Business Insider – Subway franchisees are ‘desperate, livid, angry, frantic’ as the company forces some to choose between higher fees and ‘draconian’ rules

By Kate Taylor and Nancy Luna 

6 hours ago
subway
Subway franchisees are facing off against the company yet again. 
Joe Raedle/Getty Images
  • Subway is presenting franchisees with a tough choice: higher fees or a “draconian” new agreement.
  • The agreement lets Subway control hours, requires participation in deals, and bans criticism.
  • If franchisees don’t want to sign, their royalties rise to 10%, up from an already high 8%.
  • See more stories on Insider’s business page.

Subway is forcing franchisees to choose between higher fees and a “draconian” new agreement, creating yet another conflict at the struggling chain.

In recent weeks, insiders have been buzzing about a new deal that Subway presented to franchisees at renewal time. The agreement is significantly stricter than the prior one, granting Subway control over hours of operation, requiring franchisees to participate in menu promotions, and banning negative comments about the company “in any forum.”

A representative for Subway told Insider that the agreement was “competitive and comparable with other franchise agreements” in the restaurant industry. John Gordon, an expert on the restaurant industry, said that “no one in their right mind” would sign Subway’s new “draconian” agreement.

Subway franchisees have another option if they don’t want to sign the new agreement, but it’s financially onerous.

Franchisees can stick with their original terms if they pay a 10% royalty fee. Subway franchisees pay corporate 8% of gross sales every week, already higher than industry rivals such as McDonald’s and Jimmy John’s. Gordon said Subway would be the only restaurant franchise to have a 10% royalty fee. A rate so high that it would immediately stand out like a sore thumb to potential franchisees, he added.

The Subway representative said the option to remain on the old agreement in exchange for 10% royalties was included in the prior franchise agreement, introduced in 2001.

“Franchises are desperate, livid, angry, frantic,” a West Coast franchisee of more than two decades told Insider.

Hundreds of Subway locations have closed in recent years. The new agreement is going to make it even harder to turn a profit, said the West Coast franchisee, who discouraged new franchisees from buying stores.

“The changes to the new franchise agreement are just outlandish, and I don’t think any franchisee 20 years ago could have even contemplated the vast changes that they’re taking now,” said another veteran operator who wished to remain anonymous.

Insider spoke with five Subway franchisees about the new agreement. While their identities are known to Insider, they were granted anonymity to avoid professional repercussions — especially in light of the proposed agreement, which some said would even ban criticizing Subway in private franchisee forums.

“It’s just silly that they have a clause in there like that,” an operator said. “There’s always going to be disagreements, but to say that we’re completely prohibited from our First Amendment rights of free speech is outlandish.”

Subway’s new agreement overhauls existing terms

Ron Gardner, an attorney for the North American Association of Subway Franchisees, outlined some of the new conditions in a document — sent to franchisees in mid-May — reviewed by Insider.

In the document, Gardner said that this was the “first major overhaul in the Subway franchise agreement in over 20 years,” and that franchisees looking to sign new agreements or renew agreements will be asked to sign on to these new terms.

The document and franchisees who spoke with Insider said that changes include:

  • The company can control hours of operation, which franchisees said is particularly worrisome as they struggle to hire and retain enough workers to stay open.
  • Franchisees “cannot make any disparaging or negative comments about Subway in any forum or on any medium,” Gardner said.
  • Franchisees are required to participate in reward programs and marketing promotions (some of which, such as the $5 Footlong, have been a point of contention among franchisees).
  • Anything in stores with the Subway name on it, such as furniture, signs, and decorations, will remain Subway’s property when the franchisee leaves the business.
  • Subway could require franchisees to “invest in and implement new technology digital initiatives” at their own expense, the document said.
  • Subway can terminate a franchise agreement if a store is closed for any two days in a 12-month period.
  • If a franchisee leaves the system before their agreement expires, Subway can require them to pay up to three years’ worth of “future lost royalties.”

One of the veteran Subway operators Insider spoke with said the proposal to give franchisees a choice of paying a higher royalty fee of 10% or agreeing to new franchisee terms was first introduced 20 years ago. The Subway representative confirmed this, saying that the “first franchise agreements containing that provision became effective in 2001, so with a 20-year term, they are now expiring, and that provision is being implemented for the first time.”

So when the increase from 8% to 10% was presented as an alternative to a new franchise renewal agreement, it came as no surprise. But franchisees said they were blindsided by the level of control that Subway demanded in the new agreement.

The veteran franchisee was especially upset by a provision to force franchisees to comply with national menu promotions, deep discounts that kill revenue and profits. Operators often don’t participate in these promotions so they can stay afloat. Last year, some franchisees even filed complaints with the Federal Trade Commission in response to a “$5 Footlongs when you buy two” deal, Restaurant Business reported.

This operator called the new terms borderline “price-fixing.”

Subway franchisees fear they’re being squeezed out

 

subway
Some franchisees fear they are being forced out of the business. 
Artur Widak/NurPhoto via Getty Images

Some franchisees said the new agreement was part of a larger plan to force operators — specifically those with fewer stores — out of a business that’s already in free fall.

The chain, which denied that it was up for sale, permanently closed more than 1,600 Subway locations in the US  in 2020. Subway’s US sales fell to $8.3 billion in 2020, down from $10.2 billion in 2019, Technomic reported.

Franchisees interviewed by Insider said Subway was doing whatever it could to boost revenues amid declining store sales.

Under CEO John Chidsey, who joined in November of 2019, Subway increased its franchisee start-up fees in 2021 and cut other franchisee benefits. One operator from the eastern US described Chidsey as “jonesing for money.”

If stores close, Subway wants a bigger payout, franchisees said. According to the new franchise agreement, franchisees could have to pay three years’ worth of royalties and advertising fees if they leave the system prematurely.

“This is a squeeze on the franchisees,” the veteran operator said. “If they can’t make a profit off royalties, they’re going to squeeze as much money out of that bottom third of stores until they all close.”

Over the past year, the company has downsized its development agents, a middleman position that oversees franchisees in large regions, and rebranded the role as “business developer.”

Between May 20, 2020, and December 1, 2020, 11 development agents left the system, according to corporate documents reviewed by Insider. Those territories, which include oversight of nearly 2,000 Subway restaurants in US states, are now overseen by corporate.

A Subway representative confirmed that the chain had adopted this more traditional franchisor/franchisee model in certain markets with the introduction of Subway Market Operations.

