst of Financial Forensics. His founded management consultancy, Pacific Management Consulting Group has been working on complex operations, financial analysis, and organizational assessment engagements since 2003. Contact: 619 379 5561, jgordon@pacificmanagementconsultinggroup.com.


[1]   SBUX Quarter One Earnings Call, Chipotle and McDonalds Earnings Call on July 26 2022.

Nation’s Restaurant News – Dutch Bros bucks slide among ’21 IPO brands

First quarter 2022 had 77 IPOs that raised $12.2 billion, compared to last year’s first-quarter total of 395 offerings that raised $140 billion, according to a Barron’s report based on data from Dealogic.

Dutch Bros bucks slide among ’21 IPO brands

Current bear market casts dark shadow over stock plans

Ron Ruggless | Jun 17, 2022

Dutch Bros Inc. remains the sole stock trading above its opening price among the five restaurant companies that went public in 2021, and the current bear market has cast a dark shadow over any IPOs planned this year.

As of Friday, the five restaurant public offerings of last year were led by Grants Pass, Ore.-based Dutch Bros Inc.:

  • Dutch Bros was trading at about $33 a share from a 52-week range of $20.05 to $81.40. Dutch Bros set an opening price of $23 a share when it debuted Sept. 15 and was the only one of the five restaurant stocks that was still above its opening price.
  • First Watch Restaurant Group Inc. was trading at about $13 from a 52-week range of $11.57 to $25.46. First Watch, based in Bradenton, Fla., set an opening price $18 a share and debuted Oct. 1.
  • Krispy Kreme Inc. was trading near $13 a share from a 52-week range of $11.98 to $21.69. Krispy Kreme, based in Charlotte, N.C., set opening price of $17 a share and debuted July 1.
  • Portillo’s Inc. was trading just above $15 a share from a 52-week range of $14.84 to $57.73. Portillo’s, based in Oak Brook, Ill., set an opening price of $20 a share and opened on Oct. 21.
  • Sweetgreen Inc. was trading at about $12 a share from a 52-week range of $11.72 to $56.20. Sweetgreen, based in Los Angeles, set an opening price of $28 a share and debuted on Nov. 18.

The record 2021 IPO year for restaurant companies may be a high watermark, increasing interest among other brands. Several restaurant companies had considered public offerings this year, including Plano, Texas-based Fogo de Chao, Seattle, Wash.-based MOD Pizza, a special purpose acquisition company agreement with Panera Bread and Austin, Texas-based Torchy’s Tacos.

“Management needs to be aware of the pressure every quarter to talk about numbers,” said John Gordon, principal with the Pacific Management Consulting Group, who recently attended a restaurant investment conference in New York.

He said analysts at the conference were discussing likelihood of a recession and its impact on the restaurant landscape. Those concerns were heighted in light of Wednesday’s Federal Reserve interest hike of 0.75%, the largest increase at a single meeting since 1994.

Gordon noted that investors, especially the institutional ones involved in IPOs, dislike uncertainty, and the landscape currently offers a lot of that.

But brand executives expressed interest in stock options, which were opened with public offerings, as a useful tool to incentivize general managers in a competitive job market, Gordon said.

Also, the IPO market has a rhythm, which may be slowing after a hectic year of 2021.

“There are only so many companies out there that are looking to raise capital,” said David Hsu, a management professor at the Wharton School at the University of Pennsylvania, in a SiriusXM report in April. “There’s going to be a natural ebb and flow.”

First quarter 2022 had 77 IPOs that raised $12.2 billion, compared to last year’s first-quarter total of 395 offerings that raised $140 billion, according to a Barron’s report based on data from Dealogic.

The stock market slide since, which has hit bear territory, has cast many IPO plans in amber for the time being. The Nasdaq market is down more than 30% since the beginning of the year, and the Dow Jones is down more than 17%.

However, bright spots exist among the newly public companies.

Andy Barish, an equity analyst with Jefferies LLC, noted in a preview to the Nantucket Consumer Conference that Dutch Bros has encountered some near-term same-store sales headwinds, but long-term growth is “unmatched in [the] industry.”

Dutch Bros, a drive-thru coffee concept, recently expanded in the Dallas market amid sales trends that had softened late in the first quarter because of higher consumer gas prices and inflation.

“Nonetheless, we think sales drivers exist (loyalty, digital, marketing, pricing, menu adds, op efficiencies) and current expectations could prove conservative,” Barish wrote, with a “growth engine best in the industry.”

