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3Q:17 Same Store Sales

  • Modest +1.4% 3Q:17 comp growth for $1B+ chains was tempered by hurricanes (-30 bps. to -100 bps headwind) as the large chains continue to struggle for top-line growth.
  • While the $1B+ QSR chains are keeping pace with their smaller peers, the $1B+ FSR chains are losing ground to regional and mom-and-pop sit-down competitors according to government data. This contrasts with the idea that delivery and carry-out platforms are helping the national casual chains to take share from the smaller players in the same fashion as the pizza category.
  • Surprisingly, sit-down industry sales outperformed QSR industry sales by 80 bps during the quarter according to government data.
  • CPI for food-away-from-home turned positive for the first time since 4Q:15 which is good news for the restaurant industry. All-the-same, grocery food price increases remain very muted (under +0.5%) with grocery sales growth somewhere between QSR and FSR industry sales growth.
  • C-store sales growth (ex. gas)  is outpacing restaurants and grocery stores.



KFC's focus on bundled value, relevant marketing and quality improvements continues to propel sales growth and builds on the chain's considerable brand equity in the form of its world famous Original Recipe and Extra Crispy seasonings/coatings (contemporized by the addition of its Nashville Hot spicy & Honey Mustard BBQ regional flavor profiles). KFC's compelling value strategy offers consumers price certainty for complete, "real" meals and a promotional focus on $5/$20 Fill-Ups & $10 Chicken Share deals keeps things simple and affordable. Strong, innovative marketing benefits from creative Colonel impersonations and KFC's education-plus-humor ad strategy has helped increase ad awareness. Further, KFC does well with online marketing, generating digital share of voice that far exceeds digital spend and, resultantly, the chain has enjoyed a +45% increase in Millennial consideration over the last 3 years. Investments in equipment & training provide a more consistent customer experience and going forward sales should benefit from remodel program acceleration with plans to update 70% of the system by 2020. In conclusion, KFC is making Southern fried chicken cool again with its holistic, 360 degree “re-Colonelization” concept upgrade.


Annual Databook


Pizza Hut

Pizza Hut is in the process of repositioning its brand around the key elements of a 5/1/17 Transformation Agreement which includes: (1) $130MM franchisor investment to: upgrade restaurant equipment; accelerate improvements in restaurant tech; enhance digital & eCommerce capabilities; and boost ad dollars; and (2) franchisee agreement to: implement national price points through 2019; increase their contribution to the ad fund; and contribute towards tech investments. The chain's primary challenge comes from its legacy of dine-in assets (50%+ of the system) which are slowly being migrated to its more profitable Delco delivery format. As the market has clearly evolved to delivery and carryout, Pizza Hut's legacy dine-in stores have less appeal, no marketing support and are not well suited to delivery. In any case, Pizza Hut is transitioning away from innovation as a point of competitive distinction (as in the past) towards a hot & fresh delivery positioning driven by compelling value (in the form of competitive national value offers and a new loyalty rewards program) and increasing digital ordering capabilities in order to ensure that "No one out-pizzas the Hut". The basic idea is that by replicating what has worked so well for Domino's and Papa John's, the #1 domestic brand (at least through 2016) could eventually participate in the outsized comp growth of its peers. This is important as Pizza Hut's 2017 store-level profit is significantly pressured by comp declines, an increased requirement in franchisee ad spend along with higher food and labor costs. In conclusion, Pizza Hut's turnaround is built upon the simple premise that an invitation to the "great pizza party" does not require a reinvented wheel (that hopefully comes next), but rather, a focus on what is currently working so well for its market share grabbing peers.


Unit Economics

  • RR’s Industry Data Report on Unit Economics provides: (1) FYE 2016 unit level AUV along with COGS, labor, royalty, advertising, other operating and EBITDAR margin estimates for 46 chains; (2) a 5-year history of unit economic performance; (3) an analysis of food and labor cost drivers; and (4) aggregate G&A margins, rent margins and leverage ratios based on RR’s annual lender survey. 
  • Report highlights: (1) Average 2016 EBITDAR margin for the $1B+ chains declined -40 bps as lower COGs were more than off-set by an AUV decline and higher labor & operating costs; (2) flat G&A and higher rent expense based on our lender survey suggests 2016 EBITDA (post G&A) also contracted; (3) franchisee leverage levels decreased and coverage ratios remain solid with lenders reporting minimal delinquencies; and (4) the outlook for 2017 EBITDAR margins is negative as a result of tepid sales growth, escalating labor costs and rising commodity prices.