State of the Consumer

• While government stimulus was successful at buoying the 2-year annual growth rate for total retail sales to a level slightly higher than pre-lockdown results, there was a clear market share shift among industries as consumers pivoted to a new reality.
• The key question is how much grocery spend will return to the restaurant space over time?

• In any case, not all is well with the consumer and according to government data below 1/3 of adults are dependent on sources other than their salaries to make ends meet.
• Also, a recent government survey reports that 7.8MM people in a survey of 52.6MM adults (15%) are behind on rent.

• These points are reinforced by Fed data which shows ramping consumer debt.

Stimulus Spending Detail

• With stimulus money going primarily to food expenditures according to another recent government survey, there are clear implications for the restaurant industry as stimulus eventually winds-down.

Papa John’s Executive Summary

Papa John’s quality positioning features original crust pizza prepared with fresh dough (never frozen) and a proprietary blend of wheat flour; real cheese made from mozzarella; fresh-packed pizza sauce made from vine-ripened tomatoes (not from concentrate); a proprietary mix of savory spices; and served with a container of garlic sauce for dipping & a pepperoncini pepper. Notably, the chain’s quality positioning currently facilitates higher price point promotions, supporting check. The brand’s ongoing turnaround (including the addition of Shaq as a spokesperson) has succeeded at broadening its reach with new & lapsed customers. Its repositioning also includes: menu innovation designed to drive reach into new demos and to diminish the need for discounting; digital strength (+70% mix); and efforts to increase marketing relevancy among the younger demos. A successful Papa Rewards loyalty program (20MM members up from 12MM two years ago) drives half of its 75% delivery mix, generating higher frequency and higher tickets while facilitating 1-to-1 marketing/offers, driving traffic without relying on blanket discounts across all channels. Post 2019 comps have sharply rebounded, reflecting: the brand’s repositioning strength (after the departure of the controversial founder); favorable post-lockdown positioning with its touchless delivery model and added capacity provided by its DSP partnerships; successful menu innovation and new product news which has helped with trial & check; strength in digital & loyalty which helps with reach & frequency; and a more targeted discounting strategy (1:1 as opposed to across-the-board discounting/everyday value). All this has translated into an all-time high EBITDAR margin (consistent with an all-time high AUV), helping both development prospects and unit-level valuations. If there is one chink in the armor, it maybe that Papa John’s pivot away from value could have medium to long-term implications depending on consumer strength in the new, post-lockdown world (especially when considering that pizza largely skews to a lower income demo). In conclusion, Papa John’s management team has driven a solid turnaround which amplifies its inherent strength as a well-positioned pizza delivery player in a post-lockdown world.

Applebee’s Executive Summary

Applebee’s (tied for 2nd place in casual dining market share with Chili’s & behind Olive Garden), benefits from key brand positioning elements which include: a comfortable grill with great tasting food & a prominent bar area which provides energy for diners; abundant value; decorating cues tied to individual neighborhoods; and appeal as a place to connect with family & friends. TV ads are well done, featuring compelling food photography set to famous pop songs (creating emotional connections) and punctuated with relevant taglines like “Eatin’ Good in the Neighborhood” and “Eatin’ good never felt so good”. Its simple American fare and cocktail innovation helps appeal to Millennials without compromising its core family grill positioning. Applebee’s abundant value is supported by: popular 2 for $20+ everyday value platform (2 entrees & 1 app); all-you-can-eat deals; add a protein to an entree for $1; $0.25 boneless wings; $7.99 – $8.99 Irresist-A-Bowls; and $5 cocktails (which provide a platform for new product news). The chain’s 36.7% 1Q21 off-premise mix consisted of 22% Carside To-Go and 14.7% from delivery with online & app orders generating tickets +30% higher than phone-in orders. A strong 2021 rebound reflects the retention of off-premise sales even as dine-in returns to normal. Sales prospects should further benefit from: the expansion of delivery from Uber Eats to Postmates & DoorDash; virtual brands (like Cosmic Wings) & ghost kitchens; share gains from independent restaurants that have closed across the country; the development of smaller restaurant prototypes; and off-premise enhancing technology like I-have-arrived app (Flybuy). All-the-same, Applebee’s share of $1B+ casual chain sales have steadily declined from 17.5% in 2010 to 12.2% in 2020, reflecting stiff competition and an internal challenge to find a sustainable value proposition that works sufficiently well in its smaller markets to drive traffic. This challenge is further reflected by significant AUV underperformance, even when considering a sales/sf metric to reflect small footprint stores. In conclusion, while Applebee’s has worked hard to balance the pursuit of value for its core Middle American customers and increased relevancy to attract a younger guest, more time may be needed to address the disparate needs of these demos especially as the system seeks to recover from a post-lockdown world.