“The SMO team is led by franchise industry experts who work directly with franchisees to drive operational excellence in their territories,” the representative said. “Subway’s business developers have and always will play a key role in our brand development and franchisee operations.”

With development agents out of the picture, Subway gets a larger cut of royalty fees, as these agents typically received about one-third of those fees. The diminishing ranks of these development agents have left franchisees without a layer of protection from leaders who might question these new terms by corporate. Most development agents owned their own stores, so they had skin in the game.

“The development agents publicly will not say anything, but behind the scenes, they’re going to say that this is terrible for them as well. So the fewer that there are, the less they’re going to push back,” said a veteran franchise operator.

The new agreements could also make Subway a more appealing acquisition target, Gordon said. A franchise agreement that guarantees a 2 percentage-point increase in royalties “tends to make the Excel and PowerPoints look better,” especially at a company that has some issues, Gordon said.

Some franchisees want to take a stand

In May, a group of Subway franchisees wrote an open letter to owner Elisabeth DeLuca, calling for her to fix the myriad problems they have with the business and reduce royalties to 4.5%. DeLuca, the widow of cofounder Fred DeLuca, owns Subway along with cofounder Peter Buck.

Instead, Subway proposed an agreement with higher royalties. To some, this felt like a slap in the face.

Some franchisees want to take a stand against the new agreement. One franchisee Insider spoke with said he and others were planning to contact their elected officials, while another suggested a walkout across the system.

“All they got to do is lock together, and close the doors for a week,” said the operator from the eastern US. “It would cripple Chidsey.” He added, “You can bring him to his knees.”

Fighting as one is the only way, he said. If everyone protests, that makes it that much harder for Subway to fight back as the company would have to take some 22,000 US units to arbitration over any alleged breach of contract. The operator said that Subway is run by executives hired by Chidsey, many from his previous position running Burger King, who know nothing about Subway.

“He’s effectively backed Liz and Dr. Buck into a corner — they can’t fire him,” the operator said. “There’s effectively no one at the company that understands that universe.”

New York Post – Subway hits franchisees with new store closure rules

By

Subway stores that close more than once a year without permission barring “an act of God” — a strict legal term that tends to include only the most severe of natural disasters — risk being taken over by the Milford, Conn., company headed by ex-Burger King CEO John Chidsey, sources said.

The restaurant chain — which grew to popularity with its $5 footlongs — is allegedly making these and other new demands via new 20-year contracts it started handing out last month.

Franchisees who choose not to agree to sign their stores in the event of a non-qualifying emergency away will be required to fork over 10 percent of their gross revenues to headquarters, sources said.

A New York Post composite showing people shoveling snow outside a Subway Restaurant
Subway franchisees say the restaurant chain is threatening to take their stores away if they close too often, including in a snowstorm.NYPost composite

Taco Bell, by contrast, charges its store owners a 5.5 percent royalty fee, while Burger King levies a 4.5 fee and McDonald’s demands just 4 percent of franchisees’ revenues.

Subway CEO John Chidsey
Subway franchisees say Subway CEO John Chidsey is behind the new snow day push.
Getty Images 

The push has some store owners threatening to walk away from the company co-founded by Fred DeLuca in 1965.

“I’ll start systemically shutting them down,” a Northeast franchisee told The Post of the new demands, the details of which were also outlined in a recent report to members of a Subway franchisee association by law firm Dady & Gardner, a copy of which was obtained by The Post.

Other terms of the new contracts being handed out to new franchisees and current franchisees whose 20-year contracts are coming up for renewals include:

  • No negative comments about Subway in any forum
  • No using Subway’s name on franchisee websites or email addresses without permission
  • Franchisees that leave the system prematurely must pay royalties for three years based on the prior year’s average
  • Let Subway control hours of operation, and pricing
  • Pay $155 a month for rights to Subway’s digital menu board
  • Give any furniture, sign, or material that says “Subway,” back to Subway, even though franchisees may have paid for it, at the end of the relationship.

Experts say the most onerous change will likely be Subway’s demand that restaurants stay open unless permitted otherwise, with only one exception being made every 12 months.

Subway restaurant in the Mall of America, Bloomington, Minneapolis.
Subway franchisees say the restaurant is also cracking down on their criticisms of the company.
Alamy Stock Photo

While Subway plans to be lenient on stores that have suffered an “act of God,” experts say that’s legal jargon for only the most severe and unexpected of natural disasters, like a flood or an earthquake.

It’s unlikely, they said, to protect franchisees from snowstorms, electrical outages or even acts of terrorism.

“When I was a franchisee, my Subway was just outside the 9/11 frozen zone. Since terrorism would not be an act of God under NY law, if this new franchise agreement had been in effect, Subway could have taken my store,” said Paul Steinberg, an attorney who also used to own a New York Subway restaurant.

Steinberg said that when he was running his Subway, he aimed to open every day, even on holidays. But it was impossible.

“Often on holidays such as Thanksgiving and Christmas, nobody wanted to work — even at double or triple pay — and so I and my partner worked and skipped our family gatherings but even with that, we would have times when the snowfall was such that we would not open,” he said.

“In a place like New York, you might be closed two days per year due to snowstorms,” he said.

A Subway sandwich in wrapper
Subway store owners who refuse to agree to the new rules must fork over 10 percent of their revenues, source said.
Getty Images

Subway acknowledged that it has changed the terms of its franchisee contacts for the first time in 20 years.

“As would be expected for a large brand over the years, we recently evaluated and made changes to our franchise agreement that we believe makes it more consistent with other franchise agreements in the industry,” the company said in a statement.

It also acknowledged that franchisees who choose to not sign the new contracts will be forced to give up a larger cut of their sales.

“The royalty rate would increase to 10 percent for franchisees who elect to remain on the old form of agreement when their renewal came up. It’s important to note that this is NOT a new royalty increase that we’ve implemented,” Subway said.

People walk past Subway sandwich store in Chicago
Subway is making the onerous new demands as it continues to lose stores.
Alamy Stock Photo 

The upheaval comes amid rumors that Chidsey, who took the helm in late 2019, has been cutting costs, including moving operations to Florida from Milford, Conn., in an effort to gussy up the company up for sale.

Restaurant consultant John Gordon, who also saw the Dady & Gardner report, theorized that Subway is making a bet that the average franchisee will not shutter in face of the new contract terms, but rather agree to fork over higher royalty fees.

“What I think they are doing is creating a franchise agreement so draconian that franchisees will have no choice but to pay the 10 percent royalty fees” rather than accept the new terms.

