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


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


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

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

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

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


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

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

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


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

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

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


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

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


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


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

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

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

Dutch Bros bucks slide among ’21 IPO brands

Current bear market casts dark shadow over stock plans

Ron Ruggless | Jun 17, 2022

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

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

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

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

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

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

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

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

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

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

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

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

However, bright spots exist among the newly public companies.

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

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

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

Contact Ron Ruggless at Ronald.Ruggless@Informa.com

Follow him on Twitter: @RonRuggless

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

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

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

Recession Talk Everywhere

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

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

Jack in the Box itself caught in a Box?

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

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

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

More free advice to JACK

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

Restaurant Margin Recession Underway 

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

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

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

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

Timing is Everything: Management Must Act to Protect Margins

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


About the author:

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



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

[2]   https://unbridledcapital.com

[3]    Footnote 1, Id.

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

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

[6]  Footnote 2, Maze, Id.

[7]  Foodnote 3, Id.

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

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

Pricing and Customer Considerations at the Top of the List

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

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

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

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

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

Stacked Comps and Profit Comparables

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

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

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

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

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

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

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

Chris O’Cull:

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

CEO, Brand X

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

CFO, Brand X

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

CEO, Brand X

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

So now, three observations…

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

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

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

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


About the author:

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


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

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

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

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

Wray Executive Search – Restaurants: Much to Keep Up With! – 2022

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

Last month we discussed the increasing frequency of global black swan events [1] (consider 2001 (9-11); 2008/2009, (Great Recession) 2020-2021 (COVID), 2022 (Ukraine War) that are making life difficult for us. The results are cumulative and spillover to our sector. Fortunately, there will always be a food fulfillment need, social need, and business case for restaurants, and restaurants are always investible. There are few easy ways outs out of these problems. But surely, we must keep up with the developments of the day to help build our plans.

Menu Price and Food and Labor Cost Inflation Locked in for FY-22

There was some hope earlier that food and paper inflation were to moderate later in 2022. The war in Ukraine and its impact on grains, oils, and gasoline has ended those hopes. Jonathan Maze reported on Bank of America’s Sara Senatore survey of publicly reported chain restaurants’ food commodity cost inflation for 2022. QSR chains such as McDonald’s expect 8% in the US, Dominos 8-10%, and Wendy’s 8-10%. Fast-casual El Pollo Loco expects 18% in Q1, while Portillo’s expects 13-15% in 2022. Full-service operator Texas Roadhouse is expected to rise 12 to 14 %, while IHOP and Applebees are expected up north of 10% [2].  Keep in mind these are the rate variances only of the raw material; the total food cost percentage of sales change will be less.

Restaurant operators routinely work with changing commodity conditions as well as consumer preferences to arrive at attractive, penny profitable menus. Much more of that is needed going forward. From my own corporate staff experience, you have heard me speak about the critical value of restaurant product and concept development staff…and the management systems that feed their work.

It’s all about price and inflation right now

There are many indications now that restaurants just can’t take unlimited price increases, especially with both the current consumer food and gasoline price inflation shock underway.  A March 2022 Technomic survey identified cutting back spending potential on limited-service and full-service restaurants were identified. However, the negative sales impact is more seen in full-service restaurants. [3]    Restaurant Research Journal the same, especially, trade down from full service to QSR eventually. [4]

However, on the positive side: grocery store inflation (CPI food at home) exceeded restaurant price inflation (CPI food away from home) by over 200 pts in the last BLS report, for March  2022. [5]  That gives us cover to take some price, and let’s hope that trend continues.

The BLS reported restaurant menu inflation took a 40 year high in March, with full-service restaurant prices up 8.0% and limited-service up 7.2%. Grocery store prices rose 10%.

How much longer is this sustainable? I tell my operating clients there is nothing more complicated than sales/menu mix/gross profit planning and even if you think you are optimized, you are not. One issue is despite 50 years of evolution, the POS system is giving store operators or corporate analysts what they need.  What is needed is a “tiger team”—an old concept with a big ROI—to get the required systems and tools into the right places.

Waste in SKUs, waste in discounting, and overly complex controls can be found in many places that reduce effective revenue yield. For example, there are three national restaurant chains, all franchisors, that do not allow variable pricing by unit.  Many consider DMA level pricing.  What about pricing by geo cluster? In Chicago, isn’t the North Shore suburban market different than the Southwest suburbs? You see my point.

Howard v. 3.0 and what it says about management succession

As we all know, Starbucks is lucky in time and sequence to be able to have an enthusiastic Howard Schultz ready to come back to work. And in a little over a week, he has halted cash buybacks (to some on Wall Street’s displease—stock down 6%), fired his General Counsel, hired a Strategy Director with an employee communications background,  began listening tours, and fired back at the unions. What occurred to me however is that he has had to come back two times as CEO in Residence. Starbucks is a wonderful global brand and they have plenty of G&A resources. Why is it that they cannot grow waves of CEO internally? Recall in 2004, McDonald’s (MCD) had three new CEOs in a year, with two of them dying in 7 months in April 2004-February 2005. Jim Skinner emerged as the healthy CEO and served until 2017. The point is they had then[6] the bench strength to recover from two CEOs dying. In March and April 2022 to date, we have seen a slew of restaurant CEO turnover, we can see the strategic importance of the management succession issue.

So here is yet another thing for the to-do list. Truth be told, it has been there for some time.

McDonald’s Global Earnings Issue Forthcoming

With quarterly earnings approaching, an unfortunate reckoning will happen sometime soon: given the developments in the Ukraine War to date, McDonald’s will announce large losses from both Russia (850 units) and Ukraine, 111 units) divisions. Earlier, McDonald’s provided guidance on the Russian division loss of $50M per month, but no guidance on the Ukrainian loss.[7] The Russian units are virtually all company-owned and the Ukrainian units are 100% company-owned. No doubt we will hear more.

The question going forward is given the Dictator Putin’s attitude and the souring of the US/Russian relations, what will happen to the Russian McDonalds units and commerce. Looking forward, some of the Ukrainian McDonalds units could reopen but on very good belief are not anywhere close to Russian AUVs and store margins. Given the MCD $50M/month number, net income for the year would decline somewhere around $600M or 8% on a 2021 base. We’ll see how MCD and the sell-side analysts treat this. The loss is as extraordinary as it gets but is a real cash loss.


About the author:  John A. Gordon is a long-time restaurant analyst and management consultant, with 45 years experience; 5 years plus in units, 20 years in restaurant corporate staff roles, and 20 years via his founded restaurant analysis and consultancy, Pacific Management Consulting Group. He does complex analysis and projects, and his website describes him and his background. Email: jgordon@pacificmanagementconsultinggroup.com, office 858 874-6626, website: www.pacificmanagementconsultinggroup.com.


[1]   Those infrequent events that cause great difficulty in society and business going forward.

[2]   https://restaurantbusinessonline.com/financing/heres-how-much-supply-chain-costs-are-increasing-year, March 28 2022.

[3]   Technomic’s Take, Skyrocketing Gas Prices, March 17 2022.

[4]    RR Insignts Journal March 2022, https://chainrestaurantdata.com/rr-insights-journal-march-2022/

[5]   BLS, CPI Summary for March 2022, released April 12 2022.

[6]   Of course, the Board’s due diligence bet on Steve Easterbrook didn’t work out so well later, when it discovered he did have a tendency for fraternization before promotion to CEO. Per Wall Street Journal, and BusinessWeek press reports.

[7]   McDonald’s Corp. Datasheet provided, March 2022.


