McDonald's is gaining traction with an extremely ambitious modernization program with many moving parts. Its repositioning strategy includes: retaining existing customers by bolstering core strength in family occasions & food-led breakfast; regaining lost customers by improving food taste, quality, convenience & value; and converting casual customers to committed by elevating & leveraging the McCafé platform while also improving its food health profile. To this end, its menu positioning continues to transition to fresh & healthy and its food journey has included: adding fresh beef to its Quarter Pounder burgers (an answer to Wendy’s); re-introduction of McCafe espresso products to better position against Dunkin'; intro of Buttermilk Crispy Tenders (an answer to Chick-fil-A); reduced use of antibiotics in its beef supply chains; removal of artificial preservatives in its Chicken McNuggets; and improved health profile for its Happy Meals. The goal is to convert casual traffic into committed customers who can be comfortable that higher frequency at McDonald's can actually support good health. In turn, the brand’s people & facility investments provide it with authority to discuss menu improvements which appeal to families & younger consumers. While comps have outperformed for the last 2 years, traffic declined in 2018 and into 1Q19 (which reflects the chain's upscale repositioning). Going forward traffic should benefit from: an effort to run better restaurants (digesting all the recent changes & reducing executional complexities) with a renewed focus on drive-thru ops; plans to fine-tune value deal promotions; refinements in digital & delivery; and progress with EOTF and reimaging. Also, corporate expects to win back breakfast traffic with a combination of: national value; a return to local breakfast deals in recognition of differing regional preferences; and new food offerings. In any case, the brand continues to struggle with balancing its need to provide value to drive traffic with its desire to move towards higher margin, more upscale products. Just as value is foundational to this brand, so is service speed/convenience and in a well justified sprint to modernize, the system has added operational complexities which have slowed speeds. Declining store-level profits, increased capex requirements and increasing operational complexity has prompted the recent organization of the National Owners Association to represent the concerns of 1,000 franchisees and operators report that cooperation between franchisor & franchisees has improved as a result. In conclusion, there was no easy way to modernize McDonald’s in a timely fashion and now the hard work of digesting & integrating all these changes is underway – hopefully, execution will proceed as fast as the implementation of the pivot.



IHOP is well established as the largest player in the $1B+ family chain segment with 28% market share and the largest marketing budget in segment. While the brand enjoys a breakfast heritage leadership positioning particularly around world famous, flipped fresh pancakes, IHOP seeks to expand to “all things breakfast, any time of the day” and beyond this, to lunch & dinner with its recent and significant push into burgers, including a very successful 2018 media event in which IHOP pretended to rebrand as IHOb (burgers). To this end, increased investments in research and consumer insight leads marketing & promotions which drives ample buzz worthy innovation (like its Pancizzas promotion which generated 1B digital impressions) that helps break through the clutter. Also, IHOP N’ GO online ordering platform benefits from the concept's 24-hour accessibility and has helped drive impressive growth in off-premise traffic & check with plenty of runway left. The chain's strength in social media and its online ordering platform plays well to the brand's younger demo (51% of guests are 34 or younger). Taken together, improved marketing & innovation, service, daypart expansion, off-premise and remodeling has helped generate positive comps in 2018 after 2 years of decline. In any case, we suggest that an everyday value platform could drive even stronger comp growth and a lean into value is possible given food costs that strongly outperform the segment average, reflecting a large mix of high margin pancakes. In conclusion, we like IHOP's strategy, improvements and execution and believe things could only get better if the chain is able to address everyday value in a margin friendly way given the current operating environment.