And that, he said, could help the retailer pay for the growing number of leases it has piling up tied to shuttered stores.

Subway, which is responsible for franchisee leases, has suffered more store closings than openings since reaching a peak of 27,103 restaurants in the US in 2015.

Over the last three years, a net 14 percent of US Subway restaurants have closed, resulting in a 26 percent decline in royalty payments, according to public filings. Last year, Subway reported 1,601 net US store closings, bringing the total number of US locations to 22,201.

The Subway franchisee who told The Post he’d rather shutter his stores than agree to the new terms says eight of his stores have 20-year contracts coming up for renewal in the next 18 months.

He could sell those stores, but doesn’t see a buyer accepting the onerous new contracts or jacked up royalty fees. And he can’t afford to operate the eateries under these conditions. As it is, only half of his restaurants make money.

“I built this. As I start looking back, I wonder was it worth it?” he asked, reflecting on the long hours he has put in and family time he’s missed. “You can’t get out because no one wants to buy these stores.”

Franchisees posting on a private blog moderated by the North American Association of Subway Franchisees, the membership group behind the Dady & Gardner report, expressed similar feelings.

“The agreement kills any chance to sell our stores,” a Wisconsin franchisee said.

“Subway is not in line with their competitors on this, they just want all the control they can get,” an Alabama franchisee said. “Pure insanity!”

“I’m 100 percent over this,” a Pennsylvania franchisee said. “This is not what I signed up for and I’m only four years into being a franchisee.”

Ironically, franchisees who agree to the new contracts may no longer be able to post their criticisms of Subway on NAASF’s membership forum.

Steinberg, who also reviewed the Dady & Gardner report, agreed that Subway appears to be orchestrating a money grab.

“To me, this looks like a maximum milking of the cash cow with no regard for maintaining a working relationship with franchisees … or even any regard for the long-term health of the franchisor. This would be irrational to the point of verging on bizarre, but the pieces fit,” Steinberg said.

He theorized that Subway, which saw sales hit hard during the pandemic, may be concerned about its own sales prospects.

“Co-owner Dr. Peter Buck, I think he soured on the growth potential of the Subway brand long ago,” Steinberg said. “He is a smart guy and may figure that if Subway cannot find a buyer it is fated to a long and irreversible decline. In that case, it may actually be smarter to collect more revenue upfront even if it accelerates the inevitable decline.”

Restaurant Business Podcast – Why There Are So Many Big Franchise Disputes Right Now

This week’s episode of the RB podcast “A Deeper Dive” features restaurant consultant John Gordon, talking about franchise disputes at McDonald’s, Subway and 7-Eleven.

The three biggest franchise brands in the world are all embroiled in disputes with their U.S. franchisees.

This week’s episode of the Restaurant Business podcast “A Deeper Dive” features John Gordon, a restaurant consultant out of San Diego, who talks about these disputes and why they’re happening.

The three brands are McDonald’s, Subway and 7-Eleven. At McDonald’s, franchisees have been pushing back against a $70 million technology fee and could take legal action to stop it.

At Subway, the brand is closing 1,000 restaurants a year, operators expect others to walk away and now the company wants to increase their royalty payment to 10% from 8%already high when compared with other sandwich brands.

7-Eleven, the giant convenience store chain getting increasingly into the food business, has issues of its own—most recently with franchisees pushing hard to be able to close overnight because they can’t find enough workers.

Gordon discusses each of these disputes and whether they have anything in common.

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Wray Executive Search – The Restaurant Puzzle Palace

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

Compared to years and decades ago, restaurant managers at all levels have so much more information. When I started in 1978, it was about French fry yields, meat variances, and labor hours versus chart.  Those key performance indicators (KPIs) are still important but now there are real time guest ratings and guest flow indicators to manage.

I’m working a corporate transformation project for an international multibrand franchisee with several US brands. They are very sophisticated and invested greatly in management systems. One of the findings we realized is the data itself seen every month needed to be examined from a 30,000 foot view; one month of results was not a call to action but interesting, rather best seen as a part of the puzzle to be seen from above.  The lesson: take your time but not too much time to see the trend.

A Promising View From Above

We are amid Quarter One restaurant earnings and the results have been spectacular when viewed against 2020. Of course, 2020 is the worst base in the world to compare to as that was the Pandemic year.  Most but not all companies and analysts have shifted their focus to discussion against 2019 as the base. Facteus, the consumer spending reporter based on credit card sampling, shows healthy weekly full service and quick service spending gains versus 2019 through May 4 via their FIRST system.  To be sure, the full-service segment did not hit positive until March when the Biden stimulus funds began to flow.  On Friday, May 7, the number of US passengers clearing TSA gates was 1.7 million, a post Pandemic record, but still, a way to go from the 2.4 million average pre March 2020 and in 2019. [1] Coresight Research reported that via their sampling, more consumers dined at restaurants in late April to May and are resuming general social activities.[2]

Every time that cash has been injected into the economy, restaurant sales have taken off. So it is logical to assume that there will wear off as the funds are spent down. The good news is the stimulus raised restaurant demand into our historical peak months of May-August. While vaccine progress continues, it is slower than we might hope.  I am watching movie and sports events attendance as well as summer travel as factors to offset the wear off of the stimulus effect. We also need resumption of meetings and conventions, which there are promising signs this fall.   Watch this space for future developments.

IPOs, and SPACs in the Restaurant Space: Do Your Due Diligence

Very good signs point to new IPOs coming: Torchy’s and Dutch Bros. are making all the right signs and moves. Torchy’s Taco’s lead by veteran CEO G.J. Hart presented at the 2019 ICR Exchange and its momentum (and good food) then was clear. Dutch Bros. is a small box coffee DT chain in Oregon and Northern CA featuring specialty coffee and is a real draw here. What was more surprising was that Krispy Kreme announced that it had filed private documents with the SEC to go public. It was surprising to me only that JAB Holding, the Luxemburg family holding fund had such strong results with Krispy, especially international results, since 2015.[3]  One very strong motivation: the stock market has soared in most sectors for all kinds of reasons. Investors and prospective companies seek returns.

