KEY TIPS FOR LAUNCHING A SUCCESSFUL RESTAURANT

Posted on December 1, 2021December 3, 2021 by Franchise Strategist

Key Tips For Launching A Successful Restaurant.
BY Gary Occhiogrosso Contributor

For many people, opening a restaurant is a dream. One of the many things I find so interesting about the restaurant business is the blend of creative artistry and the detailed and challenging business aspects necessary to be successful. As an Adjunct Instructor at NYU’s School of Professional Studies, I teach restaurant concept development and business planning. On several occasions, I have been asked by my students to summarize the top issues that one must consider when planning to open a restaurant. Generally, regardless of the type of restaurant, the planning and considerations are the same. I’ll cover a few of the top line elements here.

At the beginning of the process, you should write a simple business plan. It would help if you thought about the many pieces of the puzzle connected to a successful outcome. Many novice restaurateurs, very often chefs, only consider the food component, but there is so much more. A well thought out business plan will include creating a unique concept, a competitive analysis, site selection, financial projections, equipment needs, staffing, and of course, the menu.

Let’s start with a concept

It’s essential that your restaurant offers a unique experience. It could be a Wine Bar with small plates, or a BBQ theme or a Create Your Plate concept. Whatever you decide, it is critical that the environment and “vibe” within the restaurant places the guest firmly inside the experience you’re attempting to create. Don’t confuse the guest with a concept that’s disconnected. As I often remind my clients, “everything touches everything else.” For instance, you wouldn’t use elegant tableware in a fried chicken restaurant or disposable plates in an upscale steakhouse. As obvious as this may seem on the broader elements, it’s essential to take that idea to every detail of the restaurant concept, no matter how small. Everything from the paint color to the music to the tabletops to the wall hanging must work together. The decor elements, the menu, and the service level need to provide the guests with a seamless experience that, when done well, goes almost unnoticed because it’s natural and authentic.

If You Build It, Will They Come?

Building a clientele is never as easy as hanging a sign over the door. It takes smart planning, execution of marketing, and living up to the promise in your mission and brand position statement. You should never assume, “if you build it, they will come.” Questions to ask yourself are; how will my restaurant connect with people? Why does my restaurant exist? What type of people am I looking to attract? What do they read or watch? How do they spend their spare time? What is the best way to reach them? Your concept should appeal to a particular, selected audience. There is no such thing as “everyone is my customer.” Knowing why and for whom your restaurant exists is crucial to success. Your marketing plan should offer compelling reasons why that guest base should frequent your establishment regularly. Is the concept created for health-conscious people? Is it aimed at Millennials or Baby Boomers? It is a full menu or dessert brand or a convenient, fast food, value-based concept. Your social media, print ads, and community outreach should focus on one single audience with one single message. Once you’ve built a loyal base of customers and repeat business, then you should consider expanding your base by marketing to others in the area with a proposition that appeals to them.

Your People Plan is Key

A great team will help you win everyday. Hiring great people is the first step in delivering service excellence and a consistent product to your guests. Your mission statement “the why” along with a corporate culture that emphasizes respect for employees, commitment to your guests, service to the community, and concern for the environment will guide you when selecting your staff. It’s not enough to hire people with restaurant experience; they should also understand and be excited about the mission of the restaurant. If not, they will go through the motions with an inauthentic approach and often fail at exceeding guest expectations. Examine your corporate core values and hire people that match it. Next, supply your staff with comprehensive, ongoing training and the proper tools so can they carry out the day to day tasks flawlessly. Hire for qualities, train for skills.

The Market and Competition

Understanding the market area where you’d like to open your restaurant is a crucial element to the plan. Carefully research the demographics to ensure there are enough people in the area that match whom you believe will embrace your concept. When looking for your location, work with an experienced commercial broker that can supply you with data to help you choose the area and the site correctly.

A full competitive analysis is also essential. For example, check the pricing of your competition. Be sure you’re not over or underpriced for the market. Check other services they offer, such as delivery and online ordering. Spend time in the market area, dine several times at as many competitors as possible, and position your restaurant to address the missing needs in the market. Having a unique value and selling proposition will keep you ahead of the game. Remember, everyone is vying for the same consumer dollars, so you need to create points of differentiation that will help your establishment stand out from the competition.

Consistently Great Food

Your menu must not only be relevant to the concept and the market but should be prepared and served perfectly every time. Restaurant guests expect dishes they grown to love to have the same flavor and high quality each time they visit. Inconsistent products can lead to disappointed guests, bad reviews, and slumping business. Your menu should be not only delicious but also simple to execute. The more straightforward the menu, the less chance of mistakes in preparation. Consistency increases guest satisfaction. Some chefs and “foodies” create menu items that are too complicated and require a highly skilled professional in the kitchen. This approach is fine if you intend to open a high-end restaurant staffed with high price personnel, but not in a fast-casual or family restaurant setting. A winning menu is simple, fresh, relevant, and great tasting. A competent chef can assist in developing dishes that are unique and great tasting that are also simple to produce with less skilled labor. If you have aspirations of owning more than one location, then simple execution, and consistent products are a must to achieve the goal of operating multiple restaurants.

Cash Is King

There are many reasons why restaurants fold. It could be the wrong concept, poor choice of location, not correctly researching the competition, poor service, an uninspiring menu, or bad food, to name a few. That said, the negative impact of undercapitalization may be the most frequent cause of restaurant failures. Knowing how much money you need to launch the restaurant is only the tip of the iceberg. You must assess ongoing cash needs while the restaurant is newly opened and gaining momentum. It may take many months for a restaurant to break even and then eventually become profitable. Being able to support the financial needs during this phase is often the “make or break” challenge that many new restaurateurs cannot overcome. A well thought out projection model that you create with the help of a professional financial advisor can save you from the frustration, negative financial impact and heartbreak of a failed restaurant. Considering capital needs for the first twelve to fifteen months is not only prudent but essential to the success of any new restaurant. You must be prepared to cover the operational costs and expenses as the restaurant “ramps up.” Carefully consider your cash needs and how much working capital you must have on hand, ready to deploy.