Orlando Sentinel – In hunt for new CEO, Red Lobster has some explaining to do, experts say

Red Lobster CEO Kelli Valade is resigning after just eight months at the helm of the Orlando-based seafood chain, a quick departure that one industry analyst called “very, very, very bad.”

A news release announcing Valade’s resignation did not give a specific reason for her departure, which she called “an incredibly difficult, but necessary, decision.” It is effective April 15.

“We’ve accomplished a lot in a short period of time, including building a great leadership team that alongside the board will carry the business forward to achieve our vision,” Valade said in the release.

Valade took over as CEO in August after the retirement of the brand’s longtime leader Kim Lopdrup.

Red Lobster CEO Kelli Valade is resigning after less than a year at the helm of the Orlando-based seafood chain.
Red Lobster CEO Kelli Valade is resigning after less than a year at the helm of the Orlando-based seafood chain.

San Diego-based restaurant analyst John Gordon called the resignation “very, very, very bad.”

“No CEO anywhere wants to be on board a company only eight months. That says it all,” Gordon said. “That is an indicator of severe stress and malfunction that you can only stay on a job eight months before some sort of irreparable break occurs.”

In hunt for new CEO, Red Lobster has some explaining to do, experts say

Apr 08, 2022 at 2:20 PM

Prior to joining Red Lobster, Valade had been president and CEO of Black Box Intelligence since 2019 and before that she spent more than 22 years at Brinker International, including as brand president for Chili’s Grill & Bar.

“Kelli has a very sound, very, very strong reputation in the restaurant industry as a leader and in casual dining in particular through her experience coming up through the ranks in Brinker, which of course has both Chili’s and Maggiano’s,” Gordon said.

Gordon said the resignation is a bad signal to future CEOs for Red Lobster. He added everything becomes uncertain at a company following the departure of a CEO.

“This kind of causes a shiver of ice to go through the management ranks,” Gordon said.

Those management ranks have been changing in recent months, with David Schmidt revealed as the company’s new chief financial officer on March 14, Cijoy Olickal as chief information officer on March 28 and Patty Trevino as chief marketing officer on Jan. 18.

When a tenure is as short as Valade’s time at Red Lobster it could be a mismatch in what was expected either by the executive or by the board from what the situation actually is, said Ron Piccolo, chair of University of Central Florida’s department of management.

“It would tell me it’s probably not a great culture to be in or the financial operating circumstance is challenging more so than it might appear on the surface,” Piccolo said. “Why so abrupt? It’s not known whose choice it is to break the relationship.”

He added it was unfortunate this would happen at a brand so important to Central Florida.

Red Lobster board member Paul Kenny is expected to be a “liaison” between the company’s leadership and board during the transition, and a search for a replacement is expected to begin immediately, the release said.

“On behalf of the Board, we thank Kelli for her service and accomplishments during her tenure as CEO, including navigating through the most recent wave of the COVID-19 pandemic,” said Rittirong Boonmechote, chairman of the Red Lobster Board of Directors, in the release. “She has helped us assemble a talented and highly capable leadership team to lead us forward. We wish Kelli the very best in the future.”

In 2020, seafood supplier and Red Lobster stakeholder Thai Union and a group of investors acquired the rest of the seafood restaurant company from private equity firm Golden Gate Capital. Thai Union has its headquarters in Thailand and its seafood brands include Chicken of the Sea, John West, King Oscar and others.

The investor group that was part of the acquisition included key shareholders Kenny, the former CEO of Asia’s Minor Food, and Rit Thirakomen, CEO and controlling shareholder of Thai chain MK Restaurant Group.

That sale came following concerns from outside analysts over a loan reaching maturity and while the coronavirus pandemic crippled much of the restaurant industry. Red Lobster, which has more than 700 restaurants, completed refinancing that debt last year.

Before that refinancing and sale, the loan had more than $355 million outstanding as of a June 2020 report from Moody’s.

Red Lobster’s operations “recovered significantly” in the fourth quarter of 2021, but saw a challenging start to 2022 with the omicron variant of coronavirus and higher costs, according to a presentation from Thai Union.

Austin Fuller

Austin Fuller

Orlando Sentinel


Austin Fuller is a business reporter at the Orlando Sentinel covering retail, restaurants and technology. A lifelong resident of Central Florida, he graduated from Stetson University in DeLand and previously worked for The Daytona Beach News-Journal.

The Washington Post – McDonald’s, Starbucks And Coca-Cola Suspend Business In Russia Amid Mounting Public Pressure

A McDonald’s restaurant in Des Moines on April 27. (Charlie Neibergall/AP)

Several major American food and beverage companies announced Tuesday that they would suspend their operations in Russia, a step that comes after days of mounting public pressure on the corporate world to sever ties with the country over the Kremlin’s invasion of Ukraine.

The group included McDonald’s, Starbucks, Coca-Cola and PepsiCo, some of which had operated in Russia for decades and had faced heightened scrutiny in recent days as other companies elected to halt their business dealings there. A veritable naughty-or-nice list, compiled by a Yale University professor, generated headlines by highlighting the companies maintaining normal operations.

McDonald’s chief executive Chris Kempczinski said the global fast food chain would temporarily close its 850 restaurants in the country.

“Our values mean we cannot ignore the needless human suffering unfolding in Ukraine,” he said.

The company said it will continue paying its 62,000 Russian employees while stores are closed.

The decision is a notable shift for a company that has usually shied away from inserting itself into polarizing topics, industry experts say, signifying changes in global culture where corporations are no longer choosing to be neutral on social issues but responsive and declarative about their stances.

McDonald’s, Coca-Cola and Starbucks suspend business in Russia
McDonald’s, Starbucks, Coca-Cola and PepsiCo halted their operations in Russia on March 8, amid mounting public pressure over the Kremlin’s invasion of Ukraine. (Reuters)

Shortly after the McDonald’s announcement, Starbucks, Coca-Cola and PepsiCo announced they would pause services in Russia.

Starbucks’s licensed partner, the Kuwait-based Alshaya Group, which owns and operates 130 stores in Russia, will temporarily shutter locations and “provide support” to its roughly 2,000 local employees, Starbucks CEO Kevin Johnson said in an open letter. The company will also halt all shipments of Starbucks products to the country.

“The invasion and humanitarian impact of this war are devastating and create a ripple effect that is felt throughout the world,” Johnson wrote in a letter last week, as more people demanded that companies take a stance.

Coca-Cola, in a brief statement Tuesday, made a similar announcement and suspended its business in Russia.

And PepsiCo, which has operated in Russia for more than six decades, halted its soda sales, including its eponymous cola and 7UP. But the company said it would continue to manufacture milk, baby formula and baby food, allowing it to keep tens of thousands of workers employed.

“Pepsi-Cola entered the market at the height of the Cold War and helped create common ground between the United States and the Soviet Union,” the company’s chief executive, Ramon Laguarta, wrote in an email to employees.

But after days of remaining in full operation, the company decided to partially pull out “given the horrific events occurring in Ukraine,” Laguarta said.

McDonald’s is in a unique category among businesses that have announced halts and freezes in service or products in Russia. Fast-food brands have largely continued operating because many of their restaurants are owned by franchisees, and corporate brands have limited abilities to control operations at local facilities.

McDonald’s owns more than 80 percent of its Russian locations compared with roughly 5 percent of restaurants that are owned in the United States.

The stores that are company-owned are mainly for testing products and other corporate goals, according to John A. Gordon, an independent restaurant chain expert and founder of Pacific Management Consulting Group.