There is also a literal boatload of restaurant SPACS present, 8 by the count of Jonathan Maze in March.[4]    A SPAC is a specialty purpose acquisition company, which raises money and has two years to make an acquisition. Often, restaurant insiders are part of the board and serve as “rainmakers”. SPACS have been used for years, they offer quicker access to the stock market listing. Burger King was a SPAC listing in 2012. However, due diligence on smaller companies is recommended. For example, the highly promoted better burger BurgerFi went through its SPAC process but then was unable to publish its first annual audited financial statements. As a result, it recently received the routine warning from NASDAQ that it was out of compliance with the Exchange’s rules and that it must comply.[5]

For that matter, most investors prefer the traditional IPO process, with a S-1 disclosure document, roadshows, and known investment banks. I can’t stress the importance of reviewing baseline financial statements (income statement, balance sheet, and sources and uses of cash) and outyear projections critically, comparing to as many different scenarios as possible.

Chicken Sandwich Product Development Note:  New News Please

Early in my corporate staff career (finance), I got the opportunity to work with both supply chain and concept and product development routinely.  As the chicken sandwich wars have covered the globe, imagine my amazement that every chicken sandwich is essentially the same with the same flavor profile. This is just beyond belief. I would have thought there would have been some variability, some chain claiming some unique flavor profile. Apparently not. Of course, I understand the need for QSR simplicity and uniformity coming from that segment initially. Hopefully, some QSR brand can pull off a marketing and product development coup by adding sauces/flavors/seasonings.

About the author:  John A. Gordon is a long time restaurant analyst and management consultant. He specializes in operations, financial management and strategic assessments and reviews for clients, including investor due diligence and litigation support. He is a master analyst of financial forensics (MAFF) and can be reached at jgordon@pacificmanagementconsultinggroup.com, office 858 874-6626.

[1]   See https://www.tsa.gov/coronavirus/passenger-throughput

[2]    Coresight Research, May 10, 2021.

[3]   Restaurant Business Online, The Bottom Line, May 5 2021

[4]   Restaurant Business Online, Here Are All the Restaurant SPACS Right Now, March 17 2021.

[5]   Nation’s Restaurant News,  NASDAQ warns BurgerFi…, April 20, 2021.

New York Post – Restaurants dangle bonuses amid labor shortage — and workers aren’t biting

By Lisa Fickenscher

The restaurant industry is starved for workers –and some operators are going to desperate lengths to reel in prospective hires.

James Meadowcraft, a McDonald’s manager in Tampa, Fla., recently advertised plans to pay $50 per job interview on the sign outside his location that sits along a busy thoroughfare.

“I tried to make a little splash,” Meadowcraft said of the sign, which signaled that interviews would be conducted Mondays through Fridays at 2 p.m.

But the enterprising restaurateur removed the sign after just two weeks because it failed to lure a single candidate. “No one responded,” Meadowcraft told The Post. “I didn’t even get anyone trying to scam us.”

Experts say it’s a sign of just how difficult it could be for restaurants — from fast-food joints to five-star venues run by celebrity chefs — to ramp up staff as the economy tries to bounce back from its pandemic lows. As The Post has previously reported, low-wage workers are in short supply as generous government benefits stand to pay some people as much as they would if they were working a full-time job.

“The industry is very desperate,” John Gordon of Pacific Management Consulting Group told The Post. “Cash bonuses are not the norm in the restaurant industry.”

Full-service eateries and bars like The Galley and Mary Margaret’s Olde Irish Tavern in St. Petersburg, Fla., have taken to handing out $200 checks to all new hires as of March 25, managing partner Pete Boland told The Post. New employees also stand to snag “a potential raise after a 90-day performance review,” Boland said of the perks he’s advertised in a local trade publication.

So far, however, the offer has failed to lure any prospects, Boland told The Post. “It’s been a month and no one has responded to the ad,” he said.

Even celebrity restaurateurs like Stephen Starr, who operates eateries across the country including Buddakan, Pastis and Morimoto has taken to dangling $300 signing bonuses at some of his restaurants, he told The Post’s Steve Cuozzo.

Starr didn’t return a request for comment about whether the bonuses are working, but Jimmy Haber, owner of swanky chophouse operator BLT Restaurants, says the job market is so bad right now he doesn’t know if he should even bother rolling out his new bonus plan.

Restaurateur Stephen Starr
Restaurateur Stephen Starr is using signing bonuses to lure workers.
Getty Images

Haber, whose company runs BLT Steak and BLT Prime restaurants in the Big Apple, Miami and other locations around the world, “has strongly considered sign-on bonuses” to help with the job crunch, he told The Post. The plan would be to pay bonuses ranging from $500 to $2,000, depending on the position, between 30 to 90 days after hiring.

“But we can’t find any suitable candidates to offer the bonuses to,” Haber complained.

Of course, the failed efforts are unlikely to deter other restaurateurs from trying their luck as the industry scrambles to meet soaring consumer demand fueled by a growing vaccination effort and government stimulus checks.

Another McDonald’s franchisee, who asked not to be identified, said he recently started offering $200 bonuses to new hires who stay with the company for 90 days.

“A lot of operators” are offering $100 signing bonuses, he said, adding that it’s too early to tell whether either payment plan will help lure workers.

“Our staffing levels have not really changed from a few months ago, but the demand (from customers) has gone up dramatically,” the operator said. “Stimulus + tax refunds + pent up demand + extended unemployment has given the food industry and enormous boost all at once.”

Nation’s Restaurant News – Panera Bread got rid of in-house delivery: Here’s why that’s significant

Panera Catering.jpgPanera Bread
Panera Bread closed down their in-house delivery channel without an announcement.
The fast-casual chain has offered in-house delivery for five years but confirmed this week it would switch to third-party-delivery only

Joanna Fantozzi | Apr 15, 2021

Panera Bread confirmed Thursday that they have closed their in-house delivery channel after five years and will now rely on third-party delivery services instead. The change was administered without any fanfare after the St. Louis-based bakery/café chain had previously expanded its delivery capabilities over the years to become one of the largest non-pizza restaurant companies offering in-house delivery.

“Panera continually evaluates our model to put guest preferences at the center of everything we do,” Chris Correnti, senior vice president of off-premise channels at Panera, told Nation’s Restaurant News. “This change enables Panera to offer a broader delivery range to serve increased demand for delivery, in response to an off-premise market that has grown and shifted dramatically over the past year.”

For the first three years of Panera’s delivery experiment, the company relied entirely on its own in-house delivery capabilities and fleet of drivers, expanding the program over the years until by 2018, the Panera app and website offered delivery services in 1,300 locations across 897 cities. At the time, Panera was bucking trends as an outlier as most chains were turning to third-party delivery operators. In 2018, NPD Group warned that the downside to building your own fleet of delivery drivers was dealing with higher labor costs in an industry known for its rapid turnover rates.