Have A Plan And Follow Your Dream

Owning a restaurant can be personally rewarding and profitable. Many people have built great restaurant companies following these simple guidelines. Desire and passion will only get you so far. Create your business plan as a road map. Your plan will help you stay on track when dealing with the many moving parts of launching and successfully operating a new restaurant.
==================================================
About the author:
Gary Occhiogrosso is the Founder of Franchise Growth Solutions, which is a co-operative based franchise development and sales firm. Their “Coach, Mentor & Grow Program” focuses on helping Franchisors with their franchise development, strategic planning, advertising, selling franchises and guiding franchisors in raising growth capital. Gary started his career in franchising as a franchisee of Dunkin Donuts before launching the Ranch *1 Franchise program with its founders. He is the former President of TRUFOODS, LLC a multi brand franchisor and former COO of Desert Moon Fresh Mexican Grille. He advises several emerging and growth brands in the franchise industry. Gary was selected as “Top 25 Fast Casual Restaurant Executive in the USA” by Fast Casual Magazine and named “Top 50 CXO’s” by SmartCEO Magazine. In addition Gary is an adjunct instructor at New York University on the topics of Restaurant Concept & Business Development as well Entrepreneurship. He has published numerous articles on the topics of Franchising, Entrepreneurship, Sales and Marketing. He was also the host of the “Small Business & Franchise Show” broadcast in New York City and the founder of FranchiseMoneyMaker.com

==================================================
LEARN MORE ABOUT STARTING YOUR RESTAURANT: www.frangrow.com www.frangrow.com

FULL SERVICE CASUAL DINING – WE GO TO SCHOOL WITH GENE LEE, CEO OF DARDEN (DRI)

Posted on August 1, 2021August 2, 2021 by Franchise Strategist

Darden’s most recent reporting period was their fourth quarter, ending at the end of May. Their two largest chains are Olive Garden and Longhorn Steakhouse. Important, but less material, are Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Season’s 52, Bahama Breeze and Eddie V’s.

FULL SERVICE CASUAL DINING – WE GO TO SCHOOL WITH GENE LEE, CEO OF DARDEN (DRI)

BY Roger Lipton

Gene Lee, and his management team at Darden (DRI), provide about the most candid description of current fundamentals among the publicly held full service casual dining companies. Not only are their reported results about the best in the industry, but they describe, on their quarterly conference call, how and why. Our summary below is of “best practices”, as produced by Darden, and the outlook as presented within their conference call on June 24th.

GENE LEE’S SCRIPTED COMMENTARY

Gene Lee, CEO, commented that they have begun to see demand come back strongly. They are relying on Technomic for industry data, which quantifies the casual dining industry at $189B in 2020, down from $222B in 2019. Though the industry has shrunk by 10% in units during the pandemic, Darden believes the industry will at least regain the 2019 level, implying that AUVs could be higher than before. Not mentioned was “price”, but that would obviously contribute to higher nominal sales.

Lee considers that the Darden business model has improved over the last year. “We’ve invested in food quality and portion size….made investments in our team members to ensure our employment proposition…..and we invest in technology, particularly within our to-go capabilities, to meet our guests growing need for …the off premise experience.”

RICARDO CARDENAS’ (COO) SCRIPTED COMMENTARY

Ricardo Cardenas, President and COO, described the operational simplification effort, which has improved execution and strengthened margins. Even as dining rooms have reopened, off-premise sales have remained strong, proving to be “stickier” than expected. During Q4 off-premise was 33% of sales at Olive Garden, 16% at Cheddar’s and 19% at Longhorn. Technology within online ordering has improved to-go capacity management and curbside delivery. During the quarter 64% of Olive Garden’s to-go orders were placed online and 14% of Darden’s total sales were digital transactions. Nearly half of all guest checks were settled digitally, either online or on tabletop tablets or via mobile pay. Cardenas described the effort to recruit and retain operational talent, claiming no systemic issues. Supply chain issues have also been largely avoided.

RAJESH VENNAM’ (CFO) SCRIPTED COMMENTARY

Rajesh Vennam, CFO, described how SSS compared to pre-Covid (2019), improved from negative 4.1% in March to positive 2.4% in May and positive 2.5% in the first three weeks of June. Though to-go sales have seen a gradual decline, this has been more than offset by in-store dining. In the fourth quarter, CGS was 90bp higher (investments in food quality and pricing below inflation), labor was 190bp lower (320 bp of simplification efforts, partially offset by wage pressures). Marketing was 200 bp lower. Restaurant EBITDA margin was at a record EBITDA of 22.6%, 310bp higher than pre-Covid. CGS inflation is expected to be about 2.5% and hourly labor inflation at about 6%.

QUESTION AND ANSWER DISCUSSION

Gene Lee talked further about the “employment proposition”. The store level margin allows for adequate wages, along with promotion of a thousand team members per year into management. When questioned about store level margin expectation, CFO Vennam indicated that store level EBITDA in the short term is expected to be 200-250 bp better than in 2019, with pricing of 1-2%, lower than CPI inflation of about 3%, but full year margin (ending 5/22) has yet to play out. Commodity inflation of 2.5% for the year will be 3.5-4.0% in the first half, expected to tail off to roughly flat by Q4. Chicken and seafood are elevated, also cooking oil and packaging, a little bit in dairy.

Lee feels that the throughput improvements, including menu simplification, allow for more sales capacity from this level. Mother’s Day sales were a record and mid-week capacity is not fully utilized. Consumer behavior is not yet normalized, so the mix between dine-in and off-premise is still uncertain.

When questioned about the sales improvement “flattening” in May and June, CFO Vennam pointed out that promotional levels are not as heavy now as in ’19, obviously helping the operating margins even with sales just modestly higher. Gene Lee commented later that the current advertising is generic, removing all incentives and discounts, with record operating margins, so marketing decisions going forward will obviously be carefully considered. Later in the call, Gene Lee talked about the Fine Dining segment also improving (a little later than Olive Garden and Longhorn) from down 12 in March to down 6 in May.

COO Cardenas described how technology is reducing “friction” in the guest experience, as well as for team members, making ordering and pickup easier. To further improve the process within the restaurant, a revamp of the point of sales system is planned.

Gene Lee talked about the potential to improve direct marketing to new digital customers, especially with the newly acquired ordering preferences. Lee emphasized the effort to improve the craveability of the menu, at the same time simplifying and improving the core items.

Relative to the addition of additional brands, Lee expressed great satisfaction with the improved returns within the existing portfolio. While not ruling anything out, he seemed to feel that there is substantial opportunity to profitably invest internally.

GENE LEE OPENS UP A LITTLE FURTHER

When pushed about why the sales recovery within Darden is not as fast as elsewhere, Gene Lee’s response was telling. “Because we’re not participating giving away food to third-party channels…not discounting heavily….not discounting cash through selling gift cards….we put up 25% fourth quarter restaurant margins….that’s what we’re focused on. A lot has changed…..virtual brands….guys, you got to get off this……this (Darden’s portfolio of brands) is the best business in casual dining, not even by a little bit anymore…..our guests are loving the experience ….they love the changes that we made….but we’re not chasing an index and we’re not chasing where we were in the past. We love our position today.”

