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John Gordon - September 2021

Restaurant Excitement and Complications Underway

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

For those of us restaurant industry lifers who are hooked on the excitement, complexity, moving pieces, and unpredictability of this business, the last 60 days have given us the reward we crave. More is coming. By the middle of July, we thought we were on a glide path to the magical  “other side” of the Pandemic. Unfortunately not so fast. The other side is not here yet.

“The Wait for the Re-Opening Goes On”

This was the headline from the WSJ’s always well-written Heard on the Street financial analysis and commentary column on September 10. It noted the Delta variant surge and “while this hasn’t knocked the economy back on its heels, it slowed it down”. Later, it noted, Brinker's (EAT) stock was down 33% from its highs. As I noted last month, evidence of casual dining softness was apparent from several trackers, and EAT confirmed it in both brands in August.

Darden's (DRI) earnings are coming up on September 23 (Q1, 2022) and as always they are a critical benchmark. Darden, no doubt will discuss what they are doing to maximize their brand's operations and fiscal posture, as well as employees and guests, a sound position no matter what problems are underway. In short, they demonstrate there is plenty to do.  More on this in a bit.

Restaurants have reopened, and we have IPOs ready to go, and credit markets and investor money available for expansion

Restaurants are a leading indicator coming out of recession. Virtually all public chain restaurant units have reopened. Dave and Buster’s (PLAY) confirmed theirs had on their very positive call last week, one of the last laggards. (FYI—they have new multi-channel programming coming).  Even more significantly, five new restaurant brands have filed for IPOs or are in the pipeline:

Krispy Kreme     $DNUT

Dutch Bros      $BROS

Sweetgreen     TBD

Portillo’s     TBD

First Watch     $FWRG

In addition, Torchy’s Taco’s has been discussed since 2019.

The Company Owned v. Franchising Ownership Debate

This does not appear to be a very heavy “expand by franchising” group, although that could come later in some brands. In fact, most of the smartest operating executives I have met have said they would always prefer to do franchising later. Krispy Kreme (DNUT) has defranchised since we saw it last public, and soon to IPO Dutch BROS has a limited franchised program and is now more heavy company operations skewed. My opinion is some brands should only be company-owned and others franchised with a strategic mix of company units<1>; others can do both over time. In 2019, I had a heated discussion with an investor who couldn’t understand why Dave& Buster’s (PLAY) then problems would not be solved by refranchsing all the units. “Because it isn’t as simple as a McDonald’s, where a franchisee would be motivated to expand units all over the market,” I said, among other things.

The Complexities of Overexpansion

There are some very nice companies on the IPO list. For clients recently, I have studied and again confirmed what most restaurant analysts, investors, observers, operators, and industry journalists with perspective know: overexpansion is the number one killer of restaurant brand momentum. My study references the Burger Chef<2> overexpansion of the early 1970s to the Noodles (NDLS) 2012-2017 expansion, with both cited by their CEOs as dysfunctional. Now, NDLS has rebuilt and is on a positive pathway.  Think about the other 2012-2015 IPO brands and the difficult result they got when they came into expansion markets.

In the late 2010s, I  worked a confidential forensic analysis for a brand, whose whole internal goal for a time was to go public. Unfortunately once that finally happened, the company went off track. The PE sponsor and rotating CEOs lost the operating culture that was once in place. The brand, still public,  was beaten down over time by bad earnings, concept failures, and tremendous value was finally lost in a distressed exit transaction.

Less Room for Error in 2022 and Out: Operator and Investor Due Diligence Required

The development risk for new brands if not carefully staged post Pandemic 2022 is several-fold. One, now as an industry we don’t have enough employees; we are hemorrhaging employees in fact. Employee complements per store appear to be falling. <3>   And as well known, we can’t get some food and supplies at least right now, but likely lasting into 2022. The BLS food producer price index showed another uptick (2.9 pts) in the index in August.<4>  Sysco (SYY) and  US Foods (USFD), Starbucks (SBUX), and McDonald’s (MCD) are routinely noting supply chain disruptions are expected. <5>

And finally, it is not like there are spare guests. Competition remains fierce.

The QSR operators, especially those tier-one operators with drive-thrus, digital, loyalty, regular new product new news, with a strong company store, and/or franchisee store-level economics platform will be powerful competitors. <6> Restaurant Business documented the advantage the top ten operators gained over everyone else, comparing the performance of the Top 500 brands. However, the Delta surge has affected casual dining out confidence.<7> So the sit-down space will be most affected. On the upcoming Darden (DRI) earnings call, I’m waiting for discussion and questions to see how they will be flexing back to takeout and working large party catering this fall and winter.

Marketing teams and their agencies will need to be extremely omnichannel flexible as a result of Pandemic consumer changes. The marketing function, often the slowest to change tactics due to the “Big TV” media buying attitudes of their large advertising agencies will be challenged to keep up. You wouldn’t see an omnichannel approach by the huge TV media campaign now running in a national casual diner chain featuring its “country roots”.  It seems to be now betting on-premise dining. However, QSR has gotten the message.  In Q4, all three international burger majors—McDonald’s (MCD), Burger King (QSR), and the first to have it on the street—Wendy’s (WEN)--will have live US loyalty programs in place that will be readable. That will be exciting—and telling.    

About the author:   John A. Gordon is a long time restaurant analyst and management consultant with 45 plus years in restaurant operations (6 years), corporate staff positions (20 years), and management consulting roles-- a global management consulting firm plus his own founded restaurant consultancy, since 2003, Pacific Management Consulting Group (19 years). He is a Master Analyst of Financial Forensics (MAFF) and works complex restaurant operations, financial management, organization, and strategy assessment engagements. He can be reached at office (858) 874-6626, email

<1>   Similar to the McDonald’s investment rationale expressed over time.

<2>   Burger Chef was owned by General Foods from 1968 to 1883. See  General Foods Annual Report press report, New York Times Archives, hppts://



<6>   Restaurant, Patronix and PYMENTS2020 data

<7>   See my August Executive Connection newsletter. Input from Civic Science and  Morning Consult picked it up first.

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