In the summer of 2019, Panera began offering third-party delivery for the first time in partnership with DoorDash, GrubHub, and Uber Eats, but clarified that they would maintain their own delivery drivers for quality control and to cut down on third-party delivery commission fees. But now that experiment is now over.

Although Panera did not expand further upon their reasons for giving up on in-house delivery, John Gordon, a restaurant analyst with Pacific Management Consulting Group, said that he would bet it has to do with the staffing crisis:

“For Panera to abandon their vehicles and the capabilities they built in years ago, I can only think they did not want to do this and they are so short on employees that they had to,” Gordon said. “I think they would put [in-house delivery] back in a heartbeat, which may be why there’s no publicity on this: they may want to resume it immediately once labor conditions resume. It’s costing them money to do this.”

Although it’s become increasingly uncommon to find larger restaurant chains that invest in their own in-house delivery rather than fall back on third-party partnerships, Panera is not the only company to invest in their own delivery fleet. Portillo’s Hot Dogs announced plans to roll out an in-house delivery service in 2020, with the intent of creating a hybrid model alongside their third-party partnerships. Portillo’s team handles the largest orders, while their third-party partners fulfill smaller orders.

“[The biggest advantage is that we own the guest experience and that our Portillo’s team members receive tips directly,” Nick Scarpino, senior vice president of marketing and off-premise at Portillo’s, said. “Staffing is our biggest challenge right now, as is with the rest of restaurant industry.”

Panera is not the only chain to about-face in their views on third-party partnerships. Inspire Brands-owned Jimmy John’s has always prided itself on shunning third-party services but that all changed in December 2020, when they announced a third-party partnership for the first time with DoorDash’s self-delivery service. Although Jimmy John’s uses DoorDash’s marketplace and ordering capabilities, they still have their own fleet of drivers.

“We saw very encouraging incrementality. It was hard to ignore,” Jimmy John’s chief marketing officer, Darrin Dugan said of the DoorDash self-delivery pilot test that occurred during the pandemic at stores in Chicago and Austin, Texas.

Economics may well be the driving factor for Panera’s sudden switch too, Jefferies analyst Andy Barish thinks.

“The economics of doing delivery yourself was always somewhat questionable and that has proven itself out over the past several years,” Barish said. “The pizza models are totally different: delivery was always part of their business model. […] it’s an evolving world and it does not surprise me at all that Panera is moving away from self-delivery.”

Contact Joanna at joanna.fantozzi@informa.com

Find her on Twitter: @JoannaFantozzi

Correction: April 16, 2021
CLARIFICATION: We expanded upon an earlier version of this story to clarify that Jimmy John’s does still use their own in-house delivery fleet.

Business Insider – Subway’s ‘dirt-cheap’ startup costs are a huge draw, but franchisees and experts say investing comes with big risks

Apr 14, 2021, 8:01 AM
subway sandwich
Should you buy a Subway location? Experts say to think twice. 
Peter Summers/Getty Images
  • Subway continues to be one of the cheapest restaurant brands to franchise.
  • But declining yearly sales and hundreds of store closures have hurt the company and franchisees.
  • Some franchises tell Insider that operators are trying to unload locations at “dirt-cheap” prices. 

At the peak of its expansion, Subway was one of the hottest restaurant chains to own as a franchise operator. The chain used middlemen known as development agents to rapidly grow across the US. It became the largest chain in America, leapfrogging over industry giants like McDonald’s and Starbucks.

Many Subway operators have amassed dozens of stores, made possible by historically cheap franchise investment costs.

Initial investment costs are $139,550 to $342,400, according to Subway’s 2020 disclosure document. For comparison, Jimmy John’s requires $313,600 to $556,100 in initial investment costs, and McDonald’s costs are $1.3 million to $2.3 million.

But as the distressed sandwich chain lays off hundreds of corporate staff to cut costs amid rumors of a company sale, franchisees and experts say investing in a Subway outfit comes with big risks these days.

That’s prompting some franchisees to consider selling their stores amid improving foot-traffic patterns as the economy slowly emerges from the devastating effects of the coronavirus pandemic.

“Franchisees, in general, are extremely disgruntled,” one current California franchisee said. He and other franchisees were granted anonymity in order to speak frankly about the situation, and their identities are known to Insider.

This franchisee said some operators were unloading stores “dirt cheap” just to get out of leases or ownership.

Subway pushed back on the conclusion that the company does not offer a return on investment for franchisees. In an emailed response to Insider, a representative said that the company pledged $80 million in 2018 toward helping franchisees refresh the brand.

“This includes money spent on a variety of initiatives, ranging from refresh packages for each U.S. restaurant, grants for remodels and supplying them with new equipment for various programs,” the representative said. “We remain laser-focused on our franchisees’ growth and profitability.”

A Subway franchisee from the Midwest told Insider: “Anybody that wants to buy into any kind of restaurant franchise probably needs to have their head examined. I can’t think of a worse category to really look at. With that said, I think there’s actually some real bargains out there in the Subway world right now.”

The bargains come as Subway, along with the rest of the industry, continues to experience a decline in visits, even as business restrictions lift across the US.

Visits to quick-service sandwich restaurants declined by 10% in the year ending in February compared with the same period a year ago, according to the market-research firm NPD Group.

According to Placer.ai, which tracks monthly foot traffic at retail and restaurant chains, Subway traffic declined more than its main rivals over a two-year period. In March, Subway traffic was down 10.1% compared with March 2019, while Jersey Mike’s was down 0.6% and Firehouse Subs was down 4.2%.

Placer.ai data
Placer.ai data shows traffic patterns for Subway, Jersey Mike’s, and Firehouse Subs. 
Placer.ai

Subway’s troubles started long before the pandemic

The 100%-franchised chain has logged declining sales and store counts for years.

Subway’s US sales dropped to $8.3 billion in 2020, down from $10.2 billion in 2019, according to Technomic. The market-research firm’s data indicated 1,796 Subway locations closed in the US last year, with the chain’s store count dropping to 22,005 from 23,801.

For operators, the numbers are more troublesome when compared with yearly sales volumes at rival chains like Firehouse Subs, Jimmy John’s, and Jersey Mike’s.

A Subway restaurant, on average, generates nearly $420,000 in sales annually, according to Nation’s Restaurant News’ “Top 200 Restaurants” report, a highly regarded industry survey. According to NRN’s 2020 report, Subway’s average yearly sales that year were down from $445,400 in 2014 — the year before founder Fred DeLuca died and before the Jared Fogle scandal.