Lastly, when questioned about what the new normal will look like, Gene Lee summarized by saying: “I think we’ve still got another six to nine months to understand (if we don’t have any more problems with Covid) what are going to be the normal behaviors….and then you start developing your market plans and you get tactical on how to get these folks into your restaurant or use you as an off-premise occasion.”
================

ABOUT THE AUTHOR:
ROGER LIPTON is an investment professional with over 4 decades of experience specializing in chain restaurants and retailers, as well as macro-economic and monetary developments. After earning a BSME from R.P.I. and MBA from Harvard, and working as an auditor with Price, Waterhouse, he began following the restaurant industry as well as the gold mining industry. While he originally followed companies such as Church’s Fried Chicken, Morrison’s Cafeterias and others, over the years he invested in companies such as Panera Bread and shorted companies such as Boston Chicken (as described in Chain Leader Magazine to the left) .

He also invested in gold mining stocks and studied the work of Harry Browne, the world famous author and economist, who predicted the 2000% move in the price of gold in the 1970s. In this regard, Roger has republished the world famous first book of Harry Browne, and offers it free with each subscription to this website.

In the late 1970s, Roger left Wall Street to build and operate a chain of 15 Arthur Treacher’s Fish & Chips stores in Canada. In 1980 he returned to New York, and for the next 13 years worked at Ladenburg, Thalmann & Co., Inc. where he managed the Lipton Research Division, specializing (naturally) in the restaurant industry. While at Ladenburg he sponsored an annual Restaurant Conference for investment professionals, featuring as keynote speakers friends such as Norman Brinker (the “Babe Ruth” of casual dining) , Dave Thomas (Wendy’s) , Jim Collins (Sizzler & KFC), Jim Patterson (Long John Silver’s), Allan Karp (KarpReilly) and Ted Levitt (legendary Harvard Business School marketing professor, and author). Roger formed his own firm, Lipton Financial Services, Inc. in 1993, to invest in restaurant and retail companies, as well as provide investment banking services. Within the restaurant industry he currently serves on the Board(s) of Directors of both publicly held, as well as a private equity backed casual dining chains. He also serves on the Board of a charitable foundation affiliated with Israel’s Technion Institute.

The Bottom Line: Roger Lipton is uniquely equipped as an investor, investment banker, board member and advisor, especially related to the restaurant, franchising, and retail industries. He has advised institutional investors, underwritten public offerings, counseled on merger transactions, served on Board(s) of Directors, public and private, been retained as an expert witness, conducted valuation studies and personally managed a successful investment partnership, all specializing in restaurants/retail. He has studied great success stories over the last 40 years, from McDonalds to Shake Shack. Even more important he has watched scores of companies stumble and sometimes fail. It is this insight that Roger brings to this website. His post, dated 9/30/15, called “VISIT THE GRAVEYARD…..” lists a long list (though only a sample) of companies that have come and gone over the length of Roger’s investment career. This platform is his way of maintaining a dialogue with other professionals in the field, improving his own investment results, and remaining well informed on industry issues.
========================
FRANCHISE YOUR RESTAURANT – CLICK HERE: http://WWW.FRANCHISEGROWTHSOLUTIONS.COM

DOORDASH – IN A HUGE STATE OF FLUX AS THE PANDEMIC WINDS DOWN

Posted on April 2, 2021April 2, 2021 by Franchise Strategist

The business model is relatively simple. Once on the DoorDash platform, the company will take orders and deliver those orders for a fee ranging from 15-30%. At the same time, DoorDash charges the customer a service fee and a delivery fee that ranges from 15-25% of the cost of the order.

DOORDASH (DASH) – IN A HUGE STATE OF FLUX AS THE PANDEMIC WINDS DOWN
By Roger Lipton with permission

DoorDash is one of the largest “local logistics platform” i.e., food delivery firm, with 450,000 merchants, over 20 million consumers, 1 million Dashers (drivers) and 1.2 billion orders completed since the founding. The company has a 50% market share in the U.S. Revenue growth over the last five quarters has averaged over 211% with Q4 2020 revenue growth coming in at 226%. However, the company has lost over $1.2B since inception and lost $312M in Q4 2020. In preview of our summary: the fact the company cannot make money in the most ideal environment for its business model in 2020 is concerning. So is the fact the company has 46 pages of risk factors listed in its 10K.

We also point out that, while we are providing some “food for thought” below, third party delivery is a complex subject and in an enormous state of flux, so we don’t expect that we can answer every potential concern within these pages. We have stated before our reservations about the enormous capitalization of DASH ($42 billion as of today) and our concern about future operating margins for all the major third party delivery companies. Our intention here is to present what we can, in the hope that our work will be useful to the restaurant companies with which we have a working relationship.

THE BUSINESS MODEL

DoorDash and the other food delivery companies such as GrubHub and Uber Eats, were primary beneficiaries of governmental policies that either closed or significantly restricted seating options for most restaurants. Adding a delivery service through DoorDash, GrubHub or Uber Eats was one of the few options available to restaurants and was therefore a requirement to stay open. Obviously when demand for your service is almost mandated by the government, you are going to grow your business tremendously.

Click to enlarge

While DoorDash holds a 50% market share nationally, the company’s dominance is not universal across the country. In many of the major markets the company’s market share is less than 40%, which means that competition remains fierce, and this should keep margins under pressure in the long-term and advertising costs and competition for drivers increases. The lack of customer loyalty, as illustrated by the large overlap of usage of other deliver platforms, is also a long-term problem.

Click to enlarge

THE REVENUE BASE

DoorDash makes money by charging both the restaurant and the customer. While the company does not report its actual fee structure, the practical result is that DoorDash is charging the merchant an average of about 18% of the cost of the order, though that fee is apparently negotiable from 15-30% of the cost of the order. In addition to charging the merchant, DoorDash also charges the customer fees ranging from 12-18% of the order. The average order size is approximately $37 and only 20% of orders are for more than $50. It remains unknown to what extent this is a long term sustainable model, when the profit margin of the restaurant is materially compromised and the customer ends up paying 40% or more above dining within the restaurant or picking up the food themselves. It is also not yet clear to what extent delivery cannibalizes dine-in or pick up sales.

It is important to note that cities are passing “Temporary” Price Control Regulations in response to high delivery fees.In response to companies such as DoorDash charging upwards of 30% of the cost of an order in fees. cities are starting to pass regulations to cap the fees third-party ordering services can charge restaurants. For example, in the company’s Q4 2020 investor letter, DoorDash co-founders, Tony XU and Prabir Adarkar, stated that there are now 73 jurisdictions imposing temporary price controls, which is more than double the 32 jurisdictions in the third quarter. Generally speaking, these price controls cap the amount of delivery fees charged the merchant to 15%. The controls have predictably negatively impacted DoorDash’s profitability.

