Insights Journal: August 2020

Aug 17, 2020 | Insights

The Mission

“Extreme ownership is a mind-set, an attitude.”

“One of the key qualities a leader must possess is the ability to detach from chaos, mayhem and emotions in a situation and make good, clear decisions based on what is actually happening.”

Jocko Willink, former Navy Seal Officer

The restaurant industry was blind-sided by an unforeseen enemy that continues to lay siege while threatening to never leave. It is understandable that industry players have allowed government officials to initially lead. However, now that we are 6 months into this thing, it is time for restaurant industry leaders to do what they do best – lead forward with innovative solutions to complete the work of the public sector.

It all starts with defining the industry’s mission which must be twofold: 1) to profitably grow; and 2) to help the country safely grow and prosper. As a primary retail category, the restaurant industry must embrace its responsibility to find innovative solutions that help consumers to live as virus free as possible, socially engaged and productively employed.

Here are some preliminary ideas of areas to gain greater stewardship:

  1. Help the government to better track and audit virus infection and mortality rates. The restaurant industry excels in measurement and reporting and the country needs accurate, reliable data and analyses to make informed decisions. What are the ages & demographics involved? What are co-morbidity rates? Can we provide real-time data by market to determine when it is appropriate to re-open dine-in?
  2. Continue to develop tech to create faster, more healthy access solutions – particularly as it relates to dine-in.
  3. Institute cultural changes to support healthy habits. Encourage employees to stay-home before a minor health condition turns into something more serious. Also encourage employees with children to keep them home if they are starting to show symptoms.
  4. Continue and improve sanitary operating procedures.
  5. Improve indoor air quality. There are many affordable HVAC devices that help zap pathogens in the air. Also, the introduction of more fresh air into buildings can only help.
  6. Focus on building immunities with nutritional solutions. For instance, Vitamin D may play a big role in prevention. Seek ways to fortify menu offerings and market these advantages. The consuming public will appreciate the effort.

In the end, the industry’s mission must be to find a way back to normal, not accepting a “new normal” marked by economic upheaval, social isolation and the use of masks that serve as a constant reminder to the consuming public that society is unsafe. We have some of the best minds in the business, let’s get it done!

RR’s 1H:20 Valuation & Finance Report

  • While 1H:20 franchisee EBITDA valuation multiples declined -7.0% to 4.63x, it is +7.4% higher than the 12-year low (4.31x) set in 2009 and only -3.9% below the 10-year average (4.82x).

  • Full year 2020 restaurant originations (excluding sale leaseback financing) are expected to come-in -42.7% lower at $5.3 billion compared to initial expectations in January – this would represent the lowest origination amount since 2011 ($4.6B).

  • Borrower financial condition follows current sales trends with QSR mostly stable to improving while the vast majority of FSR borrowers’ financial condition have deteriorated. Notably, many operators received PPP loans which helped provide necessary working capital (although this has added to existing franchisee leverage – at least until it is forgiven).

RR’s 1H:20 Valuation & Finance Report Features:

(1) 1H:20 EBITDA multiple estimates (post G&A) for 45 chains based on survey data from 8 leading appraisal firms; (2) a comparison of public restaurant company and private franchisee valuation multiples; (3) a summary of real estate cap rate trends based on data provided by Marcus & Millichap; (4) an update on lending availability, changes to underwriting standards, lending rates and borrower financial condition derived from a survey of leading lenders; and (5) an overview of RR’s DCF valuation model useful for smoothing out temporary market disruptions.

RR’s 2020 Unit Economics Report

  • The average 2019 EBITDAR margin for the $1B+ chains improved slightly to 18.8% (but remains near the 17 year low) due to slightly lower COGS and flat labor costs.
  • Healthy 2019 AUV growth (+2.2%) resulted in a higher average EBITDAR dollar amount for the 2nd year in a row (+2.5% to $386k). 2019 EBITDAR dollar value is 3% lower than the 2015 high and 13% higher than the 2008 low.
  • A key consideration is determining how long it will take to return to 2019 sales & profit levels with QSR obviously recovering much faster than FSR. The silver lining is that FSR will likely retain its new found off-premise sales which should be incremental to an eventual dine-in recovery.

RR’s 2020 Unit Economics Report Features:

(1) FYE 2019 unit level AUV along with COGS, labor, royalty, advertising, other operating and EBITDAR margin estimates for 49 chains; (2) a 5-year history of unit economic performance; (3) an analysis of food and labor cost drivers; and (4) aggregate G&A margins, rent margins and leverage ratios based on RR’s annual lender survey.

Popeyes – RR Executive Summary

Popeyes’ brand positioning around a unique, flavorful Louisiana heritage (slow cooking, served fast) provides the brand permission to extend its menu beyond bone-in chicken. Its core bone-in chicken is infused with a Louisiana-inspired seasoning dry rub that is applied to fresh chicken which marinates for 12 – 72 hours and is then hand-breaded. The brand’s resounding social media marketing success around its new chicken sandwich continues to be the talk of the town, allowing Popeyes’ to move to a new level as this product has greatly extended its reach by attracting younger, more affluent customers from larger households along with a higher percentage of women. Notably, Popeyes often ascends to the top of a guest’s preference list within the QSR chicken segment once they have tried its sandwich. It is also notable that its chicken sandwich trial has driven growth in bone-in, boneless & seafood. Further, recent sales have benefit from Popeyes’ historic strength in family bundle home meal replacement (which works well in the current operating environment) and the chain’s value equation built upon layered price point promotions. All of this has translated into a 1Q20 comp increase of +29.2% after 2019 comp growth of +13% with performance also benefitting from fast growth in digital & delivery. However, while Popeyes’ sandwich sales appear to be sustaining, continued system growth may be largely dependent on this trend. Also, Popeyes faces stiff chicken sandwich competition and its huge success with this product line is likely to attract even more competition. In conclusion, while Popeyes’ eye-popping success with its chicken sandwich has helped the brand to showcase its unique, core Louisiana positioning to a greatly extended audience, it remains to be seen how well the brand will leverage this opportunity against a back-drop of growing competition.

Taco Bell – RR Executive Summary

Taco Bell is extremely well positioned as the only $1B+ national QSR Mexican player (category of 1) with core equity around abundant value, craveable innovation and a bold flavor profile. Its compelling value equation extends well beyond the notion of “cheap food” to affordable food that also offers appealing taste, flavor & gratification (food people want, not just what they can afford) and it is notable that the brand has been successful at balancing value with margins which reflects a material COGs out-performance which is facilitated by its ability to mix & match an abundance of inexpensive ingredients. While the brand is extremely dialed-into the Millennial demo with a very targeted menu and marketing strategy, Taco Bell also enjoys a universal appeal that provides a broad market reach. Access benefits from delivery, no-contact drive-thru, TB’s app and its new rewards program. Further, operational improvements are helping with service speed and guest satisfaction scores. This all translates into a long track record of healthy comp growth with the system’s 2019 AUV at an all-time high (capacity benefits from a menu that addresses multiple dayparts including breakfast, lunch, dinner, Happier Hour & late-night) and 2019 store-level dollar profits also at an all-time high. Having said all this, it is notable that Taco Bell’s post-lockdown comps have not fared as well as the other drive-thru oriented QSR chains, reflecting its Millennial orientation (a demo that was particularly stressed by the lockdown) which also translated into a corresponding loss of late-night sales. In conclusion, Taco Bell remains very well situated as one of the most relevant QSR brands in the 21st century even as it must wait for an eventual return of the Millennials and late-night.


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