Gordon said the company owns a lot more stores in Europe because the sales and profits are higher. The closing down of its stores in Russia combined with the decision to continue paying employees will come with a significant financial hit but not one that will bankrupt the company or cause markets to react in a volatile manner.

“We don’t know how long ‘temporarily’ means in terms of closures, but McDonald’s will report an operating loss,” he said. “What will happen now is the Wall Street security analysts will actually lower their earning forecast because of the Russia and Ukraine effect. McDonald’s stock price won’t be arbitrarily affected.”

McDonald’s announcement is also a sign that companies are moving away from antiquated business mentalities that center shareholder interests above all others, Gordon said.

“It’s really about the stakeholders, which is greater world of nations and people,” he said.

Other companies, such as Yum Brands, which owns Pizza Hut and KFC, might find it more difficult to replicate McDonald’s stance as many of the locations are owned by franchisees, who are likely Russians themselves, making it a bit more challenging to just close shop, Gordon said, who counts Yum Brands among his clients.

Yum Brands announced on Tuesday that it is suspending operations of KFC company-owned restaurants in Russia and finalizing an agreement to suspend all Pizza Hut restaurant operations in the country, in partnership with its master franchisee.

“This action builds on our decision to suspend all investment and restaurant development in Russia and redirect all profits from operations in Russia to humanitarian efforts,” the company said in a statement.

Yet McDonald’s expressing global solidarity with Ukraine is among the most bold and decisive moves taken by a restaurant chain of its magnitude, said Aaron Allen, a restaurant analyst and founder of Aaron Allen & Associates.

“This will absolutely be a watershed moment and will reflect a precedent, not just for war but for other causes or means of showing solidarity,” he said. “You’re pretty much closing off your revenue to make a statement. Agreeing to put purpose over profits is an indication that world’s largest restaurant chain taking a leadership stand.”

Jacob Bogage contributed to this report.

Wray Executive Search – Restaurants: The Need to Stay Flexible

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


Triple inflation currently

As an industry, we were hoping to be on the other side of the Pandemic mess by now, but its effects continue in several ways that we are too familiar with: sales variability, supply chain inflation affecting, food, paper, equipment, and building elements; and the labor availability/people effect, ultimately caused by the Pandemic in the first place. As a result, the industry has triple inflation now: COGS, labor, and CAPEX [1]all at the same time. And we have to learn and reorient to changing consumer behavior, and honestly, reeducate our guests, too to what we can do for them to meet their needs.

Added to this mix unfortunately is the current threat of a major land war in mid-Asia which could kick off at any moment as of writing this week. Most of Europe[2] and Central Asia are franchised, but disruptions like this will affect global US franchisors and local national franchisees. This gets us back to my comment last month: what chain restaurant operator would have been planning for a Central Asian War in late 2021? Of course, none. Planning post-Pandemic has to have a faster cycle time, risk-based module included as part of the function.

The necessity of pricing actions and building pricing power

Listening to the Q4 2021 earnings calls to date, the very clear forecasts of 2022 cost inflation are seen. McDonald’s for example noted a 2022 food and paper inflation forecast of 8%. It noted that 2021 store wage rates rose 10%. [3] We will have more earnings this week but casual diners seem to be forecasting food and labor in the mid-single-digit zone each. It’s clear now that supply disruption chain and COGS pressure[4] will continue through 2022 and that pricing actions to protect margins must occur.

The question then reverts to pricing power and what are operators doing to maximize it. Certainly, great product new news does it along with reaching out to the guest in an individualistic way (loyalty, digital) that builds traffic, frequency and ticket. We need only look at Starbucks and Panera’s programs post-2010 and how they dug out of the Great Recession. We are now seeing the same words from McDonald’s in terms of the value of their loyalty program. [5]  Good-looking stores and QSC builds pricing power, too. They built a different guest mix over time.

Every brand has an aspirational guest mix they do not have yet. It takes time and money to get them. With the absolute need to pass on price increases, CEOs have a go signal to begin programming their guests away from silly discounts. In my opinion, there is no need for “Dancing Dollar Kings” [6] or even 20 under $2 menus[7] unless accompanied by a parallel upper-tier menu item in the marketing creative plan.

Lately, there has been a lot of self-expressed admiration of Chipotle and Starbucks ‘ pricing power factor. They have it easier because they never did deep discounting.

Reading SSS and Financial Results in 2022

Staying with our be flexible theme, we financial analysts need it too. So, we have finally lapped over 2020, the worst, most irregular year in restaurant financial history. In 2021, some publicly traded highlighted their financial results in change versus 2019 in commentary and side schedules while the core income statement and balance sheets reflected 2021 v. 2020. Most companies and sell-side analysts talked one year and two-year results.

In analysis going forward, there is a great need to look beyond the simple one-year SSS year over year change. There is no perfect base. 2021 is infinitely better than 2020.  2019 is a good pre Pandemic base. Parts of 2021 were influenced by reopening, which affected casual dining. And government stimulus payments flowed into the economy and restaurants in the spring/summer, causing some sales spikes. The point is, you might well need to refer back to 2019 to test the true trend.

Following is a Restaurant Business/Jonathan Maze article on same and my additional comments via Linked In: https://linkedin.com/john-a-gordon-67569aa/recent/activity/shares

Favorite Investor Question: What Will Happen to the Higher Mix?

Throughout 2021, I got many questions from investors wondering when the surge of additional items per food transaction that all of the QSRs and fast casuals reported in 2020 and 2021 would end. Some were afraid that purchasing behavior would end and those same-store sales will plummet as a result.

Well, we are just rolling out of 2021 and into 2022 and don’t have that many readings yet. One who reports all the sales components we do, however, is Starbucks (SBUX). SBUX reported the larger basket size consistently through 2020 and 2021 as a higher average ticket. In many of those back-year quarters, the average ticket was significantly positive and traffic was significantly negative.

In SBUX FY 22 Q1, in the North American zone, Starbucks stores reported comp sales of plus 18%, driven by a 12% increase in transactions and a 6% increase in the ticket. [8]  So, while the price was taken it seems that most of the prior year mix behavior—the higher number of items sold per transaction—seems to have been built into the base. And transactions were considerably higher albeit over a still recovering Pandemic 2021 base. So, we’ll have to watch it, but it seems we have a winner on our hands and people are repeating their post Pandemic behavior.

About the author:

John A. Gordon is a long-time restaurant industry veteran who loves the unpredictability and never-ending complexities of our business. He has unit-level experience (6 years), 18 years of corporate staff experience, and the last 20 years as a complex situations restaurant analyst and management consultant via his founded firm, Pacific Management Consulting Group. He is a certified MAFF, Master Analyst, Financial Forensics, and works special investigations for investors, new concepts business planning and assessment, proforma development, franchisee support, expert litigation actions, and more. He can be reached anytime at 858 874-6626, email, jgordon@pacificmanagementconsultinggroup.com.

[1]   One good resource to check US construction cost inflation is the R.S. Means Company.

[2]   Except McDonald’s, which has company operated units in Europe.

[3]   But noted this was some form of a “catch up” wage action by franchisees. MCD does not forecast 2022 franchisee wage actions.

[4]   Proteins and paper items most commonly noted. On February 14, the US suspended all Avocado imports from Mexico after a threat to US inspection personnel.

[5]   McD Earnings Call, January 27 2022.

[6]   Burger King US TV feature summer/fall 2021

[7]   Current Del Taco primary marketing feature.

[8]   Starbucks Earnings Call and press Release, February 1 2022.