The company disclosed that the net impact of price controls in Q4 2020 was $36M or 44bps of profitability. The company expects the impact of price controls to almost double in Q1 2021. In the meantime, DoorDash is trying other measures to manage these caps. The company is charging an additional $1 to $2 fee in at least 11 municipalities that have caps in place. In Denver and Chicago, DoorDash began charging customers a $2 “Denver fee” and $1.50 “Chicago fee” per order. While these price controls are said to be temporary, that remains to be seen.

THE ECONOMICS FOR RESTAURANTS, CONSUMERS, & DRIVERS (“DASHERS”)

The Restaurants

The pre-tax profit margin of a restaurant generally ranges from 5-10% of revenue at the corporate level. If a restaurant is having to pay DoorDash 15-30% of an order, and DoorDash does a material portion of the sales, the company’s profit margins can easily drop by a couple of hundred basis points. If deliveries become 30-50% of total revenue the company could turn unprofitable. While some of the deliveries may currently be incremental business, and a year ago publicly held companies were accepting that premise, we haven’t heard anyone making that claim recently. While we have no doubt that delivery sales in aggregate will be higher going forward, it is questionable whether the current growth is sustainable because of the high cost to both consumers and restaurants.

In addition, by utilizing drivers from third parties, the restaurant loses the direct relationship with the customer and there is no incentive for the driver to enhance the customer experience with any particular restaurant. This lack of control and incentive could negatively impact the customer’s relationship with the restaurant. Drivers for pizza chains like Domino’s and Papa Johns are more incentivized to enhance the customer experience because they can move up the ladder at these firms and many have eventually become franchisees. There is no upward mobility for drivers at DoorDash.

Every major restaurant chain has its own app that it uses to take orders and communicate with its customers. More importantly, when a customer uses the restaurant’s app, they gain valuable information, such as order size, composition and frequency, that the company can use to improve customer relationships. They can also offer loyalty rewards and other customer-centric offers, such as sales on specific food items.

On the latest Brinker International earnings call, CEO Wyman Roberts said that DoorDash only offers high level information about orders for their Just Wings virtual brand offered on DoorDash. Because they do not share individual customer data, it complicates their marketing and data collection efforts. In the long run, we think most major brands will try to increase customer usage on their proprietary apps and reduce reliance on third-party delivery services for customer acquisition.

As more people go back to work, we believe the necessity of paying huge markups for food delivery will diminish and DoorDash will lose a big tailwind. We also believe that companies like Brinker or Darden that already have large To-Go offerings will try to replace delivery with more To-Go orders. It is a win-win for the company and customers. Customers pay significantly less, even including drive time to pick up their food and the company saves the fee they pay DoorDash. The restaurant leverages their existing infrastructure and gains more valuable data on their customer that can be used to increase sales and profitability. It can also improve kitchen efficiency.

The Consumers

To recover some of the fees, many restaurants are increasing the menu prices for items ordered for delivery. Researchers in Minneapolis recently conducted a case study of delivery platforms to compare pricing and consumer fees.

There are several takeaways from this case study.

Click to enlarge

Since restaurants appear to be marking up the menu price to recoup most of the DoorDash fee, the customer is paying 40-60% more than they would by eating in the restaurant and this is before the tip. It is therefore clear that DoorDash is the largest beneficiary, in this simplistic example, without considering the customer acquisition cost or the sustainability of the model in terms of satisfying the drivers and food consumers.

The Restaurant Business editorial staff did a test ordering chicken sandwiches from various fast-food concepts. It reported that some editors paid $15 or more for a single sandwich to be delivered. As one editor stated,
“My cost to have Chick-fil-A delivered to my home was roughly the same cost as I paid to east out at a local Mexican restaurant.”

The “Dashers” – a few problems

Similar to Uber and Lyft, the DoorDash business model relies on independent contractors utilizing their own vehicles to provide the service to customers. According to the 10K, there were 1 million Dashers (drivers) and their total earnings were $2B. Though Doordash says on their website that a Dasher can make between $15-$25 an hour, dividing $2B by 1M drivers amounts to $2,000 per year, $167/month, or $40/wk. Since over 90% of Dashers work less than 10 hours a week, this would amount to only about $4.00/hr. The company touts examples in California where Dashers earn $33-$36 an hour working less than 7 hours a week ($1000 a month) in various cities. We believe these figures are clearly outliers and not representative of the true earnings potential of a Dasher. Moreover, relying on a worker that only wants to work 10 hours a week for less than $167 a month does not seem to us to be a way to maintain a consistent, quality experience for the customer.

There is also a growing political pressure to increase the pay and benefits to so-called “gig workers”. A group in Washington state called Working Washington is running a “Pay Up” campaign to increase the income of these workers. The group published a study on the net income of Dashers in Washington state. We encourage subscribers to read it. The conclusion was startling, supporting our calculation above:

“On average, DoorDash pays just $1.45 per hour worked, after accounting for the expenses of mileage and the additional payroll taxes borne by independent contractors. The average job requires 6.8 miles of driving and takes 30 minutes to complete. “

As a result of negative publicity and new legislation, the company has already been forced to increase the amount it pays Dasher on a per order basis. The passage of Proposition 22 in California and the potential for other states to do enact similar legislation could cause the company to raise wages again. As discussed in the 10K, the impact of Proposition 22 on the company were as follows:

Amongst the 46 pages of risks in the 10-K are a few nuggets as they relate to these costs.

Several other states where we operate may be considering adopting legislation similar to Proposition 22, which we would expect to increase our costs related to Dashers in such jurisdictions. This could result in lower order volumes if we charge higher fees and commissions and could also adversely impact our results of operations.
Several jurisdictions where we operate may be considering adopting legislation that would pair worker flexibility and independence with new protections and benefits. To the extent these are adopted, we would expect the costs related to Dashers in such jurisdictions to increase and we could experience lower order volumes if we charge higher fees and commissions.
The necessity for DoorDash to improve the economic proposition for their Dashers will most likely reduce DoorDash operating margins because the merchants and consumers are already more than adequately burdened.

