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John Gordon - February 2021



The Continuing Challenges of COVID-19

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

The Fog of War

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

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

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

Reading Financial Comparisons Against the Most Difficult Year Ever 

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

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

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

Operations Imperatives for Franchisors

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

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

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

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

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