“Sales have gotten so low, lower than they’ve been in a long time,” the California franchisee said. “Inflation keeps going up. And Subway was always on that edge” of profitability, the operator added.

Subway did not return a request for comment.

But the Milford, Connecticut-based company previously told Insider that it strived to “balance what’s best for our guests and our franchise owners as we create compelling offers to drive traffic to Subway restaurants.”

When John Chidsey was named CEO in 2019, the former Burger King executive reached out to high-level operators and “said all the right things,” like being there to help operators make profits, according to a veteran franchisee.

But he has since distanced himself from communicating with franchisees, that franchisee said.

Now frustrated operators want out, the California franchise said.

Five years ago, Subway stores could be worth $300,000 to $400,000, the California operator said. If a franchisee could sell their stores for $100,000 each in 2021, they would be considered lucky, the California franchisee added.

Subway is struggling to keep up with rivals

Subway franchisees say they are struggling to stay afloat as competitors like Firehouse Subs and Jimmy John’s raise their game with menu innovation and better delivery operations. The rival chain Jersey Mike’s gave its franchises $150 million to help finance store remodeling during the pandemic.

By contrast, Subway franchises continue to battle corporate over store hours and foot-long deals.

In June, some Subway franchisees filed complaints with the Federal Trade Commission after the chain rolled out a “$5 footlongs when you buy two” deal, Restaurant Business reported. In the fall, Subway also began strictly enforcing the number of hours a week stores were expected to be open, which infuriating franchisees, the New York Post reported. Until then, the company had allowed flexible work hours and deferred royalties during the pandemic, the Post said.

More recently, sources told Insider that Subway axed a rebate corporate would give franchises to cover extra third-party delivery costs tied to tablets used to field delivery orders. In a memo seen by Insider, Subway told franchisees the company had always intended to “sunset this program once POS integration was completed.”

Subway told Insider the company “supported our franchisees by temporarily offsetting some the program’s initial costs” during the rollout of third-party delivery in 2018.

“As with everything, we take a holistic approach to all factors that touch our franchisees’ businesses with the goal of increasing profitability, including negotiating highly competitive third-party delivery rates,” the company said in a statement sent to Insider. “We continue to invest in programs to help our franchisees grow their business.”

The Subway franchisee from the Midwest said the biggest pain point for franchisees over the past several years had been the company’s deep reliance on discounting, which he said accounted for 60 to 70% of the marketing strategy in 2015.

“Our margins just kept eroding,” the Midwest franchisee said. “When the guest counts weren’t going up, and sales weren’t going up, they just piled on more and more discounts. So 2015, ’16, and ’17 were absolutely the worst years I’ve ever had in this business.”

Experts advise against investing in a Subway franchise

Over the years, Subway operators have been hooked into buying franchises because of the lower startup costs when compared with rival chains, according to 2020 franchise-disclosure documents reviewed by Insider.

When you look at the startup cost and take in the average yearly sales volumes, industry experts and franchisees said now was not the time to invest in Subway, which also charges higher royalty fees than their competitors.

Subway takes an 8% cut of total gross sales, according to its franchise-disclosure statement. Royalties for Firehouse Subs franchisees range from 3 to 6%. And Jimmy John’s takes a 6% cut of gross sales, according to the documents.

Ultimately, Subway franchises are getting hit with a larger royalty fee on declining sales, and they are likely paying the same rent as rival sub shops like Firehouse Subs, the franchise developer Dan Rowe told Insider.

“It’s a terrible franchise now with these volumes,” Rowe, the founder and CEO of Fransmart, said.

Rowe, who helped develop Five Guys coast-to-coast through franchising, said “the point of franchising is to get wealthy, financially independent, and live a great life.”

That’s not happening at Subway, he said, where many franchisees are risking their life savings to invest in a franchise system that is not a good investment.

“It’s quite sad for the franchisees,” he said. “A job is actually better because you aren’t risking your life savings, and you can always quickly quit a job. If you don’t like your Subway, you are stuck until you can sell it, and even then the landlord may keep you on the lease.”

Pacific Management Consulting Group’s John Gordon told Insider that “this is not the time, under any circumstance” to buy a Subway location.

“Find any kind of other brand, particularly one with the drive-thru,” Gordon said. “You need a drive-thru in this post-COVID environment.”

Still, the restaurant consultant Gary Stibel said Subway could still be a very good investment “as long as you’ve got a good location” that is not near rivals, which include convenience stores and premium sandwich shops like Jersey Mike’s.

Stibel, the founder and CEO of the New England Consulting Group, said Subway’s “value proposition has aged but it hasn’t staled.”

If a new owner or current leadership revives the brand, “there is the potential for Subway to come back stronger than it ever was before,” Stibel said.

Wray Executive Search – Restaurant Reality 2021

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

Our industry depends on people having money and moving around

Economic conditions are moving along nicely right now. After many downs and some ups in the COVID year, both QSR and the sit-down space are moving along—not perfectly in the casual dining/fine dining space, but better. Several things are happening now that are finally showing a broad-based sales lift—not versus 2020 which we know now is a very flawed base, but 2019, which is more realistic. Consider:

  • Economic stimulus payments flowing into the economy.
  • Better weather and “spring fever”.
  • Vaccinations clearly on the rise, reaching critical mass soon.
  • Documented improved consumer confidence in dining out.
  • Tourism and non-business related travel up.

Looking ahead, I’ll be watching for any sales fall off after the $1400 stimulus is spent out, and the typical May-July US restaurant seasonal appear. Also, movie, special event and sporting event attendance, business conventions, and business travel are essential drivers to the wellness of the rest of the industry.

Labor Shortages, Capital Spending, Store Economics: Everything Relates to Everything Else 

With the surge of business underway, operational conditions in many units have gotten difficult. Difficulties have been building for some time, but staffing levels have fallen to be critically short since early this year. Employees leaving such a up and down industry as ours, parents not letting their kids work in restaurants, better unemployment terms than working, and difficult work conditions manning a restaurant shift with so few employees (read that as really hard work) are all taking a toll. Even the New York Times has taken note.[1]

What is vital right now is that restaurant brands and especially franchisors double down on efforts to customize remodel and new unit location specifications to the actual conditions and economic realities that now exist. I note especially “especially franchisors” because the primary company-operated brands can change their capital spending mix more quickly, “on a dime”;  while changing franchisee capital spending plans takes longer.