NOW – THE RUBBER MEETS THE ROAD – AND OUR CONCLUSION

Before presenting our conclusion, the following post by an industry insider on an investment website supports our concerns.:

Click to enlarge

As the pandemic winds down, it should be no surprise that recent guidance shows sharp deceleration in revenue growth for 2021.In the Q4 2020 earnings release and shareholder letter, the company issued guidance for 2021. While the company guided for 187% growth in revenue in Q1, revenue growth for all of 2021 is only expected to be 28%. This is a significant deceleration from the 200%+ growth in 2020. Wall Street is expecting revenue growth in 2022 to slow ever further to 26%. In addition, because of the increasing costs and limits on fee and commissions discussed above, the company guided adjusted EBTIDA to $0-$200M, considerably below the $250M Wall Street was expecting going into 2021. Underlying the slower growth, we think it likely that as more people go back to work, we believe the necessity of paying huge markups for food delivery will diminish. We also believe that companies like Brinker or Darden that already have large To-Go offerings will try to replace delivery with more To-Go orders. It would be a win-win for the company and customers, as customers pay less, even including drive time to pick up their food and the merchant saves the DoorDash fee. The restaurant also gains the valuable customer data that can be used to increase sales and profitability.

We believe the DoorDash business model is far from sustainable in its present form. It is especially concerning that DASH has reported nothing but red ink in an environment so enormously supportive of third party delivery agents. Though the stock is 50% off its highs, we do not think the Enterprise Value, still over $40 billion, is justifiable. The EV multiple is over 10x 2021 projected sales and an indeterminate multiple of the ridiculously large guided range of Adjusted EBITDA from zero to $200M. We are not long or short the stock, just saying 😊

About Roger Lipton
====================
Roger is an investment professional with over 4 decades of experience specializing in chain restaurants and retailers, as well as macro-economic and monetary developments. After earning a BSME from R.P.I. and MBA from Harvard, and working as an auditor with Price, Waterhouse, he began following the restaurant industry as well as the gold mining industry. While he originally followed companies such as Church’s Fried Chicken, Morrison’s Cafeterias and others, over the years he invested in companies such as Panera Bread and shorted companies such as Boston Chicken (as described in Chain Leader Magazine to the left) .

THE RESTAURANT INDUSTRY AT THE PANDEMIC’S ONE YEAR ANNIVERSARY – WHAT NOW?

Posted on March 9, 2021March 9, 2021 by Franchise Strategist

We thought that the last twelve months of performance for individual restaurant stocks might give us a hint as to where to focus going forward. Since some of the obviously large stock gains have taken place among those with the heaviest short position, we have focused on the “short interest ratio”, the number of shares sold short divided by the average daily trading volume.

THE RESTAURANT INDUSTRY AT THE PANDEMIC’S ONE YEAR ANNIVERSARY – WHAT NOW?

By Roger Lipton with permission

The last twelve months have been unprecedented, not only from a business/health standpoint, but from a fiscal/monetary standpoint. There has been more governmental stimulus as well as monetary accommodation than ever before, which has floated all kinds of boats. The Dow Industrial Average hit an all time high just this morning, and, though the NASDAQ index has retreated the last month or so, stocks from Apple to Tesla to Gamestop have written a new book in terms of valuation.

Based upon the new $1.9 trillion Covid bill, the likelihood of a new multi-trillion dollar infrastructure bill, as well as the Federal Reserve’s ongoing willingness to buy at least $120B of Treasury securities every month, there is every indication that the above trends will continue.

From a broad brush, it is shocking to see how large the moves have been from March 8, 2020 until now. It is interesting that several of the best performing “pandemic plays”, namely Domino’s, Wingstop and Papa John’s, which made very big moves over six to nine months, have retraced and are up more modestly now (zero, 56% and 47%, espectively).

This industry, by no stretch of anybody’s imagination is generally in a place that makes these companies “worth” from 50% to 90% more today than they were before the pandemic. There is somewhat less independent competition, and some companies may have learned how to serve off-premise diners better than before, but there are also a great many uncertainties. These include (1) the cost of labor with a new mix of in-store vs. off-premise (2) commodity inflation (3) other expenses to meet health requirements (4) unpredictable consumer spending (5) still substantial competition (6) ongoing high occupancy expenses, especially for new sites. There is also, in many cases, new debt to service.

Fundamentals aside: the stocks have done the following, ranked by today’s short interest ratio.

What do we see? The average gain among the fourteen stocks with the highest short interest ratio is 90%. The bottom fourteen stocks went up by 57%. Without our focus on individual company fundamentals, readers can scan the list and conclude for themselves which stock performance is most removed from the fundamental outlook.

Where do we go from here?

Before considering the above noted $1.9 trillion Covid bill and trillions more for infrastructure, the Treasury is sitting on $1.44 trillion (to be reduced to $500B by June 30th) that was returned from the Fed last year and the Fed is currently creating $120 billion per month. This means that almost $1.5 trillion of accommodation will be provided to the economy and the markets by June 30th, before the effect of the new $1.9 trillion. This also means that equities, including restaurant stocks, may well go a lot higher in the short term. There is just too much liquidity in the capital markets.

THE BOTTOM LINE

For investors: Other things equal, we would focus on the top portion of the table above. 90% is better than 57%

For companies: In almost all cases, we would sell company stock. Pay down debt and/or build your cash balance. It may be a long time before you see these valuations again.

For management: Lighten up. You can always grant yourselves some more stock options.

Roger Lipton

Click here to visit Roger’s website: https://www.liptonfinancialservices.com/2021/03/the-restaurant-industry-at-the-pandemics-one-year-anniversary-what-now/

==================
About Roger Lipton
Roger is an investment professional with over 4 decades of experience specializing in chain restaurants and retailers, as well as macro-economic and monetary developments. After earning a BSME from R.P.I. and MBA from Harvard, and working as an auditor with Price, Waterhouse, he began following the restaurant industry as well as the gold mining industry. While he originally followed companies such as Church’s Fried Chicken, Morrison’s Cafeterias and others, over the years he invested in companies such as Panera Bread and shorted companies such as Boston Chicken (as described in Chain Leader Magazine to the left) .

If you own a business, you’ve only got days left to apply for a Paycheck Protection loan

Posted on March 5, 2021March 5, 2021 by Franchise Strategist

If you own a business, you’ve only got days left to apply for a Paycheck Protection loan

(BPT) – by Jennifer Roberts, CEO, Chase Business Banking and Sean ‘Diddy’ Combs, Founder, Our Fair Share, entrepreneur and media mogul

In just four months last year, more than 5 million U.S. businesses received a Paycheck Protection Program (PPP) loan. That helped them pay their workers, their mortgage or rent, and their utility bills. Unfortunately, many small businesses owned by minorities, women and veterans didn’t get PPP loans last year. We want to make sure you know how to apply for the funding your business really needs.

But you need to act quickly. PPP ends March 31, but many lenders may stop accepting applications sooner so they have time to process. That means you need to get started on an application quickly for PPP funds to help with your payroll costs and other bills, to get your fair share. The Small Business Administration (SBA) and participating lenders are working hard to make these loans available to more businesses in low- and moderate-income communities. And to smaller businesses, like barbershops, restaurants, nail salons, clothing brands, bars, bodegas and independent contractors.

