Carl's Jr.

Carl's Jr. is a West Coast regional chain which should benefit from its ongoing brand separation from Hardee's (allowing Carl's to be Carl's) with a resultant return to its positioning around West Coast cool, bold, passionate, disruptive and edgy. Burgers account for 75% of lunch/dinner mix, mostly represented by the chain’s almost ¼ lbs. non-Angus beef patty platform which provides a compelling mid-tier pricing option. Other brand attributes include: over-sized burgers & unique Angus platform; charbroiled chicken line with no artificial ingredients, preservatives or antibiotics ever; hand-breaded chicken tenders; made-from-scratch biscuits; and milkshakes made with hand-scooped ice cream. Its higher-end Thickburgers are competitive with “better burger” brands, but offered at more affordable prices, and value is supported by its All Star Meal box platform & Charbroiled Sliders LTO. Annual comps through 2017 were modestly positive since bottoming in 2009 - 2010 (although slightly negative YTD 2018), helped by steady menu price increases and the 2012 intro of Hardee's high margin breakfast options. An outperforming EBITDAR margin reflects a material COGs benefit (lack of discounting to go with menu price increases) which more than offsets a relatively low AUV, high ad expenditure (necessary to compensate for CKE's relatively small scale) and labor cost pressures. In any case, high rent & labor costs on the West Coast discourage discounting and make it difficult for the brand to compete around price in a very price sensitive market and Carl's premium burger positioning continues to be pressured by marketplace realities. Sales are also challenged by the lack of all-day breakfast (reflecting operational complexities) and digital access (late to the game in terms of customer facing tech & delivery). In conclusion, while the brand is finally rediscovering its true roots, the competitive reality of the marketplace likely requires a new approach to price/value, preferably one that will not dilute Carl's Jr.'s West Coast cool. 



Hardee's is distinguished in QSR by a Southern classic, comfort culture brand positioning which includes table service and a strong breakfast orientation (44% mix). Specialty hand crafted food includes: made-from-scratch breakfast biscuits; made-to-order charbroiled burgers (with over-sized patties & Black Angus options); hand-breaded chicken tenders; charbroiled chicken line with no artificial ingredients, preservatives or antibiotics ever; and hand-scooped ice cream shakes. Value comes in the form of its $5-$7 All Star Meal box every day value platform, various national LTO deals and local offers advertised in-store/on the windows. While the chain's AUV underperforms, its COGs far outperforms the segment average which reflects a profitable breakfast mix and a historical aversion to discounting and low price-points. We also appreciate CKE's plans to separate Hardee's & Carl's (in terms of marketing & menu), benefitting both brands given sharply different geographies and demos. This means Hardee's can now pursue menu, marketing and facilities which best suit its regional orientation in the South & Midwest. Having said all this, the brand remains challenged to compete with the larger, national players around value/discounting because it lacks sufficient share of voice to promote both quality and value sufficiently to overcome trade-down. The challenge is to run Hardee's as a regional brand which requires a very different skill set compared to the past practice of seeking to combine the disparate brands in pursuit of national scale. Some operators believe the brand would be better off emphasizing ample mid-tier choices of higher quality menu options and this reflects the belief that Hardee's is used more as an occasion visit as opposed to a QSR heavy user stop. In any case, a high level of turnover for the brand's ad agencies reflects the difficulty of defining a suitable brand positioning amidst all of these issues. Weak comps over the last couple of years also reflect a lack of an all-day breakfast, operational complexities associated with Hardee's business model that pressures service speed and a lack of a digital ordering platform (which is forthcoming). In conclusion, stakeholders must exercise patience as CKE's new management team continues to find ways to leverage the chain's considerable brand equity built upon quality biscuits, burgers & tenders in a difficult, competitive operating environment sufficient to reinvigorate Hardee's comp performance.



Denny's is the only national chain positioned as a system of local diners serving classic American comfort food at a fair price around the clock. The brand seeks to move its positioning beyond breakfast all-day towards an unpretentious diner with trusted burgers, salads, etc. (i.e. more credibility with the other dayparts). The chain's brand revitalization, which is in middle innings, includes store remodels (almost complete) and improvements in food quality & service (still a work in progress). Denny's menu positioning largely reflects the idea that consumers want to indulge when they dine out because they can stay at home for something plain & simple and its core menu equity reflects: 24/7 availability; everyday value; LTO innovation; and warm, friendly “come as you are” atmosphere. Everyday value comes in the form of its $2 $4 $6 $8 menu platform (particularly its $4 Value Slam LTO), senior discounts and kids eat free deals. Access benefits from progress in on-demand & delivery and Denny's 24/7 operating model allows Millennials a unique opportunity to order breakfast for late-night off-premise occasions. While comps have been positive for the last 7 calendar years and outperformed the segment average over the last 4 years, full-year 2018 comp guidance of 0% to +2% reflects a competitive operating environment, requiring an even greater value emphasis which is difficult given ongoing labor cost pressures. The chain's challenge remains to drive repeat business beyond an occasional breakfast and to grow other dayparts without diminishing the brand's very important breakfast business. Also, the reality is that this is a 60 year old system which includes older, underperforming stores. In conclusion, we expect Denny's to continue gaining traction in a difficult operating environment as it focuses on making “America’s Diner" ever more relevant.




Report Highlights
  • Remodel data and analysis on 50+ national chains, including: (1) remodel progress/system condition; (2) investment costs; (3) post remodel sales increases; (4) estimated return on investment; (5) program scope; and (6) franchisor remodel incentives.
  • 2018 represents a transition year for remodels as 24% of the $1B+ chains recently unveiled new or revised programs. As a result, the % of system stores that reflect the current image fell to a 5-year low as chains held-off on remodels until the new image. Notably, it will take some time to determine how effective these remodels will be at driving incremental sales and ROI which have been trending down over the last several years.




Subway is the largest sub sandwich chain by far with the 2nd largest ad spend in all of QSR behind McDonald's with core brand equity in the form of: customization (made-to-order); interaction between sandwich artists & guests; tasty sub sandwiches which include lots of veggies; and bread baked in-house. However, a very long sales and traffic decline highlights the brand's struggles with: stagnation of its menu, marketing & facilities; heightened competition around its fresh/healthy halo with the emergence & growth of upscale sub chains; and a value equation weakened by increased QSR discounting & aggravated by Subway's cumulative menu price increases. Adaptation has not come easy and the brand continues to struggle with finding its true North in terms of where exactly it fits in today's consumer landscape, particularly as it relates to the brand's core middle income demo. Specifically, the brand is challenged to find a proper price value formula that can reverse traffic declines while also restoring store-level profitability. This would require Subway to process more lower priced (i.e. affordable) transactions at faster speeds and could necessitate operational changes. In any case, the chain has finally embarked on a new course with initiatives like: a new premium wrap platform which is a first step in innovating with flavor & quality towards more Millennial friendly fare; a 2019 roll-out of its Fresh Now platform (Signature Flavor & Fresh Pour Beverage stations) which will be fully funded by the franchisor; and an ongoing roll-out of its Fresh Forward remodel decor package which features: vivid color palette; new ordering kiosks; and digital menu boards. The system further benefits from plans to cull and relocate its weakest stores, providing a needed sales boost to existing stores in search of capital to pay for the remodels. In conclusion, while it is difficult to assess how long it will take the chain to reignite sustainable sales given that Subway is currently in the early stages of a brand repositioning, at least it has overcome the most difficult challenge, that is, to start the process of change.