Preliminary 1Q:21 average comp growth of +9.7% for the $1B+ Chains (+7.5% 2-year stacked) is a testament to the industry’s tremendous resilience in the face of impossible circumstances.
Initial 1Q:21 QSR comp growth of +11.2% (+10.8% 2-year stacked) certainly reflects share gains offered by a nearly contactless drive-thru access model.
Even FSR has been able to put-up a +3.7% 1Q comp (-4.7% 2-year stacked) with strict dining capacity limits in all but a few states.
For sure, the industry has been strengthened by the pressure to accelerate digital & off-premise adoption and it looks likely that many of these gains (higher checks & elevated off-premise mix) will stick even as diners rush to return to their sit-down favorites.
Beyond the chains, total food service sales popped +34% y/y in March (-4% 2-year stacked) with grocery sales down -14% y/y (+11.2% 2-year stacked) according to government data.
This suggests that there is a lot more hope for the independents than originally thought.
The gap between Food Away from Home and Food at Home continues to widen, with QSR price increases accelerating to almost 2x that of Food at Home (+6.5% vs. +3.3%). This is consistent with recent comp gains which are mostly all check driven.
Hopefully, labor pressures won’t drive menu prices beyond the reach of the lower income demos.
Stock Performance
QSR Stocks Continue to Post Strong Gains
The RR Index continues to outpace the rest of the market and is currently up more than 2x the S&P 500 YTD April (+28.7% vs. 11.3%) as QSR was up sharply and FSR added to its strong March gains.
Promotional Composition
QSR Finally Steps-up Value as Stimulus Tapers
A +7% m/m increase in the QSR value mix combined with a decrease in the average promotional price point (reflecting fewer $4, $5 & $6 offers and more $3 offers) may signal the beginning of a return to normal.
Consistent with the idea of a move towards normalization, FSR is discounting less and innovating more.
Economic Outlook
Economy Strong, but Prospects Hard to Read
+13.2% GDPNow 2Q:21 forecast reflects the highest consumer confidence reading in a year (4th consecutive monthly improvement) and the lowest post-lockdown unemployment rate. Discretionary spending continues to benefit from the distribution of the 3rd round of stimulus payments ($372B distributed since mid-March including $37B in April).
All-the-same, many management teams are characterizing the labor market as the most difficult ever because of their inability to recruit new staff even with 9-10MM unemployed (apparently content to live-off stimulus for the time being). Also, inflation prospects seem inevitable given massive money creation. To this point, the FED has indicated the possibility of raising rates to tame inflation.
Higher gas prices (+55% y/y 4/21) also represent a headwind to discretionary spending.
The SBA began accepting applications for grants from the Restaurant Revitalization Fund on 5/3 (up to $5MM/location & $10MM/business – based on lockdown related revenue loss).
Key Cost Trends & Forecasts
Commodity Inflation Ramps-up to Multi-Year Highs
The April BLS Foodstuffs index jumped +66% y/y on top of +40% in March (+33% YTD 4/21) and represents the highest level since 2011.
Commodity costs extending last month’s highs include: wings (+181% y/y to another all time high); corn (+124% 8-year high); pork (+161% 7-year high); coffee (4-year high); and chicken (LTM high).
2021 PPI forecast was revised higher again for eggs, chicken, beef & pork.
Rapidly rising corn prices (feed for livestock) and difficulty hiring additional employees at processing plants could put further pressure on meat prices.
Notably, both KFC and Bojangles’ recently indicated supply issues related to strong demand for their chicken products.
Sharply higher lumber prices (+18% in 2020 & +59% YTD 3/21) show no sign of abating and will add to new store construction costs.
Job openings are starting to ramp-up as sales volumes surge, reflecting that a large pool of unmotivated unemployed makes it increasingly difficult to staff restaurants.
Franchisee EBITDA Valuations
QSR Valuations Take a Breather
FSR franchisee valuation outlook continues to improve while QSR is less bullish as dine-in prospects continue to improve.
Marcus & Millichap Cap Rates
Investors Hustle to Get In Front of Tax Hikes
Strong demand for triple net lease properties reflects push to complete transactions before the end of tax breaks provided by the 1031 exchange break & carried interest.
