Same Store Sales Trends

Trends Continue to Improve

• Monthly government retail sales data indicates total food service sales continued to improve in May while grocery store sales are slowing as social distancing restrictions ease and the Food at Home CPI growth outpaces the Food Away from Home CPI.

Promotional Composition

New Products Replace Free Delivery Offers

• Chains returned to product innovation in June with both QSR & FSR new product mix now at the highest level since November.
• The average promotional price point fell sharply as chains backed-off of family bundles.
• The percentage of chains offering free delivery declined (to 18% in June from 33% in May) as dine-in restrictions ease and people return to work.

Economic Outlook

Employment Moving in the Right Direction

• The U.S. recovered more jobs than expected in June (+4.8 million actual vs. +3.7 million expected) and the unemployment rate fell to 11.1% from its peak of 14.7% in April.
• Since the height of the lockdown, the economy has restored 7.5 million jobs in the last 2 months, although more than 22 million jobs were lost and the number of people receiving unemployment benefits currently stands at 19.29 million.
• It is unclear whether the $600/week unemployment bonus will be extended beyond the end of July. When this provision ends, the unemployment rate is likely to improve further.

Key Cost Trends & Forecasts

Commodity Prices Trend Lower, but Remain Volatile

• Most commodity prices continue to trend down and the BLS Foodstuffs Index declined for the 4th consecutive month in June (-16.5%).
• Ground beef prices pulled-back from a peak of $4.84/lb. in May to $1.67 in June (in-line with the annual average) as meat production facilities resume operations.
• Milk and cheese prices hit new highs in June after posting lows only a month ago. Class III milk prices increased +29.3% (at least a 3.5 year high) and block cheese prices jumped +43% y/y ($2.56/lb. – the highest price in at least 12 years) with implications for the pizza chains.

Franchisee EBITDA Valuations

Outlook Shifts Slightly Bearish, Strongly Favors QSR

• Franchisee valuation sentiment shifts slightly bearish, mirroring the un-even volatility of the recovery.
• Transactions remain mostly on hold for now.
• While the FSR outlook remains bearish, the QSR outlook remains favorable (particularly for chains that are out-performing including Popeyes, Sonic, Taco Bell, Wendy’s & Wingstop).

Stock Performance

Restaurant Stocks are Down -11% vs. Market during 1H20

• RR Index is stabilizing around -15% for 1H20.
• This compares to the performance for the S&P 500 which is down -4% during the same time period.

Marcus & Millichap Cap Rates

Gap Between Cap Rates & 10-Year is at a 7 1/2 Year High

• Gap between cap rates and the 10-year is close to a high even when considering that all the transactions have been for QSR.