Wray Executive Search – 2022: Restaurant Viewpoint: Thick Clouds and Poor Visibility

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

More Questions Than When We Started.

Typically, by this point in mid-January, we would have some idea what the restaurant operating tempo[1] for the year beginning jump-off point is going to be. We would have entered January, always the slowest month in restaurant sales and traffic in the Northern Hemisphere.  We would have good summary indicators through Restaurant Finance and Development Conference (which came off beautifully, live in November) and the ICR Conference (which unfortunately reverted to virtual earlier this month).  Frankly, none of this gave us a warm and fuzzy feeling.

Are Conditions on the Ground Clearer?

Unfortunately, not. Conditions on the ground in the field are quickly changeable. Consider:

Starbucks notifies all of its customers on January 14 electronically that US store hours, openings, business platforms, and product availability are apt to change due to the effects of COVID/supply chain issues.

The FACTEUS FIRST Report on consumer spending showed very gradual transaction count softness in QSR credit card transaction counts and full-service brands following in December and early January. [2]

Two restaurant analysts coming out of ICR mentioned their perception that companies seemed to talk “90% staffing” as the new staffing best point for now. Several companies noted the loss of sales due to closed units/early hour closes.[3]

Per my monitoring of company presentation of company presentations at ICR, I found little talk about supply chain/COGS inflation as “transitory”. [4]

Restaurant Research reported that the all-important sales to investment  ratio have declined (unfavorable movement) as higher construction costs/times to build have more than offset AUV growth. [5]

So after hearing all this, my key January-February watchpoints are (1) supply chain food commodity analysis (2) US social sensitivity/reaction to this new wave  (3) restaurant employment/staffing indicators, units closed early (4) restaurant operator marketing execution (5) unit margin contraction and impacts on franchisee new unit development in 2022-23.

No more hockey sticks please on Unit Development Guidance

I’m mentioning these observations to note that restaurant external communications, planning, and internal control must take on a new dimension this year. The days of spending monstrous blocks of expensive staff and executive time on a theoretical future 3 year/5 year plan are misplaced. The planning function has to be more current-focused and analytical focused on current drivers and then logical flex point options that can be adopted quickly. That is hard enough to get right. What I  recommended is to get the budget year set with detailed operations options and alternatives (including CAPEX, G&A, dividends, etc.) and simply flow 2-3 outyears from the most likely scenario.

For IPOs, new funding rounds, new brands, debt issues, etc.: investors typically focus on how many new units can the brand open and sustain over some time. I get questions from investors all the time about the original S-1 numbers restaurants have stuck with. 2021 has seen some very attractive young new brands go public for example.  But remember these claims of new unit count potential—5000; I just saw two fast-casual publicly-traded brands still backing 6,000 total units—that growth rationale is a tremendous burden to maintain. At the very least, those counts should be qualified as total world count up front in the book running process to allow for some time cushion.

Assessing New Concepts  Post 2020

COVID-19 and March 9 2000 changed everything of course, but business is still business. What’s always been important in this business (good food, good margins—see Gordon Ramsey quote in Time Out, January 14, 2022[6] ). COVID has caused some emphasis shifts as I can describe below:

  1. It is essential to build or bake into the company DNA where staff engagement and involvement at all levels of the company—from the store level to the office of the CEO. This includes franchisees, the ultimate grey zone that is rarely handled well.
  2. Being engineered to be on point with targeted and aspirational guests and the right revenue channels is key to finding the right sites. The hunt for sites is ever-present. The landlord win factor—and outyear rent factors are key to consider.

Management Lessons: Bill Marriott

I admit it: in the late 1980s, I was interested to join the Marriott Corp. in Washington DC. At the time, you recall, they ran several restaurant chains. Another opportunity in DC came up that I took and shortly thereafter, Marriott divested the restaurants. I did continue to follow Bill Marriott. Mr. Marriott is still executive Chair of Marriott and is active on social media, Marriott on the Move. Recently I came about “Bill Marriott’s 12 Rules For Being a Successful Manager” and thought it would be good to cite here. [7]

Several make sense to note here:

Number Five: Do it and do it now. Err on the side of taking action.

Number 6: Communicate by talking to your customers, associates and competitors

Number 7: See and be seen. Get out of the office, walk the talk, make yourself visible.

Number 8: Success is always in the details.

About the author: John A. Gordon is a long-time restaurant industry veteran with 45 plus years in operations, corporate financial planning, and analysis and the last 20 years via his founded firm, Pacific Management Consulting Group. He works complex operations and financial analysis projects as well as strategy assessment reviews for clients. He can be reached throughout at 858 874-6626, email, jgordon@pacificmanagementconsultinggroup.com.

[1]   Or OPTEMPO, a word that represents the pulse of activity of the business.

[2]   https://bit/ly/3fm99uk

[3]   YUM, LOCO, JACK.

[4]    Transitory is a  Wall Street CYA word copied from the Fed Chair, and in my opinion, does not apply to the restaurant space now.

[5]   https://chainrestaurantdata.com/new-unit-investment-2021/

[6]   https://twitter.com/JohnAGordon

[7]   https://skift.com/2014/02/26/bill-marriotts-12=rules-for-being-a-successful-manager/


Wray Executive Search – Restaurants: What Will 2022 Bring?

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

New Year Sales Forecasts….

Being that time of year, all the corporations and research houses are ginning up their 2022 Forecasts. We won’t see the first peek of the public companies 2022 until the ICR Conference coming up in Orlando in January (I’ll be there as usual) but Technomic and Datassential have their forecast just out. I just beat Technomic to print by a few hours, as I had an investor call the same day they published. Here is my US sales growth (not SSS) 2022 forecast, in detail:

2022 US Restaurants Total Sales Forecast vs. 2021 Base

Component Value
 New Units +1.5 %
 Price +5.5 %
 Mix +5.0%
 Traffic -2.0%
 Industry Capability/Contraction  -2.0%
      WEIGHTED TOTAL +8.0%

In 2022, I’m very sure 2021 will be the best base. By that point, 2019 will be too dated and 2020 will always be flawed as the Pandemic Year. Note that I have broken out a new factor, industry capability/contraction. This is what we see every day with restaurants losing staff, money left on the table, and demand not being fulfilled. This will be a key variable under our control…if we do something it will be better.  FYI, Technomic’s projected 2022 US sales increase is 10.4% on a 2019 base.[1] We both agree that price will be the major mover. It will be very interesting to watch price and traffic. Investors are still confused about what mix is and think it is a bad thing.

Restaurant Career Ladders: Missed Opportunities  

The December 4 Wall Street Journal ran an article detailing how hard it was to recruit and retain assistant managers.[2]  Think Your Job’s Tough–Try Being the Assistant Manager! The article detailed the exploits of two female senior hourly employees, one in an independent casual dining operation, one in a Panera franchisee unit, that were eventually promoted to store assistant manager positions through hard work and being on the spot. Their enthusiasm eroded over the years as they never learned any “managing skills” as they saw it and were just gloried hourly employees that worked any number of hours, apparently on salary. They both left restaurants as they saw too many years slipping by, and not making lateral moves either.

I don’t remember this from my many years ago years as Assistant Manager and GM. There was training, delegation, and a sense of career track at least to GM was clear. And I don’t see this problem everywhere, in every brand. But where this does happen, it tears down the whole industry.

Is a Subway Solution in the Cards?   

