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John Gordon - November 2022


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

An evening or two of watching cable television ads gives you some sense of what is happening and will be affecting consumers going forward. You see endless QSR 2 for $5 or 2 for $3 themes returning, along with ads for vacations, cruises, and exotic vacations. The 40/60 economy seems clear:    Consumers with household income over $100K seem to be OK but under that are varying degrees of price and frequency struggle. Cutting back on restaurant visits is that old standby; but I’d bet with all the time and waste of shopping and cooking factored in, cooking on every occasion is more costly in the long run. But it has hard to dislodge conventional wisdom. Going into the fall, the conventional wisdom was that the 40%--the better-off component of the consumer base was relatively unaffected. Turns out that may be wishful thinking.

Inflation’s rising toll

Listening to the publicly traded chain restaurant earnings calls, one develops a sixth sense about what the CEO or CFO is trying to politely say honestly, without being too dramatic. Early this year, there was discussion of no impact or little impact via menu mix trade down by lower income guests challenged by gasoline or other forms of inflation that were starting up. Some brands, like Chipotle, said they had no lower-income consumers.

Non-aligned consumer research company reports are now reporting that inflation sensitivity is spreading. On October 25, Morning Consult reported “ higher-income adults are also now facing budgetary tradeoffs, which are coinciding with a period of rising core inflation and dwindling real incomes. Looking ahead, Morning Consult’s Purchasing Power Barometer “points to the likelihood that real consumer spending growth is going to slow further. Consumers at all income levels reigned in spending in September.”<1>

On the positive side, the price change in restaurant meals—menu board price changes, or food away from home has been less than grocery store inflation by a wide margin every month as we have pointed out. We just wish there was more creative agency marketing to enhance this message.

Implications of rapid changes to planning and profit execution: What Walking between the raindrops means at the concept level

“Walking between the raindrops” is a corollary to Mayor Mike Bloomberg’s post-2000 business planning philosophy: be flexible and lean. Be thoughtful about potential outcomes beforehand and ready to move out of issues quickly. Have one backup plan.  Don’t get caught in red tape.

Looking ahead, for us, none of these restaurant challenges or outcomes are all that shocking, frankly. We are always going to be challenged by food and labor cost increases and how to pass on our costs effectively so as not to shock guests.  We will always struggle to some degree to attract and retain staff. We will have competitors to beat and too expensive buildings and investments to amortize. We know or should know our base customers, our aspirational guests, and with whom we’d like to increase frequency.  We are always going to struggle to make money.

If we don’t know the proforma profitability between dine-in, delivery, and take-out channels, that is a quick must-do fix. If we don’t know how much our digital guests over-index in frequency or ticket versus other guests, that must be documented to make the marketing plan more effective.  .

Read the Chipotle, Mcdonald's, Starbucks, and Darden earnings calls and investor day presentations and transcripts for a good sense of strategy.

And a standard marketing concept that hasn’t been discussed much for some time: “the high low concept”. The brand varies preplanned price media themes aligned for the time of year and the established average check tolerance. Working on loyalty, digital, and delivery programs of course.

Earnings notes…intelligence is that MCD US same-store sales are still rising, up mid-double digits in October. This is on the strength of Halloween premiums and the 2-for $3 platform, as well as adult toy premiums from early October. Placier AI indicated the Adult Happy Meal got a mid to high teens traffic uplift post rollout in mid-October.  Chili’s (EAT) company restaurant margin, unfortunately, hit a new low in its Q4 report, at a 6% EBITDA margin. Chili’s has been battered all year with food and labor cost problems.  While many are waiting for trade down guests from full-service restaurants to fast casual and QSR concepts, it does not appear to have happened yet.

2023 Forecasting….. I’m doing a worldwide benchmarking review for a client, and broadly speaking, peer companies sort out into several groupings: (a) good SSS momentum, moderate food, and labor cost inflation (b) flat sales, moderate food and labor cost inflation (c) negative sales, moderate inflation.  Some US brands and several Old Continent brands are in category C, with a harsher recession expected there. In the US. With a hat tip to my friend David Maloni, a longtime industry expert, foodstuffs themselves are coming down (as we have noted in these pages) but the problem is freight, diesel, wages, and other transportation and indirect costs are still inflationary. Therefore food will still be up in 2023, just less so. Labor wage rates will be up again, likely a bit less so (hat hit: Sara Senatore, B of A Restaurant Analyst, staffing model).

Looking forward to seeing you…. At Restaurant Finance and Development Conference, November 14-16, at the Wynn Hotel in Las Vegas. I’ll be moderating the M&A Panel on Tuesday at 130p. Please stop by!

About the author:  John A. Gordon is a long-time industry analyst and expert, with 45 plus years, in unit operations, 20 years in restaurant corporate staff roles (financial planning and analysis), and 20 years via his founded consulting firm, Pacific Management Consulting Group. He works with complex restaurant investors, operations and economics review, and litigation engagements among others for clients. He is always reachable at 858 874 6626, or

<1>   Morning Consult, October 25 2022, Measuring the Impact of Inflation on US Consumer Spending.

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