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February 2019



Restaurant Research Thermometer

Industry Insights Edition



RR's Franchise Finance Report Highlights 


  • The growth rate for the franchise financing needs of $1B+ chains continues to decline as refranchising programs wind-down.
  • However, the M&A market continues to generate healthy financing demand as operators pursue consolidation to offset unit-level cost pressures. 


  • Declining originations partially reflect less demand but also share gains from smaller, regional banks that are not included in our survey. 

  • In any case, the aggregate portfolio of franchise loans continues to expand which is indicative of the increasingly important role that franchisee investment plays in this "asset light" industry.   


Source: RR's 2019 Franchise Finance Report (outline)


Franchisor Royalty Securitzations 


  • Consistent with an asset light business model, franchisors have been busy securitizing their royalty streams which have grown to $17.4 billion as of 9/30/18, reinforcing that this is a highly leveraged industry.


Source:  Guggenheim Partners


QSR Traffic Slower than Population Growth

  • QSR traffic is not even keeping-up with the population growth as chains steadily raise their prices to deal with cost inflation, pricing themselves out of the market.


Source: Domino's Investor Presentation & NPD Group



RR's Sonic Report - Executive Summary


Sonic enjoys strong brand equity (particularly in core South Central U.S. markets) around its drive-in format with car stalls, friendly carhops and a plethora of specialty drinks & frozen treats. Its drive-in format increases the chance that every customer will be first in line and allows customers to take their time ordering without concern about slowing a drive-thru line. Sonic's unique digital POPS (point of personalized service) order platform further improves the drive-in experience while facilitating on-lot marketing capabilities. The brand's unique 5 daypart segmentation is well suited to a growing consumer snacking trend and value is addressed by LTO deals and high margin specialty drink & dessert platforms which facilitate happy hour & seasonal evening discounts. A 30% reduction in total menu items (primarily driven by a rationalization of frozen treat customization options) makes it easier for customers & operations and the strategy is to drive results with a greater focus on core products and fewer, more impactful promotions. The system recently doubled its weight in digital media to 20% of total marketing spend in an effort to drive customers to its own digital order platform and its new mobile order ahead capability generates service speeds of under 2 minutes (typically better than 90 seconds) and together with targeted rewards are expected to drive +1% in incremental comp growth. Notably, fiscal 4Q18 results (+2.6%) were attributed to: enhanced marketing reach; refreshed advertising; the intro of exciting new product news; and a completed rollout of mobile Order Ahead. Having said all this, Sonic's sales have under-performed for its last 2 fiscal years through 8/31/18, reflecting: a susceptibility to periods of consumer economic stress when people are most likely to forgo treats & specialty drinks; and increased specialty beverage and snack competition (Sonic's goal to define its value equation in terms of product differentiation & experience is challenged by competitors offering low priced deals). Sonic's challenge is to grow its store-level EBITDAR margin which is pressured by a relatively low AUV (to go with low check) and high ad contribution requirement which is a function of its smaller scale as the 6th largest QSR sandwich player with a regional orientation. In conclusion, Sonic's opportunity is to add to its attractive business model a more compelling value equation to go with a tweak to its brand positioning capable of prompting consumers to consider the chain as more of a core meal destination rather than a periodic stop for a discretionary treat.



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RR's Panera Report - Executive Summary


Panera is well positioned around its "Concept Essence": food that tastes good and is good for you with an elevated experience (Panera is where food, wellness & the digital experience comes together). Key brand elements include: a cafe-bakery image which provides a "3rd place" oasis (beyond home & work place) with the comfort of a living room and the spirit of a village coffee shop; clean foods; and quality artisan products. As the first & only national restaurant chain with a 100% clean menu, Panera provides a unique consumer currency that is highly valued by its “foodie” customers and its menu is further distinguished by foodie offers like: Lentil Quinoa Bowl with Cage-Free Egg; Spicy Thai Salad with Chicken; and Chipotle Chicken Avocado Melt sandwich. Panera's digital leadership (33% digital sales mix possibly on its way to 50%) provides improved access, customization capabilities and a platform to highlight its clean menu brand equity. Its digital platform is largely based upon its innovative 2.0 roll-out (75% complete) which includes: ordering kiosks; advanced ordering with app for Rapid Pickup; and web-based catering & delivery. A steadily increasing average retail check reflects growth in high ticket catering, delivery and Rapid Pick-Up orders and the brand also benefits from its MyPanera loyalty program which drives 50% of transactions, generating double the frequency of non-member customers. Having said all this, Panera's sales have been muted by: a difficult consumer environment marked by a sharp increase in QSR discounting; rapid growth from new fast casual entrants; and growing external competition from QSR+ and casual players providing greater value & faster service speeds at lunch. Its business model which emphasizes a healthy, quality upscale positioning may appeal to its core customers more so than marginal, value seeking consumers and, to this end, middling comp performance even after 75% system implementation of 2.0 suggests challenges to the brand's menu positioning (particularly as it relates to value). In conclusion, Panera must continue to exercise patience as it waits for its forward thinking strategy and positioning to gain traction in a challenging consumer environment which is currently marked by a higher demand for discounts more so than quality.



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Finance & 2H:18 Valuation Report


  • RR’s Finance & Valuation IDR is based on survey responses (equally weighted) from 48 finance companies including traditional cash flow franchise lenders, sale leaseback companies, SBA lenders, equipment finance companies and financial consultants/advisors. 
  • Report highlights: (1) 2018 restaurant financing volume of $11.2 billion represents an -11.2% y/y decrease and the second consecutive year of declining volume that was below initial expectations – we estimate $15.6 billion in total financing needs for 2018; (2) 2019 origination prospects are expected to come in slightly lower at $11.0 billion; (3) the total financing portfolio outstanding grew +4% to $57 billion in 2018 as franchisors continue selling stores as part of their asset light model; (4) despite more lenders entering the space, LIBOR spreads were unchanged but borrowing rates rose sharply due to an increase in index rates; (5) private EBITDA unit level valuation multiples for large chains declined slightly and are expected to remain under pressure due to unit level margin challenges while the large deal premium compressed sharply; (6) public franchisor EV/EBITDA multiples edged higher relative to private franchisee EBITDA multiples and the public multiple premium is at the top of our historic range (reflecting an asset light model and buyout premiums paid by private equity buyers); and (7) cap rates were unchanged at 6.0% as higher QSR cap rates were off-set by a decline in FSR.

Click for Report Outline



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Think'in It Through...


Social Media Hits its Limits...

Boyfriend is too busy enjoying his Taco Bell to take another picture for a social media post.


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 2019.



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