On November 23, Dr. Peter Buck, the co-founder of Subway died. Buck, a nuclear physicist, gave a young Fred DeLuca a $1,000 loan in 1965 to open a sub shop modeled on Amato’s, the still operating New England sub shop franchisor. Subway grew units, as we all knew, too much. Buck was the 50.1% owner, and after DeLuca’s death, remained in control. There was a tie of sorts between him and Fred’s widow, who had no restaurant experience, and Subway entered a difficult period, losing thousands of stores in the US and AUVs falling.

M&A interest in the brand was present earlier; it was reported by franchisees that Fred said he wasn’t interested in selling. After his death, both the New York Post and Restaurant Business reported that Restaurant Brands conducted some due diligence but ultimately passed. After Buck’s death, New York Post reporter Josh Kosman published that any potential sale of Subway was now complicated by Buck’s escrow and that one of the Subway royalty entities had a decline of $200 million year over year. [3]

RBI has moved on and made a nice acquisition in FireHouse. YUM has 4 brands. Inspire has a sandwich brand. Could Jollibee be interested if Subway US was broken away from Subway international? In any case, the Buck heirs and DeLuca’s will want maximum value. The problem is the quality of the franchisee base and earnings potential has declined over time due to long ago missteps. This bears further watching.

About the author: John A. Gordon is a long-time restaurant industry veteran with 45 plus years in operations, corporate financial planning, and analysis and the last 20 years via his founded firm, Pacific Management Consulting Group. He works complex operations and financial analysis projects as well as strategy assessment reviews for clients. He wishes all a Merry Christmas and Happy Holidays period and can be reached throughout at 858 874-6626, email, jgordon@pacificmanagementconsultinggroup.com.

[1]   https://www.technomic.com/newsroom/2022-year-climb

[2]  WSJ, December 4 2021.  https://wsj.com: articles : think-your-job’s rough?-try being-the assistant-manager–11638594003

[3]   Probably the US entity and referring to 2020 versus 2019.

Adweek – Why Papa John’s Is Breaking With Fast Food Tradition and Nixing Its Menu Boards

That and other design changes are the latest steps in a long post Schnatter turnaround

By Robert Klara | 1 day ago

Big overhead menu boards—a fixture every fast-food chain uses—are
missing in Papa John’s latest prototype.

Earlier this month, Papa John’s released its third quarter earnings, giving CEO Rob Lynch some meat to toss to the wolves of Wall Street. Systemwide sales were up 11.2% for the period, EPS doubled and revenues of nearly $513 million represented an 8.4% increase from the prior year.

Click on the link below to read the full article:

Adweek November 2021 – Papa Johns

Wray Executive Search – Restaurant Imperatives: People, Product, Pricing, and Planning

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

So we are back from Restaurant Finance Conference last week where we were delighted to catch up with 2000 or so of our extended family. The same will happen in 60 days at ICR Exchange Conference in Orlando where the public traded CEOs and pre-IPO hopeful companies attend. I’ve attended both conferences for 16 years straight. In every year, there was a set of themes and critical challenges that emerged.

In my view, this year, and forthcoming years, the industry will be challenged by the bitter backbite of the Pandemic, in four key areas: PEOPLE, PRODUCT, PRICING, and PLANNING. Simply, we don’t have enough employees; we will have to struggle with supply chain problems to get product at the backdoor costs we need; the need to cover dual food and labor cost impacts make pricing a prime concern; and lastly, effective short-run and long-run corporate planning are essential for all kinds of brands.  Planning will be a challenge because business and social conditions are incredibly confusing right now.

Observations at Restaurant Finance Conference

There is a dichotomy now between current restaurant-level margin deterioration driven by higher food and labor costs versus favorable balance sheet conditions. Balance sheets are strong and EBITDA has been strong for many brands [note EBITDA isn’t cash flow; lots of real cash outlays remain to be paid from EBITDA]. The issue right now we have double food and labor cost inflation impacts: RFDC M&A session moderator Allan Hickok reminded us correctly that no one present has managed double inflation. The P&L turning point was evident in Q1 2021, versus 2019 as a base.

And we have an eroding workforce. No one at Restaurant Finance had any magic solutions to make us preferred employers. Some employees can’t stand working for us. Starting wages have floated up way beyond what one would think. The key numbers to watch is average wage, staff complement, staff hired v. lost, operating hours lost. Our employee counts per store are down. And the cost of new store construction is up. The supply chain difficulties will be with us going forward, it’s a global problem affecting all businesses and nations. We can maximize supply chain operations, with specs, packaging, and routing economies but these are all that we can influence. If there are no drivers, our cost containment plans mean little. Where more creativity is needed is doing something to make our brands more employee-friendly. Talk about culture has to be manifested in action. If we have fewer and fewer employees, spreadsheets and earnings call estimates mean little. What repeatable series of small things can the company do for your employees that are meaningful and say that you care?

On the positive side, investors, lenders, and funds are available for restaurants. Only a year after the Pandemic year that is great. I asked a unit growth question at the M&A session and the panelists confirmed there was a lender/underwriting appetite for US new unit growth. But they watch margins; the lessons seen just in Q3 with compressed store margins are visible to all. The 2022 risk is that restaurant earnings dollars could erode vs. 2021 due to margins.

Where there is waste in restaurant processes, such as TV marketing discounting or coupons, companies need to consider quickly as the food and labor inflation problems are not transitory. In addition, strong new operators like Dutch Bros (BROS) are now public and are on the hunt for smaller, efficient drive-through sites. Legacy QSR operators, get smart on your site standards. Don’t make them too large. Spend time and money on loyalty and digital infrastructure via your CAPEX budget. Insure new market growth proformas are solid. If the growth pattern looks like a hockey stick, you have a problem.

Paul Brown, the Chair of the multi-concept Inspire Brands spoke and showed off their new Alliance Kitchen concept, which is a ghost kitchen-like property that combined product and equipment platforms of five of their seven brands to considerable cost and space savings. [1] Paul was demonstrating exactly the common support practices sharing that Inspire is charged to do, similar to his experience at Hilton Hotels. Paul was wary and said “we are good” when asked by John Hamburger when he would acquire another brand. Perhaps that should be read as ‘we are good for now and have to work what we have.’  (my wording). Inspire is a rumored eventual IPO.

Dr. Scott Gottlieb, the former FDA Commissioner, presented that with 80% of the US population vaccinated or naturally immunized, that the going forward COVID threat should decline rapidly after January 2022, similar to the UK trend.  He noted that preventative COVID pills were almost on the market that would help too.

Sales Momentum, Discussion of Check/Mix/Price

Analysts do field checks, look at Black Box, subscribe to Technomic or watch its published index, look at the NRA indices, talk to specialized analysts like myself, listen to any current quarter discission on calls, and look at the federal BLS survey to detect what is going on. There are some other credit card/digital data shops that report as well. One new data source I’ve found gives us an early peek at retail/foodservice data before the BLS is released in mid-month. From the Chicago Fed, it shows we have an improving retail/foodservice trend in October which is welcome of course.  It tracks declining September-October national COVID cases and deaths. We will have to confirm what the foodservice sales growth portion is because our inflation is much higher.  See Table One below:

Chicago FED CARTS, Retail/Foodservice Sales Activity v. YAG

Measure Oct. 2021 Sept. 2021 Aug. 2021 July 2021
Nominal +2.6% +.8% +2.0% +1.7%
Real, X Infl. +1.8% +.3% +1.5% +1.1%


Restaurant Pricing/Mix/Traffic: Is Price Too High?

I have had many conversations with restaurant investors who are concerned about the amount of restaurant price and average check growth the industry has taken and recorded in the last two years. Predictably, some publics have removed their average check breakouts in an attempt to avoid questions.

