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John Gordon - February 2024




Restaurants: Creative Catalysts Needed for 2024

 

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

 

Industry conditions in January take a step down

  So, we had an inkling by the ICR Conference in mid-January that weather and US brand backlash in the Middle East would be a problem. And sure enough, those trends carried through. Starbucks US seemed to have picked up some frequency problems in the US, but we could not confirm (and no one asked) if it was due to off-base unionization campaigns). CEO Laxman made it crystal clear Starbucks does not take geo-political positions.


McDonald’s has prewarned of Mideast sales difficulties, KFC was down 5%. So while not all the Q4 data is in and we need another quarter to confirm it, we are about to identify a new restaurant sales analytical point: US Brand Backlash.  And this is due to our old enemy that is almost impossible to see in our planning process, the “black swan”.


The rest of the industry was generally weaker and mixed by brand in January. In QSR, the Pizza brands and WING accelerated over Q4 while MCD, JACK, and WEN deaccelerated. Both SBUX and BROS also deaccelerated. In the fast-casual segment, CMG just delivered unbelievable picture-perfect Q4 results. However, it and the other fast casuals showed deceleration in January (CMG, PTLO, SHAK, SG). In full service, TXRH and FWRG showed strength acceleration in Q4 but an ease off in Q1, CAKE sales remain stable. A big Hat Tip: To Sara Senatore, Bank of America Senior Restaurant Analyst, and Bloomberg Second Measure data.


Q4 was a strong quarter, with generally accelerating sales month by month.  We should not expect much from January, it is the lowest restaurant sales month from a normalized seasonality perspective.  With January behind us, restaurant operators everywhere have their challenge now set: find the catalysts to drive sales and operate the business efficiently. 


Restaurant pricing is still above grocery prices …and will be so going forward


While not new news at all, in January, food away from home (restaurants) rose 5.1%, while food at home grew only 1.2%. LSR rose 5.8% and FSR rose 4.3%, the same kind of pattern as in prior months. [1] 


What will be the catalyst going forward? Looking ahead…..There will be some food inflation and there will be labor inflation for sure, appx. mid-single digits. So the industry is going to have to take pricing and most times it will exceed food at home because most kinds of restaurants are more complex operationally than a grocery store. And consumers might give us pricing permission for that, since once you walk in and out (or carry out) of the restaurant, the meal occasion is done.  


Some catalyst is needed to power your brand past this price issue. This places much importance on your Concept and Product development group (are they linked, by the way?), Marketing Creative, Marketing Analysis, Operations (both company and franchisee support), Finance (FP&A),  Supply Chain, Real Estate and Construction. And your franchisees.    


In last month's column, we discussed Lisa Miller’s research that promoting and supporting the brand’s base value (not meaning price necessarily ) to consumers was always productive. For example, in my view, Domino’s (DPZ) is doing that with its Emergency Pizza marketing platform, which is funny and creative and has a real dollar discount value but does not need to mention price per se in the ad copy. Or delivery anywhere with DPZ delivery folks flying through the sky to a remote site to deliver a pizza.

 

M&A Watch


Inspire IPO would change the global competitive map…..In what would be an industry-shaking development, on Tuesday, February 14  the Bloomberg M&A desk (Hat tip: Crystal Tse and Ryan Gould) reported that Roark was in very preliminary discussions to prepare the Inspire group of restaurants for a later IPO. The early discussed IPO value was said to be $20 billion. Assuming for a moment my math of a 20X multiple, that would put Inspire EBITDA at around $1 billion.  Inspire includes Dunkin, Sonic, Buffalo Wild Wings, Arby’s, and Jimmy John’s.


This would be interesting for many reasons if it happens. Most notably, a fourth public global franchisor powerhouse would compete alongside YUM, MCD, and RBI. Going public adds power and prestige to a holding company, but complexity and expense, too.  It is known now of course that they will prioritize international growth.  Market conditions right now are not favorable (watch the CBOE VIX move towards its move favorable zone ) but may normalize later.


Also, FAT Brands is almost ready to go with their profitable Twin Peaks brand anticipated IPO. Twin Peaks, a sports bar/casual dining/entertainment concept is doing well and is expanding via both company and franchisee expansion. AUVs are apps. $6M. Twin Peaks also needs favorable market conditions of course.


Restaurant Activist Log: In January, Puerto Rico based activist Pleasant Lake Partners filed notice that they had acquired 9.5% of the company and they urged BJ’s to “sell itself” to maximize stock value. Pleasant Lake has no restaurant history and only $750M under management. My opinion: Pleasant Lake does not have the credibility or size to mount a battle. This week, Citi Research agreed.     


2024 McDonald’s Marketing Tactics Discussion…. At the February MCD earnings call, CEO Chris K noted his concern about the under $45k income cohort weakness [not clear if customers, or percentage of mix] and that they would be changing their promotional mix [in the US it was presumed] to lower, single price point featured media features. Two for and other more completed price messages would be phased out. I remember thinking at the time (1) is the under $45K guest numerous enough for all this attention (2) what data is MCD looking at? and (3) what about cannibalization of the rest of the product mix?

Turns out that McDonald’s franchisees have some of the same concerns.[2] The National Owners Association has suggested that MCD return use of the valued engineered items like the McWrap created to not discount the core items. For some reason now, MCD marketing wants to discount the core menu items.


This morning, CNBC also ran a feature on the same issue.


So, to be sure, I don’t have all the numbers that McDonald’s corporate might or should have. I think the franchisees are right. In my view, if the percentage of $45K income cohort guests declined from say, 33% to 30%, I would not care much. We take absolute dollars to the bank and we care more about numbers of guests, much less about percentages of cohort in the total mix. I don’t want to discount segments of the core menu to fix a smaller problem. The MCD marketing machine is immense and “barbell” like tactics can be used. Or bring back the Snack Wrap. Unfortunately, this kind of basic blocking and tackling tactics conversation has to be had with the world’s leading QSR brand.


RBI/Burger King Franchisee Mapping Planning: A Radical Change


With RBI buying out Carrols and moving towards smaller franchisees, it is undoing 20 years of franchise development strategy in the US. Change was expected when Patrick Doyle came on board as Executive Chairman.


The RBI Investor Day is later this week and we suspect we will get more data.


And good Q&A. We will report back with comments in next month’s column.


About the author:

John A. Gordon is a 47-year restaurant industry veteran, with restaurant operations, corporate staff, and management consulting experience. His founded consultancy, Pacific Management Consulting Group, performs operations analysis, financial analysis, and organizational and brand analysis for clients. He can be reached anytime at 858  874-6626 (office) or jgordon@pacificmanagementconsultinggroup.com.

 

                     


[1]   Restaurant Business, Restaurant menu prices continue to get more expensive, Jonathan Maze, February 13, 2014., https://www.restaurantbusinessonline.com/financing/restaurant-menu-prices-continue-get-more-expensive

 

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