With this labor shortage and the likelihood of more wage rate driven action because of market or governmental actions, many restaurant brands have taken action to simplify menus and operations within the four walls. At the same time, there is a need for more outside and less inside restaurant space. Sound crazy? Yes, but that is reality. In many markets, guests want to eat outside but the 1970s-1980s footprints didn’t allow for that. This is exactly the time to do the double drive-thrus with reduced seating if you are a QSR; it holds down the CAPEX and staffing at the same time. Yet an international franchisor recently told a client of mine that the program was not available to him for some reason. Petty bureaucratic mess-up?  Perhaps.

Capital efficiency measurements such as sales to investment ratios are critical in our business. Others like simple payback, cash on cash return, and NPV analysis likewise so. More investment monies are lost on missing these metrics than missing several points on food or labor costs. Once the building is built     ( burden 1) and the debt service is locked in (burden 2) it is the most fixed of expenses and really adds up.  Anything to reduce the burden is welcome. In my opinion, a 1 to 1 sales to investment ratio is not good enough anymore with higher construction costs and operating costs, I’d think 1.5X is necessary now.  This is the time to fix store footprints throughout the industry.

Forward Looking

My friends at Restaurant Research noted in their TrafficCast that consumer plans to dine out increased 28.5% year over year [we expected a strong number] over the next 4 weeks, one of the strongest absolute results ever. Hat tip: @RRupdates. However, food at home CPI (basic food inflation) is on an upward march throughout the balance of FY-21, due to proteins. A close watcher of cable TV noted that Burger King earlier banging on a $1.00 menu for some reason, has now reverted to buy one sandwich and get a second for $1.00. The astute restaurant observer @McD_Truth noted BK was the only national brand blasting at such low price points at such a surge in business.

About the author:

John A. Gordon is a long time restaurant veteran with 45 years experience in restaurant operations, financial management corporate staff roles, and management consulting roles. His consultancy, Pacific Management Consulting Group, was founded in 2003 and works complex operations and financial analysis engagements for clients.  He can be reached at 858 874-6626, email jgordon@pacificmanagementconsultinggroup.com.

 

[1]   As Diners Return, Restaurants Face a New Hurdle: Finding Workers, New York Times, April 8 https://www/nytimes.com/2021/04/08/dining/restaurant-worker-shortage.html?smid=tw-share

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

BY 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

‘Great Reckoning’

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

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

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

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

‘Risky Proposition’

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

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

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

Paul Wiseman and Anne D’Ínnocenzio
Associated Press

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

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

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

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

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

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

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

A hit to the industry

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Noah Manskar and Lisa Fickenscher

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

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

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

Enlarge ImageMcDonald's
Getty Images

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

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

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

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

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

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

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

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

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

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

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

Watch the webinar below:

 

Key takeaways

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

Notable Quotes

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

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

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

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

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

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

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

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

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

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

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

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

 

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

Georgia-based Inspire Brands, the parent of Arby's, has purchased a string of well-known restaurant brands over the last three years. Now, it's in discussions for what would be its biggest acquisition deal: Dunkin' Brands, the parent of Dunkin' Donuts and Baskin Robbins.
Inspire Brands has bulked up through rapid-fire restaurant deals

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Wray Executive Search – We Are Finally Lapping Covid 19

by John Gordon

On March 11, the industry began lapping the most extraordinary event ever to hit the industry since World War 2. Looking ahead, it is exciting to be in a country with multiple vaccines developed already and being implemented.

But COVID’s long slowdown was painful and will impact us for years to come.

Is Pent Up Demand Real?

In the consumer discretionary sector of the economy of which restaurants are categorized, every industry except airlines is talking about “Pent Up Demand” as the rationale for 2021 and 2022 sales and profit recovery. It is a consistent theme on restaurant earnings calls and commentary by analysts, economists, the business press, and many others. Recently, the UCLA Anderson School 2021 Economic forecast highlighted pent-up demand and forecasted robust growth for the US and California in 2021.[1]  Jonathan Maze noted the restaurant CEOs have been talking up pent-up demand also, in his opinion post on March 9th[2]

My research shows that there is documented restaurant pent-up demand, but it has been historically been present. Prior NRA surveys point to this historical pent-up demand. It makes sense that more people would dine out if they had the time or money. This condition was present before COVID, however.

FY-20 is a terrible basis of comparison

From a comp sales and earnings calendar basis, all restaurant brands are now entering a period where large positive variances versus prior year are inevitable. That is the result of the improvement in sales from that depressed period. Whether “pent up demand” is involved is another question. A better base of comparison is FY-19 itself. Even a stacked 2-year comps measure is not good.  2020 is just awful in every way. Unfortunately, the publicly traded restaurants are stuck with the prior year as per the SEC formats. We’ll see what do they with the narrative. If they overplay the gains, then they will have to own it next year, too.

Likely 2021 Sales Drivers

For all this pent-up demand, I believe there has to be a catalyst to release it. Vaccine distribution will help but so too will economic stimulus. I’m very optimistic that the just passed $1400 stimulus cash injections[3]. There is a very solid history back to 2012 that shows when cash is released into the economy, restaurant sales, especially, casual dining sales jump. The January-February 2021 sales jump from the $600 stimulus show that FSR got the better end of the bump. [4]  The checks will take time to be released to bank accounts.

The other factor I think about in assessing future restaurant sales in 2021 is business travel and reopening of sporting events and mass entertainment venues. Our business has always been about being where people are. At this point, central business district occupancy seems consigned for much later recovery and domestic tourism is slowly recovering. We need domestic business travel and reopening of sporting events to power casual diner and fine diners. I’m optimistic about the latter but not about the former. The airline, hotel, and other analysts are not forecasting international recovery until 2024 or later. US room demand versus 2019 remains soft. [5]

Restaurant Profit Extraction: Flowthrough 

We financial types have for years have spoken to the concept of restaurant flowthrough, that is, the restaurant variable profit ratio. Years ago, it was called the PV, profit to volume ratio, and it was always documented to be around 50%. If a dollar of incremental revenue hit the top line, the variable profit line (the store EBITDA line) should go up 50 cents. Over the years, the QSR brands PV ratio has largely remained around that 50% value but casual dining has had a tougher time, with labor costs rising. But it largely depended on the alcohol sales mix (less labor-intense) and other product mix issues.