Contact Ron Ruggless at Ronald.Ruggless@Informa.com

Follow him on Twitter: @RonRuggless

Wray Executive Search – Restaurants: Recession Underway or a Self-Fulfilling Prophesy?

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

I was in New York City last week to attend the Piper Sandler 2022 Restaurant Summit and to meet with clients and friends. Going to meetings is so refreshing now; people are so glad to see other people after the long Pandemic pause. The City was full of tourists; restaurants were generally busy. Some new stars there are beginning to climb the staircase toward greater visibility and expansion. The Bloomberg Pret Traffic Counter tool which counts heads on the street showed Midtown traffic counts still only at 65% of 2019 however but slowly improving.

Recession Talk Everywhere

Every macro view economist has an opinion when the next recession will hit: we are already in one; Q2 next year, etc. Going to the traditional definition that a recession is  2 quarters of decline in GDP, we might be close: we did have a small GDP decline last quarter and this quarter looks like a mess. The yield curve inverted Monday, which is telling. Still, we restaurateurs don’t need that talk, but we need to plan for such outcomes. This is on top of the multiple black swans that have hit us since March 2020.

The reality is that The Fed has the tool of adjusting interest rates to “pop the bubble” leading to the supra inflation now underway, and every indication is that they will do so this week with a 50 to 75 bpts interest rate increase.

Jack in the Box itself caught in a Box?

Franchisors are in a difficult position on earnings calls because they are “asset-light” and are mostly reliant on the franchisees, using their injected capital and debt to power unit development.  They can talk about new product and concept enhancements, franchisee health and backlogs, and marketing initiatives of course. Unless the brand operates a significant number of company stores, the recurring headline operating metrics are same-store sales/traffic/check, SDAs signed and the amount of net unit growth.

New JACK CEO Darrin Harris can be seen to be in a box himself as seen at the June 6 2022 Goldman Sachs Conference. [1] The Harris team has brought in new ideas and perspectives but has thus far been able to post positive net new unit growth. During the conference, Goldman analyst Jared Garber asked the inevitable question de jour: when is JACK going to post unit growth? Harris noted with margin compression underway and difficulty of construction, 2023 was “the year” that growth would happen. He admitted his team underestimated franchisee demand to get going earlier.

My note to JACK Management is that franchisees think about the marginal ROI of the actual new investment at that time, given today’s margin outlook and CAPEX costs. It doesn’t matter so much whether the franchisee has 20 units or above or over $5M in EBITDA or low leverage. Franchisees have lived through the bad times and want that new investment to better their conditions.

More free advice to JACK

So, get the company unit expansion kicked off. This will be beneficial. It will get the company flag out into expansion markets, and franchisees can follow.

Restaurant Margin Recession Underway 

Unfortunately, the march of the effect of double food and labor wage rate inflation continues to depress restaurant-level margins. There is discussion again of 6 or 8% store-level EBITDA margins, which is of course unsustainable. Rick Ormrbsy, CEO of Unbridled Capital[2] discussed a lenders survey on his webinar June 14, in that 40% of lenders noted current operating conditions were negative and worsening, while 40% noted conditions were negative and improving. Rick, who mainly works with QSR brands M&A noted “the value you thought the business was….just isn’t the same now.”  Pizza, Burger, and Chicken brands were least preferred by lenders.  [3]

Taking the longer view…..price v. traffic v. cost inflation

We restaurant types tend to live and think by fiscal quarter. It is understandable, it is how we were educated.  Looking more broadly, it is incredible how much the industry has recovered since we “got through to the other side” of the Pandemic. Jonathan Maze’s excellent article “ Restaurants Recover From the Pandemic but Things are Far From Normal” in Restaurant Business displays that in terms of sales and traffic. [4] Jonathan notes that only 10 public chains are below 2019 levels, with 26 above 10% higher, with steakhouse operator STKS leading the way. The recovery has absolutely come from higher prices. The BLS national statistics[5] show that along with the earnings call transcripts where price and check are broken out. Traffic is down. Jonathan suggests that the 3-year decline is 2.6%. [6]

I’m not at all sure that is abnormal for a Pandemic effect. The art of counting guests is problematic except in casual diners and above, where an entrée can count as a proxy for a guest. And the Pandemic changed meal habits everywhere. With ticket going up, we have to overlay convenience and other guest rating metrics.  Speaking as an analyst, we do need more analysis. Unfortunately, the tendency on some public company calls is to cut detail, which is not long-term healthy for telling to brand’s story.

