2020 Ad Spend Report Conclusion

• In the past, aggregate marketing spend would grow in-line with systemwide sales growth (a combination of comps & new unit development). However, the effectiveness of traditional TV ads is declining as fewer consumers watch live TV, opting instead for Netflix, social media, Internet video and gaming. The brands must face the reality of what demo is left watching traditional TV (beyond live sports).
• However, change happens slowly, and it takes a great stretch of faith to migrate marketing spend away from traditional TV to nascent, unproven marketing channels.

• In any case, the data from this report does reveal a slow, but steady migration away from expensive TV advertising towards DIY social media marketing. Resultantly, we see an increase in marketing admin spend with a corresponding decrease in the percentage of spend on national, and especially, local (reflecting less scale-based cost effectiveness of local TV vis-a-vi national TV).
• It remains our opinion that the industry’s challenge to reach consumers with their messaging (given the ongoing, seismic shift in media consumption) represents a leading contributor to current traffic challenges.

Source: RR 2020 Marketing Spend Report (outline)

Millennial Report – Bank of America

•  A key conclusion of BofA’s Millennial Report is that this demo is very focused on saving for the future.
•  Since Millennials are so willing to cut-back on dining out to achieve their financial goals, we suggest it may be sensible to offer loyalty rewards that are tied to savings.
• Imagine a reward program tied to the Robinhood app which would fund the purchase of a fractional share of the restaurant company (for those that are public) after a certain amount is spent in their stores.

QUANTIFIND

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•  See Quantifind’s new Brand Sentiment Rank Index below.
• Olive Garden jumped 10 places due to a major decline in consumer conversation about boycotting OG in the prior quarter.
• Red Lobster dropped 8 places due to a trending argument between two people about Red Lobster’s affordability.

Denny’s 4Q19 Comment about the Consumer

•  It’s true that consumers demand higher culinary standards.
•  It’s also true that economic strength facilitates an ability to try higher-end products.
•  Having said that, the market also consists of “smart consumers” who have lots of deals to shop.
•  So on a given day, the consumer maybe shopping deals and the next day, following a pay-day, they maybe looking for an experience.
•  This requires a barbell strategy capable of pivoting equally to value and premium.

Source: RR’s Quarterly Concept Update (outline)

Sonic – RR Executive Summary

Sonic enjoys strong brand equity (particularly in core South Central U.S. markets) around its drive-in format with car stalls, friendly carhops and a plethora of specialty drinks & frozen treats. Its drive-in format increases the chance that every customer will be first in line and allows customers to take their time ordering without concern about slowing a drive-thru line. Sonic’s unique digital POPS (point of personalized service) order platform further improves the drive-in experience while facilitating on-lot marketing capabilities. The chain’s craveable and fun (made-to-order) menu items span 5 dayparts (drinks, desserts & sides drive snack hour sales) with the full menu available all day. A plethora of unique drink/treat options generates strong trial and frequency (offering guests a reason to return). Drinks can be personalized with add-ins, including: candy options (like Nerds); real fruit (lemon, strawberry & lime); and flavor shots (including cherry & blue raspberry). Frozen Zone real ice cream treats include Sonic Blasts made with Reese’s, Butterfinger, Snickers and Oreo. All-American food offerings include: made-to-order cheeseburgers (Sonic & SuperSonic); chicken, hot dog & coney variations; and onion rings & tater tots. Value is addressed by a steady layer of LTO deals and high margin specialty drink & dessert platform which facilitates happy hour and seasonal evening discounts. Notably, Sonic’s sales are a function of: the discretionary nature of its treats & specialty drink positioning; increased specialty beverage & snack competition; geographic concentration in Texas, Oklahoma, Tennessee, Missouri & Louisiana; smaller, rural market orientation; the challenge of establishing its drive-in/carhop model in newer markets; and weather as sales of frozen treats & beverages are more sensitive to snow, ice & cold temperatures. The chain’s sales under-performance over the last couple of years also may reflect a notable weakness in spending on food-away-from-home amongst the lower income demo that is typical to Sonic’s smaller, rural markets. Sonic’s store-level EBITDAR margin is pressured by a relatively low AUV (to go with a low check) and high ad contribution requirement which has been ineffective at driving comps – calling into question the efficacy of the two guys ad format which maybe long in the tooth. In conclusion, while Sonic seems to be doing a good job of maximizing its core operational equities while also offering a competitive value equation, a lack of corresponding sales lift suggests that the brand may need to consider a new marketing approach – perhaps one that emphasizes its food more so than the comedians.

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Dunkin’ – RR Executive Summary

Dunkin’s DNA is built around speed and convenience as a beverage led to-go brand with a mid-level positioning above c-store and QSR but below Starbucks. The chain’s famous coffee, donuts & munchkins are legendary in core Northeast markets and its coffee authority is supported by an expansion into espresso, cold brew & frozen coffee. The associated lift of Dunkin’s caffeinated drinks generates strong emotional connections with its guests and results in a loyal, ritualistic customer base, particularly during the morning daypart. The brand seeks to remove 2 of the key pain points found at a typical coffee shop (high prices & slow service speed) and, to this end, the ongoing brand re-positioning (early innings of a 3 year plan) includes: national value; a focus on speed & convenience (speed of Dunkin’) driven by restaurant simplification and equipment innovation designed to improve productivity; and digital leadership. Re-positioning also includes: premium drinks with an upgraded espresso experience; “better for you” food items; and new ad agencies in 2018. Dunkin’s menu strategy is to: grow and protect its core; leverage its upgraded espresso drinks into a greater reach with a younger demo and new afternoon occasions; and drive traffic with innovation & national value (Go2s). While 1H19 traffic continues to decline, improving sales trends were attributed to: re-branding; foray into national value; relaunch of its handcrafted espresso platform without diminishing speed; app improvements; intensive focus on training; and better execution. Also, corporate reported a nice improvement in guest satisfaction scores throughout 2Q19, reflecting operational improvements. The chain’s NextGen new build/remodel image represents a significant improvement, particularly as it relates to incorporating elements that will speed service and facilitate mobile ordering and to-go. 500 NextGen stores (remodels & new builds) are expected to be completed by year-end 2019 with the pace of remodels doubling the historic rate over the next couple of years. All-the-same, the brand still has to prove that it can overcome a trend of declining annual sales growth since 2011 which reflects: increasing c-store/QSR coffee competition (discounted coffee used to drive traffic); PM sales softness which may reflect impact of coffee discounting on a less ritualistic daypart and MCD’s breakfast all-day initiative; declining industry breakfast business growth; and cannibalization driven by development in mature markets. Dunkin’s relatively low average ticket and AUV reflects the tricky challenge for this mid-positioned coffee player to drive traffic with value and check with premium products. In conclusion, Dunkin’s work is to translate a complete and thoughtful re-positioning into sustainable traffic growth and this is no easy task as it requires the brand to compete with the ongoing coffee value war at the bottom while trying to cajole the brand’s core base of middle America to the upside.

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Think’in It Through…

When in Rome, Do as the Romans…