Here are eight facts you should know about PPP that may encourage you to apply:

1) Congress funded it with $284 billion for 2021. That’s enough for millions of more loans.

2) It’s for first-time borrowers. The SBA has already approved more than 704,000 loans for borrowers who didn’t get one last year. The SBA also has approved loans for second-time borrowers.

3) A PPP loan may be forgiven. Up to 100% of your loan could be forgiven if you qualify and meet the SBA’s requirements. That means you wouldn’t have to pay back the forgiven amount.

4) Businesses with few employees get special attention. Through March 9, the SBA is accepting applications only from businesses with fewer than 20 employees.

5) Most loans are relatively small. The average loan to first-time PPP borrowers this year is $22,000, the SBA says.

6) Smaller businesses are getting approved. 90% of Chase’s approved PPP loans in 2021 are to businesses with fewer than 20 employees.

7) Help is available to understand PPP. chase.com/ppp has a webinar, checklists and FAQs to walk you through the application process. You can also check out sba.gov/ppp.

8) It’s easy to find participating lenders. The SBA’s website — sba.gov/funding-programs/loans/lender-match — has a “Lender Match” link to help you connect to a lender near you.

The 2021 PPP is scheduled to expire March 31, but to get your application to the SBA by then, you need to act now. If you believe you are eligible, we urge you to find a lender, prepare your information and apply.

Get started now. Don’t miss out!

To learn more, or to access helpful tools and resources, please visit chase.com/ppp or ourfairshare.com.

=============================
FRANCHISE YOUR BUSINESS – COLLECT ROYALTIES – CREATE LEGACY

Good News for Franchisors: New Favorable Accounting Rules Go Live!

Posted on February 20, 2021March 10, 2021 by Franchise Strategist

Good news for franchisors: New favorable accounting rules go live!
By Michael Iannuzzi
Posted with Permission from Franchise News Wire

Who said accounting was boring? For the past two-and-a-half years the International Franchise Association’s Financial Accounting Standards Board (FASB) Task Force has been working with the FASB to issue guidance to help reduce some of the cost and complexity in applying Topic 606 — revenue recognition rules over initial franchise fees. On January 28, 2021, the FASB released Accounting Standards Board Update 2021-02 to Topic 606, an “expedient” that can be adopted by non-public franchisors on their December 31, 2020 financial statements. What does this mean for non-public franchisors?

During the year-end December 31, 2019, non-public franchisors that issued their financial statements prior to the FASB issuing an election to defer Topic 606 during June 2020, were tasked with the challenge of implementing Topic 606 for the very first time by following these steps:

Step 1 – Identify the contract with a customer (in our case, a franchise agreement)
Step 2 – Identify the performance obligations in the contract (training and the right to use the license, as examples)
Step 3 – Determine the transaction price (the franchise fee paid)
Step 4 – Allocate the transaction price to the performance obligations (determine the value to be received, more on this later)
Step 5 – Satisfaction of performance obligations (delivering the service)

The current method (prior to issuance of the expedient)
The struggle for franchisors was how to identify the performance obligations in Step 2 and how to value the transaction price to be recognized as revenue in Step 4. Using pre-opening training as an example, many franchisors offer training that is specific to their brand as well as generic training, such as how to use QuickBooks. The challenge was to separate the training into brand specific vs. non-brand specific trainings (Step 2), then to come up with a value to allocate (Step 4), and ultimately recognize a portion of the initial franchise fee as revenue and record the remaining initial franchise fee as deferred revenue to be recognized over the life of the franchise agreement. This proved to be very difficult and costly for franchisors of all shapes and sizes. There were assumptions made that the entire amount of the initial franchise fee should be deferred and bypass the steps above. That’s not to say that isn’t the case; however, you would have had to do the analysis to conclude that the entire fee should be deferred and not just default to that position.

In applying the practical expedient, “pre-opening services that are consistent with those included in a predefined list within the guidance may be accounted for as distinct from the franchise license.” What does this mean? The intent was to simplify Step 2. In Step 2, non-public franchisors can now look at most of their pre-opening activities and count them as one performance obligation, meaning they are delivering an upfront service to a franchisee. This would potentially allow them to recognize more of the initial franchise fee as revenue, creating an income pickup for franchisors compared to the amount being recognized based on prior rules, as they are now allocating more of the transaction price identified in Step 4 to these costs.

Even though we are in the middle of audit and registration renewal season, these rules could prove to be beneficial for franchisors. The expedient will allow for more representative income recognition and allow franchisors to adjust their opening equity for prior franchise agreements. Careful consideration needs to be given when adopting the expedient. Most importantly, this is meant to be general advice, and franchisors should always consult with knowledgeable franchise and accounting professionals before forming any conclusions.

Michael Iannuzzi is a partner and co-leader of Citrin Cooperman’s franchise accounting and consulting practice. The company provides audit and accounting, business consulting and advisory, and tax planning services to a wide spectrum of clients within the franchise community. Iannuzzi works with franchisors and multi-unit franchisees in a variety of industries, including, but not limited to, fitness and athletic centers, children’s entertainment services such as recreational youth programs and party providers, junk removal companies, mobile concepts, pet hotels, quick service restaurants (QSRs), and grocery stores. For more information, call 212.697.1000 x 1250 or email [email protected]

TOP 15 DIFFERENCES BETWEEN A FRANCHISE AND GOING OUT ON YOUR OWN

Posted on January 27, 2021February 10, 2021 by Franchise Strategist

As you are new to the world of franchising, you might find it difficult to narrow down the franchise options. This is where a franchise consultant can help you.

TOP 15 DIFFERENCES BETWEEN A FRANCHISE AND GOING OUT ON YOUR OWN
By Tom Scarda, Certified Franchise Executive – Founder The Franchise Academy

To start a business, you have two options – a) Franchising or b) Starting a new business on your own.
Franchising refers to becoming a part of an established company by getting a license to use their company name, business model, marketing tools, etc., from the franchisor.

On the other hand, if you start a new business, you have to develop a product or service, business plans, marketing strategies, etc., by yourself.

There is a myth that franchising is more expensive than starting from scratch because of all the fees. However, in the long run, it may prove to be less expensive, especially if you fail.

Are you wondering – which one is the best? Are franchise consultants correct in saying – Franchising is better than starting a new business?

Read along; our list of top 15 differences between franchising and traditional business will answer all these and much more.
Sr. No Details Franchising Traditional Business
1 Business Idea In franchising, you leverage an already existing idea, no need to recreate the wheel. In a traditional business, you have to start from scratch and develop an idea by trial and error.

