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December 2018



Restaurant Research Thermometer

Industry Insights Edition



Value Wars?


  • Investors see a lot to like about restaurant stocks as indicated by a steady climb in public market valuations according to data from Hedgeye. 
  • While this maybe partially attributable to a steady stream of private equity buyouts over the last couple of years with valuations as high as 19x, certainly public stock investors don't believe that all remaining stocks will receive such rich bids?

  • The increase in industry-wide value promotions below stands in stark contrast to the sharp increase in stock valuations above


  • It seems that investors are focused on growth in digital and off-premise with the belief that leading-edge restaurant chains are the new FANGs worthy of tech stock valuations... 


Source: RR's Menu Report (outline)


Keeping An Eye on A Resurgent Chipotle 



See our 3Q18 summary below for Chipotle's most recent performance‚Äč


  • 3Q18 comps increased +4.4% (+3.8% price/+1.7% mix/-1.1% traffic). Comps grew mid-single digits during July & August before softening to low-single digits in early September. The launch of its new "For Real" marketing campaign in late September restored comp growth, improving current traffic levels to flattish results (with comps returning to +4% so far in October). Mix benefits from incremental queso sales.
  • Digital sales grew +48.3% in the quarter, representing 11.2% of sales.
  • Brand goals: to become a more culturally relevant & engaging brand that builds love & loyalty; digitize & modernize its restaurant experience to create a more convenient & enjoyable guest experience; run great restaurants with great hospitality & throughput; exercise discipline & focus; and build a great culture that can innovate & execute across digital, access, menu and the restaurant experience.
  • New news is not the brand’s primary “unlock”, but rather removing friction with digital access, reclaiming throughput capability and increasing brand visibility with resonant "For Real" campaign.
  • Full-year 2018 comp guidance remains low to mid-single digits.

Marketing & Menu

  • "For Real" campaign celebrates what is uniquely Chipotle – a belief that there is a connection between how food is raised & prepared and how it tastes. 
  • Real flavors, real ingredients, and real cooking techniques result in food that simply tastes better.
  • The brand will continue to leverage national TV through the middle of November before moving the "For Real" messaging to digital & social channels for the balance of the year. National media will be used when it makes sense to go with an always-on social & digital program.
  • Consumer research indicates that the brand is particularly relevant to Millennials & Gen Z consumers who share Chipotle’s values. This explains why digital is integral to its brand strategy.
  • Loyalty test was launched in September in 3 test markets.
  • The system is testing quesadillas, nachos, bacon, lemonade and a Mexican chocolate milkshake.
  • Marketing & promo cost will be in the low 4% of sales during 4Q ending full-year 2018 at ~3%.
Tech, Operations & Costs
  • Digitized 2nd make-lines are in 750 restaurants with the rollout expected to be completed by the end of next year. 
  • Digital pick-up shelves are in 350 restaurants with the rollout expected to be completed before the middle of 2019. 
  • App downloads have increased +25% q/q with strong interest from new and infrequent customers as well as frequent customers. Awareness of digital platforms is still under 50%. Goal is to leverage analytics to drive the right incentives for the right cohort at the right time.
  • DoorDash was added as a new partner in 2Q and delivery capabilities were added directly to app & website in 3Q. Delivery sales during the quarter benefit from a free delivery promotion on its app during September. Delivery sales continue to be incremental with very little customer overlap between in-app delivery and 3rd party delivery partner app. Average delivery time is industry leading at under 30 minutes and should improve from here.
  • Wage inflation is running around +4% to +5%.
  • Price increases will be taken in smaller pieces rather than past practice of waiting 2-3 years for a large increase.
  • AUV of $2.1MM = 21% store-level margin & $2.2MM = 22% margin.


  • #1 reason consumers eat elsewhere is because they don't have convenient access to Chipotle.
  • Exploring new formats to enhance digitally-enabled convenience including tests of digital pick-up lanes.
  • 2018 development should end-up at the lower-end of its initial 130 to 150 new openings guidance. New restaurants opened during 2018 are generating stronger performance. Chipotle expects to open between 140 to 155 new restaurants in 2019.

