Q&A with John Brodersen

​Started as fry cook in Chicago 1986, moved to Milwaukee with $35K and a dream. Built 73 restaurants in 5 states. Recently sold 53 and is now seeking 1031 trades for the underlying fee properties. Currently owns/operates 20 Popeyes in Puerto Rico and looking for growth opportunities in that market. Also seeking distressed real estate and business opportunities in the States.

Starting with the topline, can you outline what is structurally different in terms of traffic when comparing 2019 levels with 2021?

• Most QSR brands saw their toplines comp higher in 2020 and then again in 2021, providing bottom line leverage which also benefitted from labor reductions driven by dining room closures. Popeyes was particularly fortunate to benefit from a genius intro of its chicken sandwich which magnified our drive-thru appeal during a pandemic.
• Transaction counts didn’t move much, while check increases made-up most of the sales growth. Bigger orders in the drive thru may have reflected the decision of customers to order more food to compensate for extended drive thru waits.
• A big surprise to most brands is that restaurant-controlled on-line orders grew at 3X the rate of delivery growth.

How much more pricing can consumers absorb?

• Customers have already absorbed a big price increase during the pandemic because most brands removed discounting. Pushing customers up to the regular menu is technically a very large price increase. There is no need to discount when half of your competitors are closed.
• The customer push towards higher priced regular menu items didn’t result is lost market share, something we have never experienced before.
• On top of that, I think most customers had no problem with regular menu price increases of +3% or more. In general, customers don’t mind paying-up for more food in their bag so long as they don’t pay much more for each individual food item.

Let’s talk about labor. The unemployment rate is back to normal, but there are labor shortages everywhere. Why is that?

• Personally, I don’t think the government measures the unemployment rate correctly. There are a lot more jobs available than there are people looking for jobs. I’m not an economist, but to me that would be negative unemployment. Somehow GDP is higher yet we are still missing 5 million employees.

To what extent does the labor shortage impact current comp growth?

• The lack of labor is a big factor in comp store sales growth. All QSR’s experienced long lines in their drive thrus. Customer demand was there, but we couldn’t seem to achieve standard drive thru times.
• I have some restaurants with less than 10 employees on the schedule. In these stores we are temporarily limited to one shift a day, and sales obviously suffer. Fortunately, we haven’t had to close any restaurants like many other brands. But stores that have staffing issues can lose well over 20% of sales.

How much higher do wages have to go for the industry to reach full employment?

• Over the last 18 months, I have raised our average wage by over $2/hour (over 20%). Unfortunately, the wage increases didn’t seem to attract many new employees. Now we are dealing with an inelastic supply, like the high skilled end of the labor pool.
• For the past 18 months all I hear from my team is “we can’t find help”. But they all tell me different reasons why, some say safety, some say childcare, while many are just happy with the wages that the government is paying them to stay at home.
• Personally, I think we didn’t respond to the needs of our employees. Prior to Covid, Millennials had always valued their lifestyle more than pay. They wanted more flexible hours, higher quality of life and a cause to believe in. During Covid, we forgot about their needs and all we offered them was higher pay, longer hours, dangerous working conditions, and no real sense of purpose.
• One thing is for sure, when/if the pandemic ends, employees won’t take a pay cut, $12 to $15 per hour is here to stay.
• Like I said above, wage inflation will cause pricing inflation. Pricing increases cause sales increases, which in turn boosts the value of our business and our real estate. In the end, the money finds its way up the ladder, the asset owners are the winners. Keep your real estate.

How much labor efficiency is left to take out of operational costs before service suffers?

• As far as labor efficiency, we took the low hanging fruit right away in April 2020. QSR restaurants were fortunate in that we could close our dining rooms and remove the expense of the front counter staff while maintaining sales. This cut our labor cost significantly, bringing an immediate 2-3 percent to the bottom line.
• We cut out promos and limited our menus to keep things simple for our staffs, enabling them to move customers faster through the drive thru.
• I don’t think the customers liked any of the changes, but they had no choice, they had to wait in long drive thru lines or they couldn’t get served. This year, causal and quick causal restaurants are taking back market share and QSR brands are starting to respond, losing efficiency and bottom-line profit.
• Also, off-premise orders remove cashier labor needs and provide greater efficiency gains than any back of the house automation.

Do we get to 100% off-premise in QSR as a permanent thing?