2 Workflow and processes Tried and tested workflows and operations are already established. You have to create all the processes and workflows on your own.

3 Support You will be given total assistance from the company/franchisor. There will be no external help in a traditional business until your business becomes successful.

4 Marketing In franchising, you will get better reach as the franchisor will provide you with effective marketing designs and collateral. You will know exactly who your customer is and where they live. You have to design several marketing campaigns and apply the most effective campaign. This will drain your bank account.

5 Required time With franchising, you can launch your business operations immediately in some cases. Initially, you will require at least 12 – 24 months or more to set up a business. You have to try and experiment with ideas and marketing campaigns while managing finances, logistics, and more.

6 Risk There is less risk in franchising because the business model is successfully running in multiple locations and you’re just plugging in. Traditional businesses come with higher risks as you are experimenting with new ideas that may or may not work upon launch.

7 Upgrades and development The company will provide you regular updates to scale your franchise. Moreover, the company will recommend new upgrades and innovations that have passed their R&D phase. You have to update your technology and workflows to suit the ever-changing consumer demand. No other company will push updates for your business.

8 Business plans, marketing guidance, training, etc. You will be guided by the company experts in all aspects of the business from marketing to recruitment, everything A to Z. In a traditional business model, you have to chalk out plans, discover new marketing campaigns while also training yourself. In simple words, you have to do everything by yourself.

9 Investment required As the business model is well-established, you get a clear picture of your initial and recurring expenses before you buy the franchise. Here, everything is based on trial and error; thus, you never get a clear estimate of your business expenses. As a result, you spend a much higher amount in setting up a new business.

10 Expert advice, feedback, and testimonials You will receive feedback, testimonials, and expert advice in a franchising model as there already exists a community of franchises. Getting expert opinions is a distant dream in a traditional business model. YouTube videos, blogs, and books will not help much as they are not directly related to your new business idea.
If you wish to get one-on-one advice from an expert, you have to pay out extra bucks.

11 Brand Identity Your franchisor has an established brand with recognized processes, trademarks, Intellectual property, and Google awareness. As a franchisee, you will enjoy all the benefits of an established brand. Starting a new business will take a few years to establish yourself as a brand with trademarks, confirmed processes, and IP and get on Google’s first page search.

12 Chances of success In franchising, you have proven business processes, marketing tools, and well-researched business upgrades. Also, if you face any challenges, you have a community of franchises to take help from.
All of these factors increase the chances of success by manifolds. You will face unforeseen challenges at every step of your business. Reinventing the business wheel with no external support makes it difficult to grow a business. Now you know why do 9 out of 10 startup businesses fail in the first couple of years.

13 Return on investment As you have a clear idea of expenses and a tried-and-tested business model in your hands, the return on investment for a franchisee is much higher. In a startup business, you will hardly make profits in the initial years. Also, if your business does well, you will have to re-invest a sum of your profits to further grow your business. As a result, your ROI remains negligible in the first few years of your business (and who knows whether the business will last long).

14 Customer base As a franchisee, you will benefit from the loyal customer base of the company. You don’t need to develop trust among customers; instead, you need to stand up to their loyalty to the company while developing trust among new customers. In a new business, you have to establish a customer base from scratch.

15 Easy access to finance Banks are more likely to approve loans as you are associated with a reputable franchise brand. New businesses come with high risks. As a result, banks will hesitate to bet on a startup business.

Which is better for you?

The Bottom Line – How to Choose a Franchise?

Now understand that franchising has several benefits over starting a new business, you must be wondering – How to choose a franchise?

To filter a franchise option, you should –
1. Research – Enquire about the policies, credibility of the franchise, work culture, terms and conditions, etc.
2. Weigh your pocket – Research the expenses and choose a franchise that suits your budget.
3. Read the FDD – Before finalizing a franchise, you must carefully read the Financial Disclosure Document (FDD).

As you are new to the world of franchising, you might find it difficult to narrow down the franchise options. This is where a franchise consultant can help you.

A reputed franchise consultant, one who has owned and operated franchises and has a CFE at the end of his or her name, will handhold you through the entire franchising process, from finding a franchise to setting up a franchise and beyond. Or the result is that you find out that franchising is not the right fit for you. If that is the case, at least you made that decision to not move forward based on facts and not myths and misnomers.

If you wish to avoid any missteps when starting your franchising journey, you can chat with me . It’s always free of charge! Book a time today: www.GetWithTom.com

ABOUT THE AUTHOR:
Tom is a Certified Franchise Expert. He was the #1 franchisee of the year in one franchise concept and failed in another. The lessons learned from failure is what makes him an expert. Tom is the author of several books including the #1 Bestseller, Franchise Savvy: 6 Strategies that Pros Use to Pick Top Performing Franchises. He has helped more than 1500 people figure out if franchising is for them since 2005.

#FranchiseOpportunities #controlyourdestiny #changeyourlifetoday

Restaurant Industry In Turmoil, But There Is A Way Out!

Posted on May 4, 2020June 3, 2020 by Franchise Strategist

Photo by Benjamin Davies on Unsplash

RESTAURANT INDUSTRY IN TURMOIL, BUT THERE IS A WAY OUT!
By Roger Lipton

The world, as we have known it, is seriously changed for the foreseeable future. Restaurant and retailers will have to cope with lots of new requirements that deal with social distancing and testing.

PAYROLL PROTECTION?? NOT QUITE!

One of the current priorities is to access the Payroll Protection Program. Unintended consequences are already coming into focus. Restaurant operators realize that business will be slow after opening, which is still weeks or months away. If they spend 75% of the money, mostly for payroll and rent, in the next eight weeks to qualify for loan forgiveness, they will not have the resources to carry the predictable losses when they first reopen, and those losses will likely last for months at least. They have the option of holding the money, which will then remain a loan rather than a “grant. However, while the two year term, at only 1%, seems cheap enough, there is no way that cash flow will be sufficient to pay back the loan that quickly.

MATTO FRANCHISE
A Revolution is Brewing
LEARN MORE HERE:
https://www.mattofranchise.com/

Some operators will therefore let their ex-employees remain on unemployment insurance for the time being, use the government capital to cushion losses after reopening, and deal with the ramifications two years from now. Other operators, will take the money, never reopen, and walk away. There are no personal guarantees, after all.

At the least, therefore, the program must be changed to allow for a sufficient payback period to recoup losses. We suggest this will happen, because the problem, and the fix, is so obvious. There are, predictably, other unintended consequences of this huge program that was implemented with such a rush, but we will leave that for another day.

