RESTAURANTS: NO CATALYSTS SEEN TO CHANGE CURRENT CONDITIONS

Last week I was fortunate again to attend the Restaurant Finance and Development Conference, RFDC2025.  It again was the premiere #restaurant industry event. Thank you to John Hamburger, Restaurant Finance Monitor and Team. 3200 folks were registered. The sales oriented attendees were optimistic for 2026 (of course) but the rest of us were more muted per people watchers there.[1] To be sure, there is money available for restaurants but not at the unrestrained “go go” era of low interest rates. There are new and emerging brands showing up..

IPOs and going private trends will be highly situational. We did have a successful IPO this fall, Black Rock. Three brands are now being shopped for going private: Pizza Hut US, Papa John’s, and Noodles. Denny’s was just purchased by a lead franchisee. Each is struggling. Often mentioned Panera going public seems nowhere near to doing so, per my observation at RFDC. China was in the news with both Starbucks and Burger King China JVs settled.[2] There is one brand in the coffee segment and one in the chicken segment to watch for possible IPOs.

The industry sales pattern continues to weaken ever so slightly: a visual norm might be plus 1 on sales, minus two on traffic and plus 3 on average check. Few brands are in powerhouse positive mode, a bunch in the middle and an unchanging large cluster of brands in red territory. Excluding Taco Bell [and McDonalds (MCD) of late] quick service brands are negative. In my view, there are too many brands, too many units, and too much discounting. Among the publics, continuing casual dining brand strength can be seen, lifting even Bloomin Brands and BJs. Texas Roadhouse and Chili’s continue very strong, as are Olive Garden and Longhorn. Chipotle is dealing with prolonged weakness, while CAVA is fine. Starbucks (SBUX) was running slightly down while Dutch Bros (BROS) continued along a strong path.

QUICK TAKES:

·   It seems clear that independents are trending stronger, if the sales reported by the big public master distributors are representative. Are they more menu creative or have more friendly service for some reason?

·   Food commodity cost inflation is an emerging issue, now mentioned in several earnings calls in the appx. plus 5 zone. The days of ‘descending inflation’ are in the rear-view mirror. Accordingly, given the vast negative guest reaction to our cumulative 2019-2024 price increases, it seems to me we must look to the center and bottom of the P&L to find offsets.

·   McDonald’s as of writing has improved sales globally (much more so outside of the US), but company store margins are lower. McDonald’s is actively providing funding supplements for negative franchisees due to the “Extra Value Menu price cut--$11M so far. On the last earnings call, Chris K was pressed on declining margins. They repeated the age-old mantra that once sales improve, margin improvement will follow. In my view: not in the short term. Beef supplies must reenter the favorable part of the beef cost curve, which will take some time.

· Dutch Bros is getting into food, for breakfast and some take along sandwiches. This will be very interesting to watch. Starbucks, Dunkin, and others struggled with food quality for some time, given 20% sales mix.

·   While some  brands are boasting about 1% comps, unfortunately that does very little to cover inflation. If a brand is running one percent for long, store level margins will deteriorate. That was the case with McDonalds worldwide last quarter.

LONG STANDING M&A EVENTS HAVE FINALLY RESOLVED.

The much-anticipated Starbucks China sale finally happened, with a JV formed with Boyu Capital last week. It will be a 60% Boyu and 40% Starbucks venture, with Starbucks receiving $ 4 billion for its current share. Starbucks China per unit AUV and EBITDA had fallen significantly in China over the last several years, due to Luckin, Cotti and many other lower priced coffee competitors that have opened. China is full of local coffee competitors. Using the reported $4 billion purchase price, which seems to work out to a 10X EBITDA multiple. Many other details have not been reported or worked out yet. I am very glad Starbucks retained a significant share of the business. Starbucks will need the cash as Brian Niccol hopes to add more labor and rebuild some US units.

Starbucks mentioned that the overall China calculated valuation was $13 billion, which is the sum of the $4 billion, plus unit growth and licensing revenue (which Starbucks will retain). I cannot back into that number without massive growth.  

STORE DEVELOPMENT CAUTIONARY  

We all know restaurant brands are judged by how many units that they open[3] However, I was bowled over when Chipotle last quarter reported guidance for FY-25 new unit growth of 315 to 345 new units, and for another appx 348 new units in the US for FY-26.[4] That is a 17% 2 year increase in total US unit counts.  Many would see that as risky since the brand is dealing with sales problems right now. 

In my high-volume restaurant “hang out” zone in San Diego (Mission Valley), three high profile fast casuals are slugging it out: Chipotle, CAVA and most recently, Sweetgreen. They all are within steps of one another. All have slowed up recently, with Sweet Green just opening last month.   

INDUSTRY EXPERT MAC BRAND ON PEOPLE AND DUTCH BROS

Please see these insights from Mac Brand, Founding Partner, Bellwether Food Group, and a 2-time author. This is Part One of Two, highlighting the need to for us think about guests, employees and even vendors AS PEOPLE.  

The narrative around younger consumers continues to be a hot topic in the restaurant industry, and a topic in many discussions at this month’s Restaurant Finance and Development Conference. They’re not using restaurants like previous generations, and they’re drinking significantly less alcohol, which is a serious challenge for casual dining.  

Dutch Brothers is one of the places, GEN Z is going, as it offers at least three things to these consumers: 

· It’s NOT their parents or teachers, Starbucks-this is an essential factor.  

· The brand is NOT about traditional coffee; 87% of their drinks are either iced or blended, food is around 2% of sales, although there are food initiatives on the way. 

· Like the legacy soda fountain brands, think Sonic/Dairy Queen style drive-ins of previous generations, the beverages are an occasion all their own. 

·  It’s a space unique to their friends and generational peers. 

·  The drinks are NOT their parents' carbonated soft drinks, yet they deliver the same reward, which is caffeine-laden, sugar-enhanced, cold refreshments. 

· It doesn’t break the discretionary spending budget. 

· Most of their users are either living with their parents, roommates, or are in college. 

· There’s no association with legacy QSR Brands (the coolness factor). Their parents have no history with Dutch Brothers, so the connections are with their generation. For baby boomers, think of album-oriented FM stations, back in the day. We weren’t listening to Top 40 or talk radio as our parents did—the music compellingly spoke to us.  

One thing, unexpected, is the absence of alcohol at Dutch Brothers, making the entire experience safer. That factor facilitates a comfort level for an impromptu nighttime excursion with friends or the online community.  

Part Two to follow next month

[1]   Thank you to Sara Senatore and the Bank of America team.

[2]   Starbucks at  40%. Burger King, 17% for RBI.

[3] It seems like that is the only metric for QSR breads, because only RBI  is the major franchisee to report franchisee EBITDA.    

[4] CMG Q3 Earnings Press release, October 29, 2025.