• I wish we could get to 100% off-premise dining but there are reasons why that will never happen. There will always be certain customers that value the dining room experience. There are over a million restaurants with dining rooms in the United States, and those that reopen their dining rooms will take back some top line market share. Franchisors don’t work on margins; they work off the top line sales. Any marginal increase in sales will drive the decision to stay open.

Food costs are through the roof! Is this temporal or structural?

• I think food inflation is somewhat temporary compared to labor. I think we have serious distribution problems right now that will eventually be corrected. A bushel of wheat was $4.50 when I opened my first store in 1989, now it is around $6.50; it didn’t even keep up with inflation. At the same time our employee wages went from $3.35/hr. to around $12/hr.

How much of a gap between restaurant & grocery pricing will consumers tolerate?

• I think restaurant and grocery won’t just compete on price. With wage increases consumers have more money to spend and they will evaluate the entire customer experience. Price is just one component of value. Customers with higher wages will demand better service, higher quality, and more convenience instead of making their decision based just on price.

Denny’s – RR’s Executive Summary

Denny’s unique “America’s Diner” brand positioning provides the promise of everyday value with craveable, indulgent products (comfort food) served around the clock in a friendly and welcoming atmosphere (come as you are). Denny’s wants to be known as the most admired and loved “local” family chain. Breakfast all-day options typically entail operational complexities that are difficult for QSR competitors to replicate (everything is made to order) and the chain’s goal is to convert very high brand awareness of this core equity into trial of its lunch/diner offers (helping to drive frequency). To this end, the brand has developed credibility around burgers, melts & skillets. Notably, while value plays an important role to its core customer (boomers & seniors), its $2 $4 $6 $8 value menu mix is currently running at the low-end of typical range and streamlining efforts have helped drive trade-up to more expensive lunch & dinner options. This is helping the chain’s post-lockdown recovery which is reflected by 2Q21 system comps which declined just -1.2% on a 2-year stacked basis (with AUVs approaching 2019 levels despite staffing challenges that have hindered a return to 24/7 operations across its system). Current sales benefit from off-premise stickiness and incremental sales generated by its 2 new virtual brands (Burger Den & Meltdown). In any case, while its 2019 AUV represented the system’s all-time high, its family segment underperformance reveals an opportunity to improve capacity utilization beyond breakfast. Further, Denny’s AUV is also challenged by the impact of lower performing stores and AUV variability driven by lower menu/offer prices in lower cost markets (particularly in wage tip credit states). Notably, a sharp decline in its 2020 EBITDAR margin reflected material post-lockdown sales deleverage which pressured labor and other operating margins. In conclusion, now that Denny’s has largely returned to its 2019 unit-level financial performance, the chain must continue to contemporize by making further progress around lunch and dinner while also leveraging progress around off-premise to extend its reach to a younger demo.

Arby’s – RR’s Executive Summary

Arby’s strong and unique positioning among the $1B+ QSR chains is based upon a credible, affordable NY deli format (with a drive-thru) that bakes beef roasts and freshly slices all other roasts in-house to create fast crafted, made-to-order hot deli sandwiches. Its “We Have the Meats” lineup includes a full selection of roast beef, beef brisket, corned beef, turkey, chicken & gyro and its sandwiches are distinguished by generous stacks of meat toppings (big, meaty sandwiches) and leading-edge protein variety which extends well beyond Arby’s core roast beef heritage. Notably, Arby’s menu offers a compelling alternative to competitors focused on: burgers, chicken-only, cold-cut subs and veggie-heavy fast casual offerings. TV ads cut through the clutter by featuring Ving Rhames’ distinctive bass voice using humor to illustrate compelling food shots. While the brand’s value proposition is most apparent in comparison to a NY deli which may charge $10 to $15 for a Reuben vs. $5.99 at Arby’s, the chain’s price point value position is strengthened by its 2 for $6 platform, $1.79 Sliders and $1 LTOs. All this translates into all-time high EBITDAR margin and dollar profits although the chain’s AUV underperformance reveals the need for increased capacity utilization. The current prospect of low-income consumer weakness (as government assistance ends) suggests that the brand may need to further emphasize lower price points to support traffic and more progress on mobile ordering could also help sales growth. In conclusion, while Arby’s is well positioned as a QSR DT player that can serve as a credible alternative to a NY deli, the chain could benefit from strategies to bring its AUV closer to the segment average and more progress in digital.