RENT – THE BIGGEST FIXED COST

We are all reading about various companies, small and large, holding back rent. It’s understandable under the circumstances, and landlords realize that their world has changed as well. At the end of the day, we believe that percentage rents will be the new normal. The lessors have no real option. Yesterday’s rent structure is gone, and their alternative in almost all cases is to have empty space for perhaps years.

OFF-PREMISE CONSUMPTION BECOMES CRITICAL

Even after vaccines and treatments are in place, it is going to be quite a while before consumers are comfortable in close contact with strangers. We can be assured that dine in traffic will be at a lower level than previously. It therefore becomes critical for restaurant operators to do everything possible to build their off premise activities. Drive-thru locations, where applicable, can help a lot, but delivery (with or without third parties), catering, curbside pickup, packaged products to go are all brand building alternatives that can help to carry the physical overhead.

OVER-STORED NO MORE

Stated most concisely: there will be more closures than we have seen in at least fifty years (from today’s huge base). Far fewer chains will be expanding. Survivors will have less competition.

LABOR COST PRESSURE WILL ABATE

When the stores open, there will be less upward wage pressure than we have seen in the last few years and that we were anticipating would continue.

The cost structure will be more variable than ever before. It will take a while for negotiations to take place but rent will be based on a percentage of sales. Cost of Sales is variable and Labor is largely variable. Other Operating Costs at the store level (waste removal, bank fees, insurance, property taxes, etc.) can be negotiated lower. (It happens that I am affiliated with a Company that can help in this regard, with no up front cost.) Corporate Overhead can be scaled for the new world we are all living within.

In short, most operators, with a great deal of effort, should be able to generate enough sales, on premise and off, to satisfy their landlords, who will have become their partners, dependent on sales. Store level expenses will be largely variable, including rent, and there should be less upward pressure on the fixed costs at store level. Store level cash flow may not approach previous levels but should be adequate to support, if not enrich, a reasonable level of corporate overhead. Regional operators will have an advantage, with their proximity to the store level and their ability to respond quickly and efficiently to changing circumstances. National operators should decentralize to whatever extent possible for the same reasons. Dedicated corporate management should be able, in most cases, especially if not burdened by excessive debt, to lead their companies to survive, and even prosper over the long term.
++++++++++++++++++++++++++++++

About Roger Lipton
Roger is an investment professional with over 4 decades of experience specializing in chain restaurants and retailers, as well as macro-economic and monetary developments. After earning a BSME from R.P.I. and MBA from Harvard, and working as an auditor with Price, Waterhouse, he began following the restaurant industry as well as the gold mining industry. While he originally followed companies such as Church’s Fried Chicken, Morrison’s Cafeterias and others, over the years he invested in companies such as Panera Bread and shorted companies such as Boston Chicken.

Franchise Restaurants Show Modest Gains – What’s Happening On The Ground?

Posted on September 10, 2019January 16, 2020 by Franchise Strategist

Photo by Spencer Davis on Unsplash

McDonald’s is the sales standout, and they are in a class by themselves, providing value and upgraded quality to a population hungry for price/value. Taco Bell is also an exception, for similar reasons. Even Domino’s and Wingstop, who have put up great numbers in recent years, are reporting only modest gains at the moment.

RESTAURANT MAIN STREET – WHAT’S HAPPENING ON THE GROUND??
By Roger Lipton

We have long believed that the restaurant industry provides an excellent leading indicator as to consumer sentiment. It is much easier to adjust dining habits, every day, than to plan and spend for large ticket items.

Quite a few restaurant companies have reported their quarterly results, ending 6/30. The sales and traffic trends, collectively, indicate that not much has changed in terms of consumer optimism. The table below provides the reported results for comp sales, including a breakdown, mostly provided by company operated locations, relative to traffic, pricing and menu mix. Also shown on the table are the outlook, when provided, relative to commodity and labor expense.

No Meaningful Improvement
The company operators show, with just a couple of important exceptions (Chipotle and Starbucks) modest comp gains, more than offset by pricing and menu mix, so traffic is negative almost everywhere. The only other outlier is Diversified Restaurant Holdings, franchised operator of the Buffalo Wild Wings system, going against very easy comparisons. Most importantly, In terms of third quarter to date, virtually no one is guiding toward a meaningful improvement. In our view, Chipotle and Starbucks (with the strongest trends) can be viewed as “special situations”. Chipotle is bouncing back from their multi-year troubles and doing a great job with mobile app/delivery, and Starbucks is the premier worldwide brand selling an addictive product by way of an extraordinary employee culture and great technology.

Franchise Money Maker — CLICK HERE NOW: Franchise your company, expand your brand, collect your royalties!

The franchising companies that have reported are showing a similar trend, modest sales gains in almost all cases. The franchising companies steer away from reporting traffic, but it is safe to assume that pricing and sales mix trends are similar, so traffic is no doubt down. McDonald’s is the sales standout, and they are in a class by themselves, providing value and upgraded quality to a population hungry for price/value. Taco Bell is also an exception, for similar reasons. Even Domino’s and Wingstop, who have put up great numbers in recent years, are reporting only modest gains at the moment.

Delivery On The Rise
It’s important to note that, within the sales mix, delivery, curbside and in-store pickup, are rapidly increasing portions of the revenue mix, so dine-in traffic is down materially more than the comps that are reported. We haven’t heard any restaurant company bemoan, though they could, the fact that their physical plants are only fully utilized a few evenings per week.

In addition to the sales and traffic trends, we are equally interested in the commentary relative to cost expectations, namely commodities and labor. Expectations are mostly higher for commodity costs, dramatically so for chicken wing prices. It is clear that the benefit a year or so ago from lower commodity prices is in the rear view mirror, and higher cost of goods is likely. Labor expense, predictably, is expected to move ever higher.

CONCLUSION:

The beat goes on. With prime costs, as well as other expenses such as insurance, common area charges, utilities, etc. also increasing, it takes more than two or three points of comps to improve margins. A handful of the larger premier operators such as Starbucks, McDonald’s, Darden, Domino’s and Wingstop continue to provide better the best results. However, even among these “best of breed” operators, it’s a battle for market share and an increasing challenge to generate a worthwhile return on incremental investment.

Roger Lipton
====================================================================

About Roger Lipton
Roger is an investment professional with over 4 decades of experience specializing in chain restaurants and retailers, as well as macro-economic and monetary developments. After earning a BSME from R.P.I. and MBA from Harvard, and working as an auditor with Price, Waterhouse, he began following the restaurant industry as well as the gold mining industry. While he originally followed companies such as Church’s Fried Chicken, Morrison’s Cafeterias and others, over the years he invested in companies such as Panera Bread and shorted companies such as Boston Chicken (as described in Chain Leader Magazine) .