Manageable 2020 Closure Rates

• 2020 closure rates for $1B+ chains were completely manageable, ramping-up to a little over 3%.
• While this represents a recent high, we would have expected a much larger impact given the initial post-lockdown shock.
• This speaks volumes about the quality of this asset class and the innovation & resiliency of industry operators.

• The pizza closure ramp-up reflected Pizza Hut’s accelerated shuttering of its dine-in assets which was an inevitable development given the chain’s pivot to its more profitable delivery format.
• The coffee segment was stressed by stores without drive-thrus as evidenced by the chart below.
• We would have expected a higher closure of sub players (particularly Subway) but this segment adapted well to new access models for a very portable and popular menu category.

• Not surprisingly, the family segment was hard hit given its breakfast, sit-down format. But even here, the closure rate was not as traumatic as operating conditions would otherwise suggest.

Source: RR’s Unit Sales Growth Report (outline)

Silver Lining for Restaurants: ↓ Gas Spend

• Total Restaurant industry sales declined $136B (-19.4%) during the first 11 months of 2020 vs. the same period in 2019.
• A point that may not be fully appreciated is how a $75B (-16.4%) reduction in gasoline expenditures during this period gave consumers significantly more spending power that was available to be spent at restaurants (likely offsetting what could have been a more precipitous drop).

Source: BLS

• Those segments with the largest negative correlations between gas prices and annual segment same-store-sales would have received the greatest benefit from post-lockdown declines in gas prices.

Source: RR’s Same-Store-Sales & Economic Database (outline)

KFC – RR’s Executive Summary

KFC is a leader in traditional hand-breaded, bone-in Southern fried chicken with considerable brand equity around its Original Recipe seasoning (top selling menu option) and Extra Crispy option. This iconic brand is distinguished by red & white striped buckets (featuring the Colonel’s portrait) which represent an indulgent, pampered home meal replacement option that works particularly well post-lockdown during a time when families have returned to the practice of eating together at home. KFC’s relevancy improved dramatically following a “re-colonelization” of the brand several years ago with very humorous ads featuring various renditions of Colonel Sanders supported by creative social media marketing. Menu innovation also has ramped-up over the last couple of years, significantly outperforming the segment average and KFC has been doing a good job of using innovation to break-through the clutter with: “mash-ups” like chicken & donuts; Secret Recipe Fries; and a new KFC Signature Sauce. An upgraded chicken sandwich also better positions the brand relative to Popeyes. A solid value strategy further offers consumers price certainty for complete, “real” meals across a broad range of price points. Having said all this, KFC’s pre-lockdown annual comp growth over the last couple of years has not been as robust as would be expected given the totality of its brand improvements. This reflects that KFC continues to struggle with overcoming the challenge of: turning-around an older system (KFC was essentially built out nationally in the 1980’s with 5,000+ locations); and Millennial oriented advertising which is intended to grow another wave of customers but, perhaps, at the expense of its core urban, lower-income demo. The brand also faces strong competition from: Popeyes’ chicken sandwich; compelling chicken offerings from QSR sandwich players; and grocery stores selling rotisserie chickens and buckets of their own. In conclusion, KFC is making Southern fried chicken cool again with its holistic, 360-degree concept upgrade in a new post-lockdown world that buys the brand time for its over-haul to gain long-term traction after an eventual return to normal.

Pizza Hut – RR Executive Summary

Pizza Hut enjoys substantial scale and strong brand equity as the 2nd largest national player in the $1B+ chain pizza segment by domestic system sales. The brand has historically been distinguished by its Pan Pizzas, Stuffed Crust products and fun innovation. Its ongoing repositioning towards a modern delivery concept includes a conversion of dine-in assets to smaller stores optimized for delivery to go with brand upgrades that include: product quality enhancements; stronger value offerings (including national price points); increased national ad spend to support value and its sports sponsorships; delivery speed improvements; and progress with Hut Rewards. Product quality initiatives over the last several years included: extra cheese on pizzas; menu rationalization (fewer topping options) to help execution; and clean ingredient initiatives. Also, its Pan Pizza was reformulated with a: new pan; different cheese blend; crispier, buttery crust; and more sauce. The chain appears to be restoring its core menu equity around innovation as highlighted by the recent intro of 2 new pizzas made with Beyond Meat sausage crumbles. We like that Kevin Hochman (president of KFC US) was installed as the interim president of Pizza Hut at the end of 2019 based upon a plan that Hochman will replicate his success with KFC’s marketing turnaround (transitioning a stodgy brand into a relevant, contemporary rendition of its former self) by re-establishing Pizza Hut as “America’s Favorite Pizza”. However, while 90% of its business is either takeout or delivery, elevated closure rates reflect that 46% of traditional system stores include dining rooms, are located in outdated markets and are not ideally set-up for delivery. Comp under-performance is also attributed to: a lack of everyday value in a very competitive price environment; delayed digital ordering initiatives; need for faster delivery speeds; increased competition from non-pizza delivery facilitated by the rise of DSPs; and increased competition in the pan pizza category which represents one of the brand’s core competencies. In conclusion, while Pizza Hut is making good progress playing catch-up in a segment with a quickly rising bar, the brand must rediscover a defensible niche and simultaneously complete its asset conversion in order to finish its evolution into a modern delivery concept.