Jack in the Box

Jack in the Box's strengths include a high penetration in its core California markets, humorous ads around a unique brand personality and a diverse menu which spans a wide range from premium sandwiches at the top to its popular tacos at the bottom - hitting all dayparts with brunch during the day, breakfast all-day and late-night "munchies" for the party crowd. The primary idea is that JACK's menu addresses various cravings throughout the day. A better burger positioning is reinforced by its Buttery Jack burger platform & Double Jack and, although this is a regional system with 69% of its stores located in California & Texas, the brand enjoys leading QSR hamburger share in 8 of its top 10 markets. The quantity of JACK's new product intros exceeds the segment average, reflecting the brand's commitment to relevant innovation while a new, simplified menu reduces redundant SKUs and streamlines operating procedures. Sales and access should benefit from plans to implement drive-thru upgrades to 80% of the system over the next 3 years and new app & delivery functionality provides a popular option for dinner & late night guests. Having said all this, the brand's price value positioning (necessary to drive traffic in a price sensitive market) is challenged by a lack of sufficient scale and an elevated operating cost structure typical of California. This is challenging as 50% of Jack’s customers are value oriented and it is notable that this is on the high side for QSR. Further, JACK may benefit from a more clearly defined core menu competency given its limited share of voice. This is all reflected by cooling comps which are notable given system tailwinds which include: stronger breakfast & late-night sales due to new product intros; an increasing percentage of franchised stores now open 24/7 (which also helps breakfast sales); and service improvements. To make matters worse, franchisees have filed a lawsuit against the franchisor and JACK is exploring a strategic sale which may be necessary because of its severe system disunity. While an increase in its marketing calendar featuring value promotions from 50% to 80% in 2019 may help traffic, it could also further aggravate those franchisees opposed to discounting. In conclusion, no matter the owner/brand leaders, Jack in the Box must find a new path to pursue sufficient unit-level profitability in today's world marked by sharply rising costs on the West Coast and aggressive QSR discounting.  



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.


Finance & 2H:18 Valuations

  • 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.



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 underperformed 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. 


Marketing Spend

  • Declining TV viewership (with ~20% of the U.S. population expected to drop access to pay TV by 2022) renders traditional TV ads less effective, driving a higher allocation towards more cost effective national campaigns which also supports an increasing dependency on national discount promotions.
  • Increasing allocations towards relatively cheap forms of social media marketing and a decrease in McDonald’s local ad requirement explains the decline in 2018 net marketing spend.
  • It remains to be seen how this decline in total net marketing spend will affect industry traffic.