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John Gordon - November 2020



Peering Ahead

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

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

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

More news is the stable recovery pattern seen to date in the US fast food and sit down restaurants to date. The data analysis firm Facteus reported last week that fast food consumer spending was up 16% in the week ending November 8, while sit down restaurant consumer spending was up 6% year over year. <1>  Note that this is tracking consumers and does not relate directly to same store sales. This is factoring in cooler weather in many markets and some COVID surge, but both factors going forward are of great concern. The global QSR brands have generally recovered, with the US now showing more stores open and with higher drive thru store mix, a center of strength. This is a reversal from prior years where supra levels of the competition held down US progress and where international trends were stronger.

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

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

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

Some restaurant environmental circumstances have changed.

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

A near term opportunity is that the industry might not for long be operating without the benefit of the social energy, and sales, and higher margins that the bar provides. While table service was unaffected through COVID restrictions, the bar was impacted in most jurisdictions due to proximity restrictions. However, 30 states and territories have provided for “carry out” premixed liquor servings, for beer, wine, and spirits, and will be a sales and profit partial offset. The NRA estimated sales mix of the to-go items is “up to 10%.<2>  This number still has to be validated per publicly traded chain restaurant earnings commentary. In any event, the application of a near term vaccine will help motivate this population quickly. <3>Internally sourcing bar and entertainment expertise to re-energize bar zones could have a fast ROI and beat competitors.

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

<1>   Facteus FIRST report, November 11 2020.  See www.facteus.com, and @facteus post, November 12 2020.

<2>   Per interview, Sean Kennedy, VP, Public Affairs, NRA, Mashed, June 16 2020.

<3>   Civic Science polling consistently notes a segment of population ready to eat and drink in a social setting, now.

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