Insights Journal: January 2020
2020 Remodel Report Conclusion
The pace of remodels picked-up substantially in 2019 as new/improved programs from 2018 took effect and operators caught-up on remodel mandates. While remodel costs are trending higher given higher-end upgrades, new technology and rising construction labor costs, remodel ROI is improving due to higher sales bumps and stabilizing unit level margins.
Good News for the Industry
A recent article in a prominent investment publication discussed how investors are beginning to require their portfolio companies to adjust pricing sufficiently higher to generate a profit. So while it was previously ok for new entrants in video streaming, food delivery & ride hailing to gain share with loss leader pricing, these companies will increasingly need to eliminate their consumer subsidies.
This could be very good news for the restaurant industry which has been forced to compete with the cocooning effect driven by very cheap video streaming and nearly free food delivery. If consumers are forced to pay fair prices for these services, a trip out to eat could appear much more competitive.
- See Quantifind’s new Brand Sentiment Rank Index below.
- Much of some very notable changes in perceived sentiment for several brands can be attributed to singular events that get either very negative or positive reception from consumers, or alternatively, due to the increased level of brand-to-brand engagement online which prompts a lot of brand comparisons among consumers.
Olive Garden’s Fiscal 2Q20 Summary
- Fiscal 2Q20 comps increased +1.5% (-1.2% traffic/+2% price/+0.7% mix), outperforming the industry benchmark in comps & traffic by +120 bps & +110 bps, respectively. The check benefit from its $5 Take Home Entrees offer was not negated by the Never Ending Pasta Bowl deal, but was pressured by the investment in lunch made earlier in the fiscal year (new weekday lunch menu with 21 options under $10). Catering contributed +80 bps to pricing during the quarter.
- Comps during the quarter were pressured by a difficult y/y comparison given its Buy One Take One offer during the first 4 weeks of fiscal 2Q19. Also, comps at the beginning of the quarter were negatively affected by a reduction in marketing spend which necessitated more spend at the end of the quarter to support its Never Ending Pasta Bowl promotion.
- Off-premise sales grew +17% during the quarter (to 17% mix), driven by strong preference for the $5 Take Home Entree offer. Digital sales grew +33% and represented 38% of total to-go sales.
- During the quarter, industry comps (excluding Olive Garden & LongHorn) increased +0.3% with a -2.3% traffic decline (+2.5% check). Corporate reports that consumers are willing to visit brands with compelling value & strong in-store execution and that it faces more pressure on some promotional constructs that have now become permanent parts of menus.
- In any case, OG is a value leader, offering value both in the form of price and portion (value scores for its Chicken Alfredo increased when OG increased the portion size of its chicken).
- Going forward sales should benefit from innovation around its $5 Take Home Entrees and Never Ending Pasta Bowl platforms.
Wingstop Executive Summary
Wingstop enjoys strong brand positioning around: cooked-to-order chicken wings (in a deep fryer without the use of heat lamps or microwaves) that are hand-sauced & tossed in a choice of 11 flavors ranked by heat; and great access with a 75% take-out mix. Essentially, Wingstop is the first chain to translate wings into a fast-food experience. The brand increased its national ad spend contribution rate in 2019 to help fund two 12-week national TV campaigns as Wingstop seeks to increase its brand awareness (20%+ gap with its QSR peers). Notably, a customer segmentation study revealed a significant percentage of QSR customers who profess to like to eat chicken wings but have not tried Wingstop and current traffic growth is coming from these new customers. Consecutive years of positive comps from 2004 to 2018 (with +43% of cumulative growth over the last 5 calendar years driven primarily by traffic) provides a testimony of the brand’s fundamental strength and going forward sales growth strategies include: building even greater awareness through national advertising; innovating through tech to enhance the guest experience; and supporting delivery with national ads in 2020. 30% of sales come through digital channels which drive a $5 increase in check size and a new web site & app in 2019 has increased the conversion rate by +6% while driving a +$0.50 check increase. Notably, delivery mix is running 9% – 12% in 6 test markets that represent 30% of total units. All-the-same, Wingstop’s value positioning is challenged by high wing costs that necessitate relatively high menu prices and wing cost volatility which makes it difficult to offer price certainty. Its AUV is -10% below the segment average which suggests significantly lower relative traffic when considering its average check exceeds the segment average by +61% and this is indicative of Wingstop’s challenge to expand beyond its core heavy users to a broader QSR audience. In conclusion, Wingstop is well equipped to continue fortifying its unique positioning as the first and only national fast-food wings player with upgrades to marketing, digital and delivery – that is, so long as there are enough birds to go around.
Buffalo Wild Wings Executive Summary
Buffalo Wild Wings (BWW) enjoys a unique positioning as the only national sports grill & bar concept (core brand equity around wings, beer & sports) where guests can enjoy a social, immersive and interactive sports experience that replicates a stadium experience (which can’t be duplicated at other wing chains like Wingstop). Essentially, BWW provides a very cost effective and convenient way to enjoy the game day with food much better than what is available at the stadium. The brand’s ongoing upgrade seeks to: (1) diversify beyond bone-in wings (and their dramatic price volatility) by creating new menu options; (2) leverage improvements to product quality, cook time & alcohol offerings in order to further differentiate from local sports bars; (3) communicate a more compelling reason for consumers to leave their homes in order to come socialize in-store in this day-and-age of on-demand video streaming & watching sports in “man caves”; and (4) broaden the brand’s appeal beyond sports fans by leveraging new menu items. New hand-battered chicken tenders, beer-battered chicken sandwiches and upgraded boneless wings (less breading and more chicken) broadens BWW’s appeal to younger diners and, given a growing level of wing competition, could help attract more guests for non-sporting events (including the lunch occasion). The chain further benefits from plans to increase its national advertising and its Blazin’ Rewards loyalty program which could drive 30% of tickets by the end of 2019. Further tailwinds include: a return of BOGO Wing Tuesday; to-go; a more margin friendly delivery solution; and plans to roll-out its new Center Stage store design by 2021. All-the-same, it is notable that negative comps for the last 3 calendar years through 2018 reflects: a challenge with the brand’s value equation at a time when casual players improved their game; inroads into wing sales made by Wingstop and other competitors (driving the price of wings substantially higher); declining NFL ratings; declining mall retail traffic; and declining beer & alcohol consumption. Management’s own assessment is that BWW had drifted a little bit too far into casual/family dining and away from a focus on its core sports bar concept. In conclusion, BWW is in the early stages of executing a return to its roots around wings, beer & sports, but this time with a more nuanced approach to today’s market realities.