In February, three publicly traded restaurant brands, including Darden (DRI) and Starbucks (SBUX) noted on their earnings calls that their flowthrough ratios had improved to at or above 50%, from pre-COVID.  This is the legacy of higher average tickets and less dining room business and more drive thru and take out. One question will be how will this mix shift going to shake out going forward.

Greg Flynn Takeaways

One interesting interview heard last month was John Hamburger’s interview of Greg Flynn, CEO of Flynn Restaurant Group, now the largest US franchisee. He related that he had no restaurant experience after business school and created a brand called World Wrap in 1994, which was unknown to landlords, guests, employees, and guests, getting to 14 units. It was very difficult, and 100% debt-financed. Then they got the idea to do Applebee’s. Flynn is still a fan of using the franchised brand platform, and would not create a new brand from scratch again. He is not sold on virtual brands yet. They prefer to buy sites with real estate attached but might not keep it forever. He is definitely not a fan of debt financing.  The interview is interesting and can be accessed at https://register.gotowebinar.com/recording/34055447227706

 

About the author:  John A. Gordon is a long-time restaurant analyst and management consultant, with 45 years in restaurant operations, corporate staff roles, and management consulting positions, including via founding principal of his niche restaurant analysis and advisory firm, Pacific Management Consulting Group. He works complex operations and financial analysis engagements for clients. He can be reached at office (858) 874-6626, and email, jgordon@pacificmanagementconsultinggroup.com.  ­

 

[1]   https://newsroom.ucla.edu/releases/anderson-forecast-anticipates-robust-growth-march-2021#

[2]   https://restaurantbusinessonline.com/financing/restaurant/executives-put-their-hopes-pent=demand

[3]   https://www.cnbc.com/2021/03/12/1400-stimulus-checks-are-on-thw-way-heres-who-qualifies.html

[4]   See www.facteus.com, First Reports, January-March 2021.

[5]   See https://str.com/data-insights-blog/50-state-demand-state-level-recovery-lines

Wray Executive Search – The Continuing Challenges of COVID-19

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

The Fog of War

All of our lives changed on March 12, 2020, when it became clear that COVID-19 had become a big problem, here and throughout the world. Of course, it would impact our business greatly, as our business is a people business, primarily fulfilling either kitchen replacement or socialization dining. Fortunately, many—smart– management teams adapted quickly where they could. Customer preference mix changes quickly, generally the QSR space recovered very quickly, lead by drive-thru concepts, chicken, and most pizza brands. Some fast-casual brands have recovered, think Chipotle (CMG) and others. Casual dining is still difficult overall but flagship portfolios like Darden (DRI) are at the peak of their game and will continue to lead the way post-COVID.

I’ve been working on a business transformation project for a medium-size restaurant operator that has several different restaurant brands. It has first-class corporate officers, operations, financial management, human resources, and information technology disciplines among others. It is working to improve others, and it does have some investment gaps, which it has recognized. One of the interesting observations was that while they were very analytical, the corporate staff departments were so analytical that they tried to find perfect information to justify taking action. Unfortunately, they were on the verge of, in the words, of an old boss of mine, making “perfect to be the enemy of  good.”  Making company-wide decisions was taking too long.

For any restaurant organization of any size, I recommend that the CEO put the functional heads (operations, marketing finance, supply chain, HR) into a working group where ideas and proposals are developed. While it is likely that it will take some time for the functional experts to iron out difficulties, well-reasoned plans are more likely to develop more quickly. And that is the key advantage in the post COVID era. Resolving corporate level questions quickly and utilizing all corporate resources to stay up with confusing and shifting consumer shifts.

Reading Financial Comparisons Against the Most Difficult Year Ever 

In a matter of days, the industry will be comping over early March 2020, when COVID hit us in the United States. Thereafter, the publicly traded restaurant companies will have to deal with Q1 2021 earnings comparisons versus that of Q1 2020, when the bottom fell out of March. The restaurant M&A market has been struggling for some considerable time with the 2020 problem and how to normalize 2021/2020 earnings and which base year is correct.

Clearly, 2020 is extraordinarily flawed in every way as a base: it shows the most odd event ever and then swings in sales and profit, with both routine and extraordinary expense way over expectations. However, on the other hand, 2019 was a lifetime ago, conditions have radically changed since. The publicly traded companies are stuck with that comparison via normal SEC reporting formats, but some will welcome putting up 12 months of positive numbers. Other brands with success in 2020 will have problems explaining the real but optical decline in sales and profits versus prior year. The imperative for operators and investors is to explain well and not get carried away.

One of the most creative attempts to solve the 2020 problem that I’ve seen was the creation of an internal “Restated 2020 No COVID” value that was based on January-February 2020 only and then rolled out March-December 2020 based on normal seasonality to complete the year. Granted, it was only 2/12th of a year trend but the company found it useful for visual analysis.

Operations Imperatives for Franchisors

Top tier Franchisor executives understand that their brands need to be built around amazing consumer value, profitable sales, and capital-efficient platforms for great franchisees. Per my reviews of late, vital priority work is necessary for the following:

Food delivery is still lower margin (see Chipotle comments on recent earnings call) and third-party delivery (3PD) itself carries significant unfavorable guest ratings. This raises the usefulness of white label solutions like Olo. As 3PD companies continue to merge, the inevitable press for synergies has to result in higher commissions. To offset this risk,  there has to progress in direct-operated delivery (see Chick fil A, for example) or contractual/PMIX shifts to offset the difference.

Restaurant labor wage rates are rising virtually worldwide. Franchisors have done a good job in many brands in streamlining menus but more work is needed in leading the way to streamline kitchen and store footprints to offset rising wages. That is something only the franchisor controls via the franchise agreement. There is much engineering effort that has to be cranked into the franchise footprint and the economic model to make it all work since the franchisee is principally responsible to fund it.

 

About the Author:  John A. Gordon is a long time restaurant industry veteran with 45 years in chain restaurant operations, financial management corporate staff roles, and the last 20 years in his restaurant management consultancy, Pacific Management Consulting Group. He works complex operations and financial analysis and strategy assessment roles for investors, operators, attorneys, and others who need detailed restaurant perspective. This includes new business proforma, business transformation, litigation support, and other such complex projects. He can be reached at (858) 874-6626, email, jgordon@pacificmanagementconsultinggroup.com.

Wray Executive Search – Peering Ahead

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

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

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

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

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

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

Some restaurant environmental circumstances have changed.

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

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

 

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Economist – Takeaways from McDonald’s remarkable comeback

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

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

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

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

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

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

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

From Big Mac to Big Data

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