Timing is Everything: Management Must Act to Protect Margins

In May, full-service restaurant prices rose 9.0%, fast food prices rose, 7.3%. Fortunately, grocery store prices rose more, 11.9% on a year-over-year basis.[7] As I’ve noted before, in my opinion, that is our saving grace for now. Unfortunately, the margin compression that CEO Darren Harris at JACK referred to is present in every brand. This run of inflation is not transitory in our business. We have to cover costs as smartly and as timely as we can. Guests will not forgive the cold shock of a year or more of accumulated price increases that we didn’t take waiting for conditions to “normalize”.


About the author:

John A. Gordon is a 45-year restaurant industry veteran. Now a restaurant analyst and management consultant, he has prior experience in units, 20 years in corporate staff roles (Finance FP&A roles), and 20 years via his founded firm, Pacific Management Consulting Group.  As a Master Analyst of Financial Forensics (MAFF), he works on complex operational, financial management, and strategy topical engagements. Typically, investors, operators, franchisees, and attorneys seek him out at (858) 874-6626, jgordon@pacificmanagementconsultinggroup.com.



[1]  https://kvgo.com/gs/jack-in-the=box-june-2022

[2]   https://unbridledcapital.com

[3]    Footnote 1, Id.

[4]   restaurantbusinessonline.com/financing/restaurants-recover-pandemic-things-are-far-normal, Jonathan Maze, June 14 2022.

[5]   https://www.bls.gov/news.release/cpi.nr0.htm

[6]  Footnote 2, Maze, Id.

[7]  Foodnote 3, Id.

Wray Executive Search – Restaurants: The Real World So Far, May 2022

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

Pricing and Customer Considerations at the Top of the List

Pricing and Fear of consumer reactions continued to take top billing in the restaurant space. On May 11, BLS reported[1] grocery store prices [food at home] rose 10.8% in April which is good news for restaurants.

Food away from home, [restaurants] rose 8.7% in April at full service and 7.0% at limited-service restaurants.  That is yet another month where restaurant prices have risen less and thus have gotten a break—and an opportunity to take some mind share.

CNBC on-air talent is saying no US consumer discretionary companies are signaling trouble [2]Casual dining brands and fine dining brands have been doing well, especially The One Group (STKS), Ruth Chris (RUTH), and Bloomin Brands (BLMN). QSR US brands are doing less well.  McDonald’s (MCD) SSS was plus 3.5%, Wendy’s (WEN) plus 2.4%, and Burger King (QSR) .5% from their last earnings calls, for example.

In terms of pricing reaction spots, McDonald’s noted lower-income guests are trading down in terms of PMIX; WEN noted sales softness among Households under $75K income and  Dutch (BROS) noted a wave of sales softness hit in March after gasoline prices spiked. More on BROS in a bit. But that largely has been the summation of restaurant company comments to date.

Restaurant Margins have been awful, almost everywhere. That is the effect of double food/paper and labor rate inflation.

Stacked Comps and Profit Comparables

When researching and trying to isolate a trend, I am appreciative of companies and analysts that are posting sales and company store margins (at least) to a 2019 base, a 3 “three” stacked comp. The way I see it, the company cares enough to lay it all out. This is all the more relevant in 2022 with a pre-pandemic base (2019), and generally, poor quality 2-year stacked base (2020) and the usual year over year base (2021).  Companies might pick the base that makes them look the best; I would think it odd for companies to make references to 2020 now. A reference to 2019 is useful as it shows the company SSS or profit growth over the pre Pandemic base, always constructive.

Timing is Everything: Risk of Waiting too Long on Taking Price

Dutch Brothers (BROS) the 2021 IPO star ran into some trouble as evidenced in their May earnings call. They experienced a classic “turn” in which the rate of sales growth fell off, company restaurant margins fell off due to food, paper, and labor inflation, and guidance was pulled back. [3]Predictably, the stock took a huge hit. Dairy was the big commodity mover. Forensically, BROS had last taken only 1.1% price in November 2021. The preopening expense effect of opening so many stores as they are is negative. BROS also noted that sales fell off in March coinciding with the latest band of gasoline price increases. 55% of BROS guests are under 25 years of age per their research.