Some investors don’t seem to understand that when COVID hit, drive-thru brands had an increase in drive-thru sales rates to as high as 100% for a time but now slightly lower—that’s called mix—and that the number of food items per bag increased as customers ordered more. Both McDonald’s and Starbucks have talked about this consistently on their calls.  Casual dining brands don’t have drive-thrus but they had to pivot to sell more take out which typically has a higher average check than in dine-in guests. So all this is called mix.

Restaurants also have had to take price—with dual food and labor cost inflation hits. Historically it ran around 3%, but now the trend is 6%. Restaurants do not like to take price naturally and many see it as a last resort.

Is the current price too high?  Perhaps not! The restaurants with good feedback polling systems will know, as will marketing research and management consulting companies with the market research infrastructure in place. One simple way is to check against US food at home—grocery store inflation. Here finally, we have some good news, at least right now, grocery store inflation is exceeding food away from home inflation in 2021.

US BLS Rolling Year Food at Home v Food Away From Home Inflation, October 2021

US Food at Home 12 mo. Inflation, October 2021 +6.2%
US Food Away from Home, 12 mo. October 2021 +5.3%

About the author: John A. Gordon is a long-time restaurant industry veteran, with experience in restaurant operations, 20 years in corporate staff roles (Finance, FP&A), and via his own management consulting firm, Pacific Management Consulting Group, since 2002.  He works with investors, restaurant operators of all types (large franchisees, franchisors, corporate HOLDCOs), attorneys, a sell-side restaurant team, strategy management consulting firms, and others on complex restaurant issues. He can be reached anytime at jgordon@pacificmanagementconsultinggroup.com, office 858 874-6626.


[1] https://www.franchisetimes.com/franchise_news/inspire-brands-ceo-unveils-new-alliance-kitchen-at-rfdc/article_70a3159c-4255-11ec-9ee6-b3fcb1c11ccb.html



Herb on the Street – One Under-Appreciated Risk of the Dutch Bros Hot IPO

Herb on the Street
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► One of my favorite interviews – many years ago – was with Gordon Segal, founder of home décor retailer Crate & Barrel…

We discussed why he never got tempted by the riches offered by investment bankers to take Crate & Barrel public. Segal hated, just hated, the thought of putting up stores for the sake of meeting Wall Street’s growth forecasts.

Instead, he preferred opening new stores when he could find the right location, then staffing them with current employees.

The truth is, once a retailer or restaurant goes public, especially if it has a seemingly hot concept, the goal is fast growth. That means slapping up stores as fast as possible – and wherever possible – even if it’s a terrible location.

As veteran restaurant analyst John Gordon of Pacific Management Consulting put it, “This is the trouble every cool brand gets into.”

► And with restaurants, especially, the eyes of management are often much bigger than their stomachs…

A perfect example is Buca di Beppo, which had grand plans to dot the U.S. with 450 of its cavernous family-style Italian restaurants. As I wrote in Fortune magazine in 2001, when the company had just 68 stores in 21 states…

Good luck! Says one former brokerage industry analyst who now works as a hedge fund manager: “I would be very careful of any management team that thinks it can build a “national brand.” It just will not happen.”

And it didn’t…

Buca di Beppo’s stock wound up collapsing until it was acquired in 2008 by Planet Hollywood. Even today, the company’s website says it has “over 100 locations worldwide.” (Translation: If it does, it’s not much more than that.)

The truth is that some concepts don’t travel well to other geographies… or they aren’t economically feasible for rapid or even broad expansion… or, if they’re publicly traded, they simply can’t remotely get close to the forecasted numbers they use to lure investors.

► Enter the newly public coffee chain Dutch Bros (BROS)…

With 471 drive-thru locations in 11 states – almost all west of the Rockies – the company’s initial public offering (“IPO”) last month caused lots of chatter. Born out of a coffee cart in Oregon, Dutch Bros rapidly created a cult-like following for its coffee – almost In-N-Out-like. The company also separated itself from competitors with mostly cold, high-octane drinks. Roughly a quarter of its sales, in fact, come from an energy drink that has no caffeine. Execution has been beyond reproach.

The real sizzle in the story, though, is what the company says in its IPO filing about its future growth: That it believes it can balloon to 4,000 units.

That got Wall Street’s attention.

► But some big questions remain… 

Just how realistic is that number? And just as important, how long will it take to get there?

After all, much like Crate & Barrel, Dutch Bros has prided itself of only opening stores staffed by existing employees. In a story last June in Restaurant Business, Dutch Bros President Joth Ricci told the magazine’s Jonathan Maze…

We make sure the culture and the way we do things is protected. We only promote from within related to how we expand our culture and our business.

That may be easier said than done now that Dutch Bros is a public company. As John Gordon says…

Now they’ve got the burden of growing responsibly what they want to do versus the natural pressures that come with being publicly traded and pressures of quarterly earnings

But for Dutch Bros, there’s something else that may give investors pause…

Unlike most restaurants – or even coffee chains – Dutch Bros is drive-thru only. While that’s good from the cost of the buildout and revenue per square foot, it’s terrible for finding locations … especially post-pandemic and especially in crowded, well-established markets. As Gordon says…

Demand for drive-thrus is great… After pandemic they became the golden property and will remain the golden property because for those afraid to get out of the car it became the ultimate convenience.

► Therein lies what quite possible could be a possible problem for Dutch Bros…

According to Gordon…

Everyone realizes your fighting the likes of Starbucks (SBUX) and Dunkin’ Donuts… They’re all out for exactly the same kind of site – either conversion or new unit sites that Dutch Bros is.

And it doesn’t matter that the competition might not be as cool as Dutch Bros. This isn’t about the coffee, the food, or even the product

The only thing that matters is the general lack of viable drive-thru locations, both new-builds and existing. Gordon put it this way…

It’s very difficult to get sites right now… I’m working for huge international QSR franchisor that has me looking for drive-thru sites. I will tell you… for one of their brands, it is beyond impossible to find drive-thrus.

Given how hard it is – and to show what Dutch Bros is up against – Gordon says he and his client think it will take more than a year to find the right spots.

As one friend in the coffee business put it to me…

There aren’t many options and Starbucks is really big on going that route. Landlords don’t know much about coffee so a lot of them would take Starbucks because of the name.

Plus, Starbucks can pay more.

That also doesn’t bode well for part of the growth story… that Dutch Bros has yet to fully tap Southern California, especially Los Angeles and San Diego. As Gordon says…

In certain dense states, California being one, it’s going to be an immense challenge… [In other populated parts of California] city zoning makes it very hard to construct a new unit because of traffic and noise.

► There’s something else to consider…

Even if the company can build 4,000 units… how long will it take? In a recent report from investment bank Piper Sandler, I saw some impressive-looking stats…

However, the length of time to hit 4,000 units is one thing (surprise, surprise!) that Dutch Bros doesn’t say.

Piper Sandler tried to take a stab at it, though… Based on “theoretical” performance, analyst Nicole Regan said her best guess is that “it may take as many as 12 years for this ultimate unit count to materialize.”

Twelve years?

Forecasts based that far out, in my opinion, are generally meaningless. Besides, it doesn’t really matter because from here to there, the only thing that matters for Dutch Bros (or any other fast-growing retailer or restaurant) is growth relative to expectations. That goes for revenue, average unit volume, and (key in the mix) the number of units.