Chili's is the 4th largest casual player by domestic sales (behind Applebee's, Olive Garden & Buffalo Wild Wings) and its Southwest Tex-Mex theme helps distinguish it among the other national casual chains. Its refined brand positioning centers around getting friends & family together over improved burgers, ribs & sizzling fajitas and 2017 menu upgrades included: fajitas with 48% more meat and addition of rice & beans; Texas Size Ribs (+30% more meat) offered at the same price as original rib product; Bigger Big Mouth Burgers (half-pound, handcrafted patties which are smashed for greater flavor & faster cook times and served on a brioche bun); and use of all-natural chicken for its Chicken Crispers. Margin friendly 3 for $10 offer works well at lunch, dinner as well as for take-out (providing marketing efficiencies) and Chili’s other everyday value platforms include: $25 meal for 2 (share an app & dessert to go with 2 entrees); 8 lunches for $8; and $5 margarita of the month. Items are rotated onto these value platforms to keep things fresh and helps the brand avoid dependence on operationally complex LTOs every 6-8 weeks. The brand's recent pivot to value has helped jump start sales & traffic and fiscal 2Q19 traffic growth (+2.9%) was best in 10 years. Going forward sales should benefit from: an ongoing commitment to keep operations simple (menu simplification helps get the food out hotter & faster) thus improving frequency; a compelling value platform; takeout business growth; its most effective & efficient marketing strategy ever (including a more aggressive approach to direct marketing); and remodeling progress. Having said all this, it is notable that its franchisee AUV remains significantly below the system's best year (2006) and well below the segment average, revealing: (1) the brand's sales challenges since the onset of the Great Recession; and (2) the tension between a need for greater value to drive traffic and the need for a higher check. Labor margins have been trending up and now represent a system worst as sales have failed to keep pace with wage rate inflation, and resultantly, its EBITDAR margin represents a system low in addition to significantly underperforming the segment average. Annual net unit counts have been running flat to slightly down over the last 10 years and development likely must wait for more evidence of a sustainable sales turn-around and a better sales-to-investment ratio. In conclusion, while the chain's food quality investments and emphasis on its everyday value platforms have helped reignite traffic after a long hiatus, more time is needed to determine the sustainability of this model particularly as it relates to driving higher checks & AUVs.



Church's Chicken is a 65+ year old regional brand that is well established as a key chicken segment player (especially within core markets). Its ongoing brand repositioning includes: new marketing efforts; improved communication/relationships with franchisees & employees (new Excellence Advisory Council); supply chain improvements; and new, contemporary remodel elements and training. Its brand new "Bringin' That Down Home Flavor" campaign will introduce Church's fresh, contemporary look & feel that emphasizes the brand's culinary skill (Texas heritage) and personal authenticity. TV spots (first national campaign in decades) are shot in a test kitchen, highlighting fresh ingredients and careful preparation. The brand seeks to expand its reach to a new generation of guests that are driven by different expectations around services like digital & delivery and the new VP of digital marketing & technology brings to bear “consumer centric” market analysis used as a basis to form digital media marketing, consumer relationship management and social media strategy. Church's strategy is to target both long-time loyalists along with new guests with Church's mix of Southern heritage and bold Texas taste provided by its original hand-battered fried chicken (that can be spiced with jalapenos to squeeze on top) which is complimented by classics that include baked macaroni & cheese and scratch-made Honey Butter Biscuits. Its value proposition is augmented by customization and a complete, authentic meal prepared by hand by real people at a competitive price and chicken is made in small batches all day long while biscuits are drizzled with sweet honey-butter right out of the oven. Discount promotions in store windows are important sales drivers with bundle deals at the $5, $10 & $20 price points (dark meat offers provide more pieces for the money) and national promotions also feature $5, $15 & $20 price points. 3rd party delivery is available in 62% of system and Church’s will soon launch order-ahead & pickup as well. Having said all this, sales trends for this smallest national bone-in chicken player have been pressured by: lack of media efficiency; strong competition from national bone-in chicken players (particularly Popeyes & KFC) and regional bone-in players (like Chicken Express in Texas); QSR sandwich discounting to go with this segment's strong incursion into chicken products (such as Burger King's 10 chicken nuggets for $1 promotion); increased competition from supermarkets; and a secular trend towards healthier foods & boneless chicken. Church's orientation towards inner cities has also magnified segment sales challenges given an extended period of consumer weakness among the lower income demo. Resultantly, its franchisee AUV has not increased much beyond its 2011 level thus slowing the pace of reimaging and development. In conclusion, Church's is executing around a solid strategy that should help sales, unit level profitability and capital investment over time. 


4Q:18 Same Store Sales