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John Gordon - January 2020



What’s New in 2020? Well….

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

The calendar now says that is it 2020, and too many of us remember 1980, 1990, 2000 and 2010. One of the nice things about being a veteran of any line of business, like restaurants, is that your perspective deepens with the additional years. We know what we know now. Sometimes it prohibits expensive mistakes later.

The need to take down competitors to build sales

In the case of 2020, all of the restaurant space’s issues from the 2010 decade have rolled over. Nothing has changed. Exactly the same issues to start the year. That leads to the first restaurant observation noted once again at the 2020 ICR Exchange Conference that just concluded this week where a good number of public and smaller restaurant chains who hope to be public chains one day come to present. When it really comes down to it, this industry is powered by promises of growth, whether it be in the US or US and in international markets. But how is this growth going to materialize? Maturing and growing chains of all sorts need to identity and test their differentiators and competitor take down tactics. In our highly competitive economy, they have to compete not only for guests, but also employees, sites, funding, real estate and suppliers, naming just the most obvious.

This is the key factor that investors should look for: not just unit growth projections, but how will the brand capture market share and take down competitors.

We all hope things will get easier as time goes on of course but our over loaded marketplace produces great stress on startups and smaller players. Jay Sonner, partner at North Point Advisors recently penned a fantastic note<1> that identified  that despite the massive closing of stores in US retail and restaurants, some “new guard” brands are working.  These operations are clearly different and are targeted. The point is that market share has to be taken away from others. Some cited examples:

  1. Local alignment : Mendocino Farms and Snooze AM aligning with local farms and purveyors. Dig Inn as investor with upstate NY farms.

  2. Alignment to community: Cooper’s Hawk, with its 400,000 member wine club

  3. Memory Creation: Torchy’s Taco’s hotter tacos through the month; Punch Bowl Social with fun and approachability driven back into the driving range/golf experience.

  4. Photogenic/Instagram connection: are important traffic drivers and high ROI brand impression engines. Examples are Velvet Taco and Snooze high plate sharing rates.

  5. Giving respect to Kids and Pets: is important given societal shifts, especially urbanization. Many brands have had kids’ corners; several kid-safe and pet-outdoor space small brands have emerged.

Labor problems, $100,000 general managers in the QSR space? 

The second issue to rolled over from 2019 like a rock was ongoing labor availability problems. At an ICR 2020 Exchange special Piper Sandler luncheon, additional thoughts were presented by  Luke Fryer, CEO of the labor analytics and technology consultancy Harri reminded us that on the hourly associate side, a vast amount of turnover occurs in the first 60 days. This seems to me to be selection or scheduling or orientation issues. It is sometimes not setting out what the career ladders are, or even over promising the number of work hours. The point is that while wage rates might be uncontrollable, there are other ways to work at the labor control issue.

Bloomberg recently reported <2> that Taco Bell was considering paying $100,000 wages for restaurant general managers as the need was so severe. It turns out that this is being done on the company store side. We don’t know if this is some mix of salary and bonus potential, but most likely so. Some analysis is in order. First, Taco Bell has 462 company stores in the US, versus 6446 franchised locations.<3> I’m glad they have company locations and it is typical that the AUV and restaurant margins are higher at the company stores versus the franchisee stores in terms of profit dollars. Company stores do not have the burden of a royalty, and franchisor interest expense is lower or practically zero for these stores, unlike franchisees. However, it is typically true that franchisees run tighter labor cost percentages—they have royalties to pay, after all.

So, franchisees are not going to be able to afford $100,000 GM salaries. This $100,000 tactic might bring some incremental staffing relief to the company store side but will generally be unworkable on the franchisee side. In my view, labor relief has to come from anywhere other than labor rates.

John A. Gordon is a veteran restaurant industry veteran who can count a lot of new decades in this business. His restaurant consultancy, Pacific Management Consulting Group, works complex restaurant analysis engagements focusing on operations, financial management and strategy topics. He is reachable always at jgordon@pacificmanagementconsultinggroup.com, office 858 874-6626, and website, https://www.pacificmanagementconsultinggroup.com

<1>   https://www.linkedin.com/pulse/six-ways-us-retail-thriving-jay-sonner

<3>   2019 Taco Bell Franchise Disclosure Document.

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