If Dutch Bros can’t find enough good drive-thru locations, all bets are off. And while analyst after analyst in recent days has put a positive spin on Dutch Bros in their post-IPO initiation reports, it’ll take a few quarters of earnings – especially guidance and management’s commentary – for the real story to start emerging.

And that doesn’t even get into the question of whether Dutch Bros will play east of the Rockies.

Two other points to consider…

1.   If its stock ever craters – or even if it doesn’t – if Dutch Bros shows it has legs, and isn’t proven to be a mere fad, it could wind up be a potential acquisition target for a mature chain like Starbucks or Dunkin’ Donuts.

2.   Remember what I said earlier about how nearly a quarter of Dutch Bros’ sales come from one product – a non-caffeine energy drink? What’s to keep the company from striking a distribution partnership with a consumer packaged goods (“CPG”) firm for a canned version – much like Starbucks does… or like California Pizza Kitchen does with its pizzas

That’s a long-winded way of saying that while the company faces an enormous hurdle in finding drive-thru locations, there are levers that could bail out investors. The short-term could be rocky, but for investors with a time horizon of longer than “immediate gratification,” it’s definitely worth watching.

► In the mailbag, reader responses about Medicare, GoodRx (GDRX), and Traeger (COOK)…

As always, feel free to reach out via e-email at feedback@empirefinancialresearch.com. And if you’re on Twitter, feel free to follow me there at @herbgreenberg. My DMs are open. I look forward to hearing from you.

► “When comparing pricing of Plan D plans vs GoodRx don’t forget to add in the amount Social Security charges you for the privilege of using a Plan D. There is also GoodRx Gold for even better pricing. I use Kroger’s (KR) drug Savings plan which is run by GoodRx. Two years ago, I quit Medicare Plan D and am self-insured. I can’t figure out how GoodRx makes any money? Could it be that the drug store gives them a rebate for the store selling at a reduced price?” – George C.

Herb comment: George, you quit Medicare Part D? That’s a bold move… but I’m glad to hear the Kroger plan is working.

Turning to the way GoodRx makes money, as my colleague Enrique Abeyta wrote in the May issue of his Empire Elite Growth newsletter…

GoodRx pays the PBMs [pharmacy benefit managers] a fee to get access to discounted drugs. That price includes the cost to manufacturers for those drugs, as well as what they pay for the drugstore to make their margin. The markup from those inputs becomes GoodRx’s revenue.

(Subscribers can read the full issue here… And if you aren’t a subscriber, you can click here to find out how to gain instant access.)

► “Herb… Don’t forget to check for other discount drug prices beyond GoodRx. They are not always the least expensive. For example, I get [a] continuous glucose monitor. In my area GoodRx has it at around $128 for two from CVS (CVS) with about $117 from Giant Pharmacy or $120 from my local pharmacy. A different discount card which seems to go by pharmacychecker.com has them for $92 at CVS rather than $128 (same CVS location) but in searching around I found another card that has them for $77 at a CVS in Target (TGT)… still CVS but it has to be one in Target. If you get them at a regular CVS, it is more. Makes you wonder even more how much they really cost. Medicare doesn’t cover them yet but when it no doubt does it will pay more than this. Very strange and dysfunctional medical market in the USA.

“Another thing that is also odd is the many drugs are lower priced for commercial insurance patients only. If you are on Medicare they are not discounted. I was taking one drug on a commercial insurance plan before my wife retired and it was a $5 co-pay each month. Under Medicare and a Plan D it was a $40 co-pay until the donut hole then it was a $112 co-pay each month. GoodRx didn’t help with this one as it was one of those advertised on TV.

“And then there are the dental discount plans that you pay for rather than free that discount the dental cost by 40% or 50%. Be sure to look into those if you have to pay your own dental bills. I think GoodRx is going to expand to do that as well but for now I use the Aetna one.” – Larry M.

Herb comment: Thanks for the insightful comments, Larry.

GoodRx definitely has competition, including in-store at the likes of CVS, when at point-of-sale the clerk might steer you to their even cheaper price. You know, the one that wasn’t advertised but is offered because you showed a GoodRx coupon. Still, GoodRx probably has the single-best pricing platform, which is to its advantage. I think the one thing we can agree on is that there when it comes to screw ups, drug pricing in this country is at or near the top of the list!

► “So given what you’ve written I assume you’re no longer voting Republican right?” – Jack H.

Herb comment: Hi Jack, I see the sarcasm there! Reality: I rarely discuss politics… but, for the record, I am and have been for years a registered independent.

► “Herb, your discussion regarding Traeger evoked some thoughts. We bought our first Traeger over fifteen years ago when they were produced by a small company in Oregon. We have purchased seven more since then as we moved from one home to another and left ours for the lucky homebuyer. We even gave one to our parish priest for a home warming gift. We did buy one at a Costco and while the price was attractive the model was different than Traeger’s own models and was “bundled” with pellets, cover, etc. to make it seem like more of a bargain.

“Why would they do this you asked. For people like you who haven’t heard of Traeger and might never know of them! Costco has millions of members who shop regularly and many of them will be introduced to the brand during their normal visits. Once someone is ‘hooked on Traeger’ few will move away from them. Meanwhile, Traeger sells their top-of-the-line ‘Timberline’ models at premium prices available only at select retailers who won’t discount them. You should check out a Traeger… they’re used to cook many dishes besides barbecue for which they are well known. My wife even bakes cakes in ours as well as recipes aimed at an oven! The Traeger imparts special flavors using different wood pellets and temperatures are electronically controlled as precisely as our kitchen oven. We love our Traeger and use it several times a week! Best,” – Robert O.

Herb comment: Hi Robert, unfortunately my over-priced Lynx is built-in, and everybody I know who uses a Traeger swears by it (though one friend who recently bought one was a little underwhelmed).

I think the bigger issue here is why Traeger was discounting its grills at Costco Wholesale (COST). It’s one thing to be at Costco, which sometimes is a “tell” that a company is having problems pushing a product. I understand the difference with Traeger, and its Costco relationship, but discounting at Costco – with not only special sales but even deeper-discounted road shows – is a red flag. Of course, so was Starbucks opening up stores across the street from one another, and you see how that turned out!

CNBC Make It – Here’s how much money you’d have if you invested $1,000 in Domino’s pizza 10 years ago

Domino’s Pizza

In 2011, one share of Domino’s cost less than $30, enough to get you a few pies and a 2-liter bottle of Coke. The pizza chain was still in the midst of a major rebrand that saw it toss out its old recipe and admit to its customers that it had failed to deliver quality food.

But over the past decade, Domino’s has undergone one of the biggest transformations not only in fast food, but also in corporate America. At nearly $480, the price of a single share of Domino’s today could pay for an entire pizza party.

And despite posting its first drop in same-store sales in more than a decade this week, the chain’s long-time shareholders still have come up out on top.

If you had invested $1,000 in Domino’s on Oct. 14, 2011 at a share price of $28.32, the market value of your shares would be $19,980 today, according to CNBC calculations. In contrast, a $1,000 investment in the S&P 500 index would have seen a 343% return over the same time period and would be worth about $4,340.

Domino’s transformation can’t be pinned on a single factor, but instead on a savvy rebrand that saw the company improve every aspect of its business, says analyst John Gordon of Pacific Management Consulting Group, who has 45 years of experience in the restaurant industry.

In early 2009, Domino’s shares were trading under $10 and the company had seen years of weak sales. The company brought in new CEO Patrick Doyle who set about to turn the company around.

The first step was improving its food. The pizza chain was open in its marketing about the failures of its old product and emphasized how much of an improvement its new recipes were.

