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Restaurants: Consumers Slide Back and Forth
by John Gordon, Principal and Founder, Pacific Management Consulting Group
I remember in early 2020, I wrote a column for Executive Connection that had the theme “not much was new from the January 2000 ICR Conference”, which is a good beginning of year proxy. Wow, how things have changed now! We are still being rocked by the effects of the Pandemic in many ways.
We really have a price perception. One aspect is that some of today’s consumers cannot understand why prices are so much higher now than in 2019. The fact that we had to increase prices is a part of the business, but I see now we have failed to educate our guests. There is some finger pointing going on now in the franchise sector whether franchisees are responsible for over pricing. NO-I do not buy that--the franchisor is the steward of the brand, sets the marketing (mostly) and certainly sets the standards and procedures. If there is pressure for new units and remodels in a down market, of course there will be pressure on price. Collectively, we all failed to communicate with our guests.
Consumer Momentum is back and forth.
Per the Bank of America August restaurant consumer tracking, one year restaurant spending was up 3.4% month to month vs. July, which was a down month. Independent restaurants rose 840 pts to +4.3% Smaller Coffee small and midsized chains rose plus 17.3% [Wow]. Fast casual remained slightly positive. QSR less pizza moved up moderately 350bts to barely positive .1%. Casual dining improved sharply. All restaurant segments including both online and brick and mortar moved positively.
With all the discounting going on in QSR nationwide, sales being down in July and up modestly [compared to the other segments], sales imply that market share that market share was lost to others. I would surmise mix shifts were responsible. This August movement beat the long-term July to August seasonality, where July is slightly better.[1]
In addition, the CNBC/National Retail Federation (NRF) also noted restaurant gains in August. This makes for plus 1.21%, minus .24% in July and plus 1.71% in August (month to month, seasonally adjusted. [2] Year-to-year sales were up 2.90% in August versus minus 2.29% in July.
What Continues:
On the cost side, we are still in a period of food and labor inflation. Food cost inputs and dollars are not deflating, the rate of increase is less than 2021-2023, perhaps low single digits. Labor rate increases are higher, 6-7%. New unit construction costs remain high. Interest rates have jumped up from the low cost of money era in the 2010s.
The industry still has a price perception problem with guests, almost worldwide, reported by many companies and surveys. Unfortunately, our rate of surveyed US price inflation exceeds that of grocery store inflation by a factor of 4% vs. 1%. In the US political wars, grocery food inflation and consumer fees have taken center stage.
Brands are addressing it in diverse ways; some taking no price, some a low-price approach via big GRP TV, digital, coupons and direct mail/POP tactics. Some work a mixed bar bell approach, some by adding new menus and platforms to stand out and present a refreshed look. Some are highlighting the brand inherent value and talk about central brand themes.
Value v. Price
There continues to be massive miscues about “value.” Many QSR management teams tend to think and talk about “value” as price. But price is just a subset of value. Value is the whole experience and emotive satisfaction. It is my experience, and opinion is that it is more difficult for franchisors to get ahold of the whole brand and fix it because they have outsourced much or all the operation to franchisees. And the franchisees must fund it.
This is why perhaps Chipotle (CMG) can turn on a dime, and implement new products and platform themes, while heavily franchised brands like Burger King and Subway have been trying to remodel forever. Asset light is an attractive thought in the investment world, but there are explicit disadvantages.
On Thursday, September 12, Cava Chair Ron Shaich was interviewed on CNBC. There was discussion all day about McDonald’s, noting that its $5 meal deal offer was extended through December. Ron concluded, ‘‘if price is all you have, that is a difficult place to be.” [3]
Brand Standouts have a Several Common Characteristics.
Fortunately, the industry has a few strong public restaurant symbols that have posted great results, momentum, and stock gains. These brands have to be studied closely-‘imitation is the best form of flattery’—except if one is creating the exactly same kind of restaurant brands in the overstored US market.
Still, the following brands have been standouts in many ways: Texas Roadhouse, the only casual diner brand, along with, Chipotle, Cava, Dutch Bros, and Wingstop have been exceptionally strong in a weak consumer market. In terms of the next cluster lower, Dominos has had a good year [except for the recent July miss reaction, this was unwarranted IMO], same for Shake Shack, and Brinker, with sales gains at Chili’s and a stock run up since April. Darden of course remains the leading casual dining HOLDCO, likely number one in the world [although the DRI stock began to recede vs. the S&P 500 in March]. [4]
One interesting observation is that of the top five brands, ONLY Wingstop is heavily franchised. The rest have little franchising or licensing or have frozen it [BROS, SHAK, TXRH] or none. Investor appetite for asset light restaurant investments continues to be sure, but these current US standouts are true. The natural desire to hold onto positive company store economics versus a much more limited and lower royalty per store can be responsible.
Another common characteristic is that these top standouts brands reached national prominence in the last 20 years, with Texas Roadhouse the oldest (late 1990s), Chipotle (early 00s) and Wingstop (early 2010s). CAVA and Dutch BROS are still in period of formative expansion. Younger, building brands that attain scale are welcomed by guests.
Of course, there are many powerful, older brands too that have not gone public, and mostly their founding families are likely glad about that: In n Out, Jersey Mike’s and Chick fil A come to mind.
Run up of bankruptcies.
The Restaurant Business Online semi-official running count of restaurant Chapter 11s/7s is around 20 as we speak. BurgerFi (BFI) was the first public restaurant brand that filed in a very long time. Burger Fi went public via the SPAC process and was extremely late to the Better Burger market. In addition, to fuzz up the tracking of results (IMO) and provide a larger sales base, they acquired Anthony’s Pizza in 2023. Red Lobster was the largest of course, with a buyer now found. Franchisees with weaker brands; brands with debt over leverage, failure to obtain ROIs on new unit remodels and acquisitions and lack of restaurant level profit and free cash flow common factors.
M&A Developments
Later this week, we may get additional color on the two recent Darden acquisitions, Ruth’s Chris, and Chuy’s, both former public symbols. Darden has handled many acquisitions very well over time. Another interesting acquisition of the One Group (STKS), Benihana, may get some color.
One merger that blew up spectacularly was the US parent’s Friday’s deal with Hostmore. According to the September 16, The Telegraph, publicly traded Hostmore sales were down 12% as reported and UK Administrator Teneo is already at work. This underscores how bad Friday’s/Hostmore merger would have been. Their chief goal was to sell all of Friday’s company units. Brands always need skin in the game, especially for declining brands.
About the Author
John A. Gordon MAFF is a long-time restaurant analyst and management consultant. He is a Master Analyst in Financial Forensics. With 20 years of restaurant corporate staff experience and almost 22 years via his consultancy, Pacific Management Consulting Group, he has seen it all. Gordon focuses on restaurant earnings, brand assessment corporate organization reviews and complex analysis for investors, attorneys, operators, franchisors, and franchisees. Call him to talk more at (858) 874-6626, or (619) 379-5561. Email: jgordon@pacificmanagementconsultinggroup.com.
[1] Bank of America, Sara Senatore and Team, B of A credit card results, September13 2024.
[4] Very recent Placer AI data have Olive Garden traffic more positive in the upcoming quarter.
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