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August 2019 Insights



Restaurant Research Thermometer

Industry Insights Edition



RR Unit Economics Report Highlights


  • Report highlights: (1) Average 2018 EBITDAR margin for the $1B+ chains came in even with 2017 at 18.8% (the lowest level since 2008) and it is notable that lower COGS were fully off-set by higher labor costs; (2) at the EBITDA level, lower G&A expense helped to off-set higher rent based on our lender survey; and (3) 2019 EBITDAR margin pressure reflects rising labor costs and slightly elevated commodity costs aggravated by increased industry discounting through 1H19, slightly off-set by modest same store sales growth prospects.

  • The % of lenders reporting declining borrower financial conditions continues to decrease as improving sales trends are offsetting their concerns about rising labor and commodity costs for now.

  • In any case, while the average Fixed Charge Coverage Ratio “FCCR” (Annual Debt Service Payments + Rent)/EBITDAR declined slightly in 2018, it remains far in excess of the typical minimum 1.25x ratio used to underwrite franchise loans.

  • Further, average franchisee adjusted leverage ([(debt + leases*8)/EBITDAR]) declined slightly to 5.0x in 2018 and remains well below the 5.9x average maximum used for underwriting.
  • This explains why few franchisee delinquencies have been reported by lenders.


Source: RR's Unit Economics Report (outline)



Drive Revenue and Brand Engagement with AI


  • “Foodies” make up about 6.6% of consumers in the fast food/fast casual segment compared with 6% in general population.


  • Although foodies make up a small portion of the restaurant category population, we can clearly see that this segment is different from the core QSR consumer in that they tend to be older (35+), mainly Caucasian and slightly more female that the core QSR consumer.


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2Q19 $1B+ Restaurant Chain Summary 



Source: RR Quarterly Concept Update (outline)


Taco Bell - RR Executive Summary


Taco Bell is extremely well positioned as the only $1B+ national QSR Mexican player (category of 1) with core equity around abundant value, craveable innovation and a bold flavor profile. Its compelling value equation extends well beyond the notion of "cheap food" to affordable food that also offers appealing taste, flavor & gratification (food people want, not just what they can afford) and it is notable that the brand has been successful at balancing value with margins that benefit from: recent promotional focus on $5 boxes; a switch to its new $1/$5 Cravings Menu (which replaced the 20 item $1 value menu at the beginning of 2019); and a move to $1.29 price points, up from $1 in some cases. In any case, its value positioning is facilitated by a material COGs out-performance which is driven by the ability to mix & match an abundance of inexpensive ingredients. The brand is extremely dialed-into the Millennial demo with a very targeted menu & marketing strategy and this cult, Millennial lifestyle "hipness" brand entertains with playful and engaging story ads that include compelling fake trailers for fake movies with sequels that provide viewers with a reason to stay-tuned.  Healthy comp growth reflects strong brand positioning and its AUV is at an all-time high (capacity benefits from a menu that addresses multiple dayparts including breakfast, lunch, dinner, Happier Hour & late-night) and store-level dollar profits are also at an all-time high. Access benefits from the recent launch of delivery (4,000 stores with marketing support starting in February 2019) and the installation of two 22" kiosks in 4,000 stores with the rollout expected to be completed by the end of 2019. We like that its delivery menu prices are the same as in-store and that Taco Bell has negotiated a reasonable 15% commission to pay Grubhub for deliveries. In conclusion, Taco Bell's strengths continue to far outweigh whatever few weaknesses we can find as the chain continues to represent one of the most relevant QSR brands in the 21st century.



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TGI Friday's - RR Executive Summary

TGI Friday's long-established brand equity as the original bar & grill national chain works well with Millennials (40% to 45% of guests) who maybe more likely to visit a bar than a sit-down restaurant. As Friday's bar scene cannot be replicated at home, it is more immune from to-go and delivery cannibalization and its large mix for alcohol sales helps to drive check & margin. The brand seeks to differentiate around tech & digital which also works well for Millennials and its app functionality includes: booking & check-in; pre-ordering; mobile payment with Venmo split check capability; loyalty; and social media sharing capabilities. We like the possibility of a test in Dallas which allows guests to place orders while seated in-store at the table. AI customer interfaces on app & social media (well suited for a social brand) is intended to offer customization & cost effective marketing and an emphasis on growing its loyalty program (to drive frequency) fits-in with its efforts to develop an AI driven 1-to-1 marketing platform. An expanded digital reach further drives growth of high ticket off-premise sales generated by new, younger customers and new occasions with existing patrons when a meal at home is preferred to a social night out. However, the chain's relatively small scale and decreasing share translates into a smaller share of voice and mostly negative comps since the 2008 Great Recession reflects the system's fundamental challenges, particularly as it relates to value in our opinion. Comp performance over the last couple of years has been especially challenging, translating into a system low AUV and EBITDAR margin (impeding CAPEX investments that maybe necessary to fuel a rebound) and net closures over the last 10 years. In conclusion, while Friday's does well to differentiate around its original bar & grill brand equity layered with efforts to lead the casual space in Millennial friendly tech innovations, there is still more work to do around value such that Friday's can join in the progress that its competitors have made in better meeting today's consumers where their wallets are at.



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Think'in It Through...


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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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