“They actually celebrated it, they made fun of themselves on TV,” Gordon says. “They developed a knack for very good marketing that they were able to fine tune over a period of time.”

Domino’s also led the way, along with Starbucks and Panera, in digitizing its operation. It built out its website and app, and encouraged customers to stop placing orders over the phone and instead do it through the company’s online platforms, which Gordon says allowed stores to run more efficiently.

“As the transactions became more and more digital, the average ticket became higher,” he says. “Franchisee cash flow improved from $49,000 per store in 2008 to $158,000 in 2020. That gave them the internal cash flow to build more stores on their own without having to go to the bank.”

The company also doubled down on analytics and increased the efficiency of its pizza delivery routes, which allowed franchisees to maximize revenue for their stores, Gordon says. And over the past decade, these improvements have turned it into “the dominant global U.S. pizza operator.”

“Among the publicly traded stocks, I can’t really think of any other stock that has recovered to this degree, both operationally and on the stock side,” Gordon says. “Other stocks have gone up and down, but this company has fundamentally, operationally and financially recovered for its franchisees and shareholders.”

Wray Executive Search – Restaurant Excitement and Complications Underway

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

For those of us restaurant industry lifers who are hooked on the excitement, complexity, moving pieces, and unpredictability of this business, the last 60 days have given us the reward we crave. More is coming. By the middle of July, we thought we were on a glide path to the magical  “other side” of the Pandemic. Unfortunately not so fast. The other side is not here yet.

“The Wait for the Re-Opening Goes On”  

This was the headline from the WSJ’s always well-written Heard on the Street financial analysis and commentary column on September 10. It noted the Delta variant surge and “while this hasn’t knocked the economy back on its heels, it slowed it down”. Later, it noted, Brinker’s (EAT) stock was down 33% from its highs. As I noted last month, evidence of casual dining softness was apparent from several trackers, and EAT confirmed it in both brands in August.

Darden’s (DRI) earnings are coming up on September 23 (Q1, 2022) and as always they are a critical benchmark. Darden, no doubt will discuss what they are doing to maximize their brand’s operations and fiscal posture, as well as employees and guests, a sound position no matter what problems are underway. In short, they demonstrate there is plenty to do.  More on this in a bit.

Restaurants have reopened, and we have IPOs ready to go, and credit markets and investor money available for expansion

Restaurants are a leading indicator coming out of recession. Virtually all public chain restaurant units have reopened. Dave and Buster’s (PLAY) confirmed theirs had on their very positive call last week, one of the last laggards. (FYI—they have new multi-channel programming coming).  Even more significantly, five new restaurant brands have filed for IPOs or are in the pipeline:

Krispy Kreme     $DNUT

Dutch Bros      $BROS

Sweetgreen     TBD

Portillo’s     TBD

First Watch     $FWRG

In addition, Torcy’s Taco’s has been discussed since 2019.

The Company Owned v. Franchising Ownership Debate

This does not appear to be a very heavy “expand by franchising” group, although that could come later in some brands. In fact, most of the smartest operating executives I have met have said they would always prefer to do franchising later. Krispy Kreme (DNUT) has defranchised since we saw it last public, and soon to IPO Dutch BROS has a limited franchised program and is now more heavy company operations skewed. My opinion is some brands should only be company-owned and others franchised with a strategic mix of company units[1]; others can do both over time. In 2019, I had a heated discussion with an investor who couldn’t understand why Dave& Buster’s (PLAY) then problems would not be solved by refranchsing all the units. “Because it isn’t as simple as a McDonald’s, where a franchisee would be motivated to expand units all over the market,” I said, among other things.

The Complexities of Overexpansion

There are some very nice companies on the IPO list. For clients recently, I have studied and again confirmed what most restaurant analysts, investors, observers, operators, and industry journalists with perspective know: overexpansion is the number one killer of restaurant brand momentum. My study references the Burger Chef[2] overexpansion of the early 1970s to the Noodles (NDLS) 2012-2017 expansion, with both cited by their CEOs as dysfunctional. Now, NDLS has rebuilt and is on a positive pathway.  Think about the other 2012-2015 IPO brands and the difficult result they got when they came into expansion markets.

In the late 2010s, I  worked a confidential forensic analysis for a brand, whose whole internal goal for a time was to go public. Unfortunately once that finally happened, the company went off track. The PE sponsor and rotating CEOs lost the operating culture that was once in place. The brand, still public,  was beaten down over time by bad earnings, concept failures, and tremendous value was finally lost in a distressed exit transaction.

Less Room for Error in 2022 and Out: Operator and Investor Due Diligence Required

The development risk for new brands if not carefully staged post Pandemic 2022 is several-fold. One, now as an industry we don’t have enough employees; we are hemorrhaging employees in fact. Employee complements per store appear to be falling. [3]   And as well known, we can’t get some food and supplies at least right now, but likely lasting into 2022. The BLS food producer price index showed another uptick (2.9 pts) in the index in August.[4]  Sysco (SYY) and  US Foods (USFD), Starbucks (SBUX), and McDonald’s (MCD) are routinely noting supply chain disruptions are expected. [5]

And finally, it is not like there are spare guests. Competition remains fierce.

The QSR operators, especially those tier-one operators with drive-thrus, digital, loyalty, regular new product new news, with a strong company store, and/or franchisee store-level economics platform will be powerful competitors. [6]  Restaurant Business documented the advantage the top ten operators gained over everyone else, comparing the performance of the Top 500 brands. However, the Delta surge has affected casual dining out confidence.[7] So the sit-down space will be most affected. On the upcoming Darden (DRI) earnings call, I’m waiting for discussion and questions to see how they will be flexing back to takeout and working large party catering this fall and winter.

Marketing teams and their agencies will need to be extremely omnichannel flexible as a result of Pandemic consumer changes. The marketing function, often the slowest to change tactics due to the “Big TV” media buying attitudes of their large advertising agencies will be challenged to keep up. You wouldn’t see an omnichannel approach by the huge TV media campaign now running in a national casual diner chain featuring its “country roots”.  It seems to be now betting on-premise dining. However, QSR has gotten the message.  In Q4, all three international burger majors—McDonald’s (MCD), Burger King (QSR), and the first to have it on the street—Wendy’s (WEN)–will have live US loyalty programs in place that will be readable. That will be exciting—and telling.     


About the author:   John A. Gordon is a long time restaurant analyst and management consultant with 45 plus years in restaurant operations (6 years), corporate staff positions (20 years), and management consulting roles– a global management consulting firm plus his own founded restaurant consultancy, since 2003, Pacific Management Consulting Group (19 years). He is a Master Analyst of Financial Forensics (MAFF) and works complex restaurant operations, financial management, organization, and strategy assessment engagements. He can be reached at office (858) 874-6626, email jgordon@pacificmanagementconsultinggroup.com.


[1]   Similar to the McDonald’s investment rationale expressed over time.

[2]   Burger Chef was owned by General Foods from 1968 to 1883. See  General Foods Annual Report press report, New York Times Archives, hppts://nyti.ms/1GLuFJK


[3]   https://technomic.com/newsroom/technomic-study-uncovers-labor-crisis-foodservice-industry-may-not-be-temporary

[4] bls.gov/ppi/#news

[5]   https://bloomberg.com/news/articles/2021-08-21-u-s-food-suppliers-are-having-trouble-keeping-shelves-stocked

[6]   Restaurant Dive.com, Patronix and PYMENTS2020 data

[7]   See my August Executive Connection newsletter. Input from Civic Science and  Morning Consult picked it up first.