While Arby’s is well positioned as a QSR drive-thru player that can serve as a credible alternative to a NY deli, the challenge is to expand its market reach among more affluent consumers sufficient to drive both frequency and checks.
While Denny’s management team is executing well around a very solid strategy, the brand is held captive to currently unfavorable economic conditions which are particularly hard on its core low-income demo and which also challenge Denny’s ability to execute around its key price value objective.
• A 2021 spike in the franchise transfer rate reflects the need for scale in a high-cost environment facilitated by an abundance of underperforming units post-covid and the predilection of some franchisees to exit the business because of post-covid operational challenges.
• The average number of units owned by a franchisee group in the $1B+ Chains increased from 5.5 in 2019 to 5.8 in 2021. Smaller operators (like in the sub-sandwich segment) are ripe for further consolidation.
Del Taco is the 2nd largest Mexican QSR, positioned around a wide variety of better-quality food (use of fresh ingredients represents a competitive distinction) offered for reasonable prices. While Del Taco enjoys strong concept fundamentals, the chain is tested by a harsh California business environment aggravated by the brand’s orientation towards a vulnerable, less affluent demo.
Burger King is challenged to find ways to expand its market reach towards new, more affluent consumers who are willing to pay for the brand’s strong core equities and quality upgrades at a time when its core lower-income demo needs more value than ever.
Taco Bell is extremely well positioned as the only $1B+ national QSR Mexican player and enjoys the added bonus of being able to tap into a material COGs outperformance to go deeper into value should that be warranted.
• Aggregate 1H:22 franchisee unit-level EBITDA valuation multiples contracted slightly (-2.3% y/y) and are -3.9% below their 2H:16 peak.
• 2H:22 EBITDA multiple outlook (-6% y/y decline) would be the biggest contraction since 1H:20 and reflects weaker unit level economics; higher borrowing costs; and a growing disconnect between seller & buyer perception of going forward profitability.
• Full-year 2022 restaurant originations (excluding sale leaseback financing) are now projected to be $10.5B which is -23% lower compared to initial expectations.
While Popeyes enjoys a very strong brand positioning, even as sales moderate from its famous chicken sandwich spike, the current economic challenges for its core lower-income demo combined with huge chicken cost inflation represents a notable sales challenge for an unknown duration.
While Applebee’s solid turnaround is exemplified by its recent sales outperformance, it remains to be seen how well the brand’s core Middle American demo will fare given the current economic stress that is sure to prompt at least some QSR trade-down.
While Little Caesars maybe the best at carryout, it remains challenged with the need to translate its fun menu and marketing into sustained traffic around its higher price points sufficient to increase unit level profits.
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