The effect of the sales slowdown in March is that BROS calculates that they are not getting their normal Q1 seasonal sales pickup.   In addition, the company store’s contribution margin fell to 18.3% versus 26.8% in 2021. With the sales softness, Senior Management has no plans for price increases “at this time”.

Dutch BROS is a very good brand. They can work themselves out of this situation. Still, the lesson for all might be to take small disciplined price increases where warranted and not be in a situation where big catch-up price increases later might be necessary.

Franchisor CEO getting the toughest question on earnings call recently…..

The CEO of an international QSR franchisor was stretched to respond to a question asked about franchisee profitability recently. A review of the call was telling in three ways.  Here is a lightly edited recap of the total exchange, editing out only the Brand CEO and CFO name.

Chris O’Cull:

Thanks, good morning, guys. CEO, how are U.S. franchisees reacting to the margin pressure and even rising interest rates? I’m just trying to understand how these factors might affect the willingness to open new units or even just make investments in the business.

CEO, Brand X

Yes. No, as you think about the partnership that we’ve always had with our franchise community, it’s really tight. And we’re regularly meeting with them to make the right calendar adjustments, to make sure that we’re still focused on our one more visit, one more $1 strategy. So we’ve got that good high loan calendar in place, continue to drive folks into our app, and really partner with them to drive a lot of profit enhancement actions along the way. What we need to do on price, how we continue to hold in there nicely on mix, how we trade folks up with great innovation in the rest of the daypart as well as breakfast. And then a lot of work to really take out some of the complexity in the back of the house of the restaurants, and we continue to drive op simplification to make sure that we manage the profitability story. As CFO Brand X  said earlier, we’re starting to build margin. He talked about P3, we talked about additional pricing actions in the – into Q2. And as we think about the last 2 years, we’ve had a lot of momentum in our business. We talked about record profits in 2020. We’re collecting our franchise financials right now, and I’ll let CFO Brand X talk through that.

CFO, Brand X

Yes. CEO, we have preliminary financials. We will finalize it at kind of show the full detail at Investor Day, but the headline is record profit for the U.S. franchise system in 2021. That’s positive. Leverage ratios on their balance sheet are basically unchanged. And as we look at our benchmarks, our franchises are less levered than the industry benchmarks. As a result of it, we feel comfortable that we’re really going into clearly a tougher time with very healthy balance sheet, record profits and therefore, it’s still a confidence in the growth algorithm for our brand and for our system.

CEO, Brand X

So net-net, Chris, what you’re really seeing is that we’ve had some great momentum on the unit development in Q1. We’re still comfortable with the strong pipeline that we have in place and the commitments that we have to deliver on the new restaurant openings this year that our franchisees are in a position to get to that 5% to 6% net unit growth during the course of the year. Supply chain is a little more challenged, and the team has done a great job really getting ahead of making sure we’ve got all the components to get to those openings this calendar year.

So now, three observations…

Observation One: Brand X CEO really cares about that 5 to 6 % net unit growth metric. I got the impression the franchisor would move heaven and earth to make those goals. Guidance given? Investor expectations?

Observation Two: The CEO is thinking in 2021 terms, not 2022 terms. Note the CFO is now doing the annual prior-year franchisee profit and balance sheet survey. Okay, but what about the sharp margin declines in 2022? And interest rate hikes.  They need a more current FY data sampling system.

Observation Three: Brand X is thinking about units in the pipeline, already funded with 2021 cash or loan contracts. CEO doesn’t answer Chris question which was about 2022 unit level franchisee economics which will be lower as their current call results demonstrated. [4]   Those finances will matter and affect those new units going forward.

Bottom line, running a franchised system is a lot of work.  


About the author:

John A. Gordon is a restaurant industry veteran with a background in operations, corporate staff roles (Financial Management), and via his founded management consulting firm, Pacific Management Consulting Group. He works complex analysis projects for clients such as brand organizational diagnosis, investor support, and litigation projects. He is reachable at 858 874-6626, email jgordon@pacificmanagementconsultinggroup.com.


[1]   https://www.bls.gov/news.release/cpi.nro.htm

[2]   CNBC Sara Eisen, The Recession Debate, May 16 2022, https://www.cnbc.com/video/2022/05/16/you=could=build=a=case=that=the recessions=already-started.

[3]   See Dutch BROS Investor Relations Web Page and presentations.

[4]    Brand X Earnings Call Transcript, as captured by Seeking Alpha, www.seekingalpha.com, May 2022.