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Unit Economics

  • RR’s Industry Data Report on Unit Economics provides: (1) FYE 2018 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 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; (3) franchisee leverage levels remain elevated but coverage ratios are solid with lenders reporting minimal delinquencies; and (4) 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.



Popeyes' Louisiana bold/spicy menu profile emphasizes its slow cooking techniques which are unique to QSR. Its core bone-in chicken is infused with a Louisiana-inspired seasoning dry rub that is applied to fresh chicken which marinates for 12 – 72 hours and is then hand-breaded. Its Louisiana heritage provides the brand permission to extend its menu beyond bone-in chicken to boneless chicken products as well as seafood (particularly shrimp). The brand's growth strategy for bone-in: expand its unique flavor profile (adopting boneless flavors); enhance its price-point promotions; and better leverage media. Its growth strategy for boneless: build awareness; drive hand-held innovation; and gain traction for its new chicken sandwich which is doing very well in test markets. The brand's value equation is driven by a steady layer of $5 meal promotions (protein, biscuit & side) along with periodic deals at the $3.99, $10 & $20 price points. Its value equation is also supported by boxes of bone-in family home meal replacement dinner options and deals promoted in store windows. Fortunately, its new product news has started to rebound during 1H19 after sharply declining in 2018 (which is notable given that innovation has historically represented a key brand equity). In any case, the system's 2-year stacked comp of -1.3% through 2018 reflected ineffective marketing/promotions, KFC's strengthening position and heightened QSR discounting. Resultantly, corporate recognizes its need to better balance its calendar with more impactful LTOs consisting of stronger single guest (particularly around boneless) and family bundle offerings as the brand seeks to compete around value without diminishing its premium positioning. In any case, its last remodel program was completed in 2016 (with an updated system providing another point of distinction in the QSR chicken space) and the system benefits from store-level dollar profits which outperform and a strong development outlook. In conclusion, Popeyes challenge has to do with finding a way to leverage its distinctly unique Louisiana flavor positioning to re-establish comp outperformance in a market marked by heightened competition and a resurgent KFC.


Unit & Sales Growth

Report Highlights
  • 10-year history for 56 $1B+ chains including: (1) total units; (2) company vs. franchisee ownership; (3) new units; (4) closures; (5) franchise transfers; (6) average units per franchisee by concept; (7) systemwide sales; and (8) system sales market share.
  • 2018 aggregate systemwide sales growth improved to +3.4%, although this was still below the +3.8% 10-year historical average due to the lowest net unit growth in at least 17 years and only modest same store sales growth.
  • Consistently low aggregate annual gross unit development rate (+3.5% average from 2009 – 2018) for the $1B+ chains remains well below pre-recession levels (+5.6% average from 2003 – 2007).
  • Actual 2018 new unit development was slightly below initial year projections.
  • Up-tick in chicken segment growth reflects more aggressive Popeyes development.
  • Closure rates continue to rise and 2018 matched the 16-year high (set in 2009) which reflects persistent unit level margin pressure over the last 3 years (with 2018 store-level EBITDAR margin for the $1B+ chains the lowest in at least 16 years).
  • 2018 closures were notably pressured by sub-sandwich weakness which was mostly due to Subway.
  • The 2018 franchise transfer rate (unit level M&A) exceeded the development rate for the 7th year in a row, which reflects: a continued move towards franchisee consolidation (in search of scale-based cost efficiencies); high construction costs (slowing development); and the difficulty in securing acceptable sites.



Applebee's benefits from a return to its Eatin' Good In the Neighborhood grill & bar positioning with an emphasis on abundant value (plate coverage) and buzzworthy beverage & culinary innovation (leveraging mainstream American recipes/flavors) that is designed to get diners off the couch and over to America's Kitchen Table. Applebee's everyday value positioning includes its signature 2 for $20 - $22/$25+ platform and monthly $1 - $2 craft cocktail offers (mirroring low priced QSR coffee/espresso offers) which work well for the brand's core middle-income customer base. Resultantly, the chain enjoys an all-time high value for the money rating (surpassing its primary competitors) which is consistent with a check that is substantially lower than the segment average. Also, promotions like the Dollarita and all-you-can-eat riblets attracts a younger crowd of Millennials which come in groups and skew toward female, Hispanic and African American. TV ads are well done, featuring compelling food photography set to famous pop songs (creating emotional connections) and punctuated with its "Eating good in the neighborhood" tagline. Operations benefit from a reduction in store performance variability and back of the house simplifications, helping to drive all-time high guest satisfaction scores. Recent comp sale trends are outperforming and benefit from corporate contributions to the ad fund to go with the 2H17 initiative to redefine the Applebee's brand identity & culture. Results are attributed to: nurturing a winning leadership team that is very well seasoned & collaborative; re-establishing franchisee trust; increased investments in research & consumer insight; enhanced guest & team member engagement through consumer-facing technology & CRM; guest satisfaction improvements; a focus on traffic-generating menu innovation & abundant value; and accelerated growth in its off-premise businesses (To-go/car-side & delivery is ramping-up as the system also develops a new family catering channel). However, despite +5% comp growth during 2018, the system's AUV remains significantly below the segment average with an EBITDAR margin that is finally rebounding from a 2017 system low. In conclusion, Applebee's return to its roots as a strong value player which is now quite adept at keeping things interesting and relevant is an essential first step towards the brand's important task of catching-up with the segment average AUV which will be required to fund remodels and development necessary to maintain its claim as king of the casual mountain. 



Papa John's

Papa John's recent sales have suffered dramatically because of very bad publicity which sparked the brand's ongoing turnaround. A restoration of consumer sentiment is expected to take 12-18 months and corporate reported in 1Q19 that the brand is not even 12 months past its 2nd big event. The resultant brand overhaul included: the removal of company's founder, CEO & marketing spokesman; a $250MM investment from a turn-around investment fund (Starboard Value LLP); the appointment of new board members including NBA star Shaq O'Neal who will also act as brand ambassador for at least 3 years; and an audit on brand culture & new appointments to enhance diversity. PJ's new positioning around a relentless pursuit of "better" and bringing people together addresses the expectations of Millennials & Gen Z consumers for companies to have an active role in making the world a better place. Long-term growth priorities include: making people a priority; improving brand differentiation; creating accessible value; implementing tech advancements; and improving unit economics. The goal is to create a customer-centric organization which will leverage customer data to integrate and innovate across every consumer touchpoint. Previously, the brand largely followed the founder's singular vision of keeping focused on better pizzas. Essentially, PJ seeks to evolve into a brand management organization with marketing based upon: customer segmentation; customer needs assessment; and customer journey mapping. Its new CMO's mandate is to better connect with customers around the brand's product quality differentiator (fresh original dough, fresh packed sauce, meats without fillers & pizzas with no artificial flavors or colors) and accessible value (making it easier for customers to purchase PJ’s pizza whenever, wherever & however they want) without sacrificing one for the other. These new consumer insight & analytical capabilities will be applied to its Papa Rewards loyalty program via its 4Q18 re-launch and the brand plans to leverage customer data into 1-to-1 marketing designed to drive traffic without relying on blanket discounts across all channels. Trials around a broader menu to better compete with the delivery aggregators and Domino's and tests of how to execute value on the national and local level should help to improve the brand's relevancy. In any case, it is a challenge to translate a pizza+ positioning into a higher check given the commodity nature of this segment which is so reliant on a lower income demo. In conclusion, while Papa John's brand has suffered a tremendous hit, its ongoing repositioning is well designed for the patient so long as the chain can figure out how to do value as a pizza+ player.