Source: RR's Quarterly Concept Update Report (outline)




RR's Pizza Hut Report - Executive Summary


Pizza Hut benefits from substantial scale and strong brand equity as the 2nd largest national player in the $1B+ chain pizza segment by domestic system sales. The brand (historically distinguished by its Pan Pizzas, Stuffed Crust products & fun innovation) has suffered a 15.4% decline in domestic market share among $1B+ pizza chains over the last 10 years through 2017 with comp underperformance attributed to: bi-furcated dine-in/delivery system (with no marketing support for 40% of units that are dine-in); the brand's historical 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; and increased competition in the pan pizza category. The brand's current goal is to reposition towards a modern delivery concept with the help of its 2017 Transformation Agreement which included: (1) $130MM franchisor investment to: upgrade restaurant equipment; accelerate improvements in restaurant tech; enhance digital & eCommerce capabilities; and boost ad dollars; (2) franchisee agreement to: implement national price points through 2019; increase their contribution to national ad spend; and contribute towards tech investments (digital ready POS). Brand upgrade also includes the addition of extra cheese on its pizzas and plans to either close or convert 80% of existing dine-in units to its Delco or new fast casual dine-in formats. The brand’s marketing pivot towards a new NFL sponsorship (picking-up where Papa John's left-off) goes along with a new ad agency (the 5th in 10 years) and its notable that NFL ratings have been declining even though it remains one of the biggest marketing games in town. Value remains one of the most important aspects of the pizza business and while Pizza Hut has made progress with its $7.99 large 2-top online only deal (introduced March 2017) and a new $5 pick 2 platform (2 medium pizzas for $10), the chain may do well to establish a permanent pizza value offer that is accessible online and off-line alike. Also, the chain may have more work to do to create a better financial model for delivery in high wage states (this represents a concern for the entire industry). In conclusion, while Pizza Hut's sensible turnaround is built upon a return to basics (hot, affordable & convenient pizza) it is possible that sales would further benefit from a strong everyday value equation to go with a renewed emphasis on core competencies including pan, stuffed crust & innovation.


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RR's Jimmy John's - Executive Summary


While Jimmy John's has been well differentiated in the sub sandwich category by its delivery prowess, the emergence of 3rd party delivery services for its competitors has necessitated the expansion of its hallmark "Freaky fast" tagline to the new "Freaky fast, freaky fresh, Jimmy John's, freak yeah." mantra which reflects the idea that being freaky is a way of life for Jimmy John's with an unusual, maniacal focus on not just speed, but quality, freshness & sandwich making (things that normal people don't even think about). Fortunately, JJ still retains the upper-hand in delivery speeds which typically run around 15 - 20 minutes vs. 1+ hr. wait times for some 3rd party delivery options. All-the-same, JJ's sales are challenged by: a $10 average check (which can go much higher after delivery charges & tips) in a world of heightened QSR discounting; and increased sandwich competition from players that include: fast casual (Potbelly, Jersey Mike's & Firehouse Subs); QSR (Subway & Arby's); c-stores (Wawa); and prepared sandwiches at grocery stores. AUVs could also benefit from a daypart expansion beyond its dominant lunch business. Hopefully, a new CMO (first one since 2007) will help the brand incorporate some of the basics of QSR like value offers and innovation to drive traffic. In conclusion, Jimmy John's may just find that it must continue expanding its tagline from freaky fast and now freaky fresh to a freakin' good value to jump start traffic in today's world marked by QSR discounts and a sea of competent sandwich competitors who can now all do delivery.


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RR's Annual Databook


Benchmarking for $1B+ Chains and Other Select Concepts

Unit Sales & Margins, Build Costs, Valuations, System Stats, Units by State



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Think'in It Through...


Where's an honest investor able to find a discounted restaurant stock now-a-days??


Please pass on to your colleagues


Disclaimer of Liability: Although the information in this report has been obtained from sources Restaurant Research® LLC believes to be reliable, RR does not guarantee its accuracy. The views expressed herein are subject to change without notice and in no case can be considered as an offer or solicitation with regard to the purchase or sales of any securities. Restaurant Research’s analysis and opinions are not a guarantee of the future performance of any company or individual franchisee.  RR disclaims all liability for any misstatements or omissions that occur in the publication of this report. In making this report available, no client, advisory, fiduciary or professional relationship is implied or established. This report is intended to provide an overview of the restaurant industry, but cannot be used as a substitute for independent investigations and sound business judgment. Copyright 2018.



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