1Q20 Investor Calls: Key Points & Analysis

• In a shocking Black Swan event, the industry suffered the forced closing of all dining rooms in late March 2020. While this shock was less troublesome to concepts already heavily oriented towards drive-thru and off-premise, the devastation for sit-down oriented chains has been previously unimaginable.
• In China, the government locked down its economy for ~3 weeks before re-opening with new precautions in place. However, the myriad of local and regional governing authorities in the US took a decidedly more conservative approach, shutting the economy down during the end of March, all of April with an uneven reopening throughout May & June. As an example of an extreme, the mayor of LA county suggested that his indefinite stay-at-home could extend until August.
• In recognition that society endures an annual flu season with a mortality rate of 61,000+ and a 800,000+ hospitalization rate a couple of years ago, the industry would benefit from more transparency from governing authorities around data, demographics and models with clear national guidelines about what triggers a lock-down/reopening.
• The industry must work with the government to find a way to protect the most vulnerable (elderly & immune compromised) without shutting down the economy during outbreaks. There is much work to do along these lines.
• In any case, this lock-down has demonstrated the need for operators and chains to maintain a rainy-day fund with sufficient liquidity to retain staffing for a period of time should the need arise again.

1Q20 $1B+ Restaurant Chain Summary

Digital/Off-Premise Overview

• Post lock-down, all sales shifted to off-premise, driving a tremendous amount of traffic through digital channels as customers sought to minimize human contact (better to order over a phone or PC).
• While it remains to be seen to what extent this shift will remain permanent, this trend certainly represents a benefit to all industry players as digital channels tend to be stickier while generating higher tickets.
• Further, there are labor savings advantages associated with originating sales over digital platforms that compliment opportunities to link loyalty programs and targeted 1-to-1 marketing.
• It may be too early to discern lasting trends as it relates to 3rd party delivery because of all the discounting used to drive traffic over this channel.

Casual Segment Overview

• Casual was the hardest hit segment as dine-in typically represented ~85% of total sales mix.
• The chains that fared the best had well-established digital/to-go/delivery channels in place and many of these chains enjoyed dramatic growth in these channels post lock-down. Much of this traffic represented new customers and the hope is that the chains will retain this incremental business over the long-term.
• Segment players also shifted their promotions to family bundle deals for a while, with offers in the $10 per head range. However, this trend was not long lasting which suggests these price points may have been too high. Also, the family bundles did not provide customization options that are possible with individual orders.

Family Segment Overview

• Family segment players were hardest hit because of their sit-down breakfast orientation. With people working from home, sales during the breakfast day part declined more so than lunch & dinner. This was also true of late-night sales with the bars and evening entertainment venues closed.
• Also, family segment players generally are less developed in digital/off-premise (compared to casual players) because of their sit-down breakfast orientation. Though Denny’s & IHOP have expanded beyond breakfast, consumers are less likely to look to them for off-premise lunch/dinner solutions.

QSR Burger Segment Overview

• QSR burger players fared well given an approximate ~75% sales mix at the drive-thru even before the lock-down.
• Not surprisingly, these players also enjoyed strong growth in their digital/delivery channels.
• Some of the players instituted limited DT menus in order to reduce their labor requirements and it is notable that these chains are discussing the possibility of taking this opportunity to make permanent changes/reductions to their menus upon the reopening of their dine-in facilities.
• A large QSR burger operator recently commented to us that their delivery tickets were up +166%, driving “HUGE flow-thru of incremental revenue and cash flow”. The operator went on to state: “I would rather have 15-20% of $20 average check than 25% of $7 … simple math”.
• According to another large QSR burger franchisee utilizing drive-thru only, margins improved due to a reduced menu, larger check sizes and closure of dining rooms which are about 15% to 20% less efficient than the drive-thru. As a result, COGS improved 100–150 bps and labor an additional 200–300 bps.
• Notably, Jack in the Box enjoyed a +8% comp increase during the week of 5/10 by keeping its full menu and operating hours intact throughout the lock-down.

Pizza Segment Overview

• The pizza segment was able to capitalize on the spike in demand for delivery for affordable home meal replacement options.
• Further, we can see evidence of the success of Papa John’s ongoing turn-around.
• Also, we see Pizza Hut’s struggles magnified by its dine-in Red Roof assets during the lock-down.

Chicken Segment Overview

• The chicken chains continue to amaze, led by Wingstop’s now pizza-like digital mix and Popeyes cult-like sandwiches which are carrying the rest of the menu as well.
• KFC’s more recent sales are improving due to the success of $30 Fill-up family meals which are increasing the average check.

Coffee Segment Overview

• The coffee segment is well positioned for a recovery as consumers return to work and look to leading edge digital capabilities & drive-thrus for their caffeine breaks.

Mexican Segment Overview

• Mexican is recovering nicely as well with both Del Taco and Chipotle’s digital sales kicking-in.
• Chipotle has enjoyed stronger results from units featuring its drive-thru “Chipotlanes” and this will be the focus of the chain going forward as Brian Niccol (formerly from Taco Bell) directs the chain to more closely resemble QSR++.
• Taco Bell results were impacted by the loss of breakfast, a unique daypart in the Mexican segment.