Applebee's (directed by a new, well seasoned & collaborative management team) is implementing a well conceived turnaround plan that includes: culinary innovation (with investments in food quality and back-of-the-house simplifications); a renewed value orientation with a return to its middle-market DNA; efforts to leverage high brand awareness as an affordable destination during happy hour & late night, re-igniting alcohol beverage innovation as a driver of high margin incremental sales; accelerated rollout of off-premise channels; and improved guest insights to ensure a strong correlation between test results and end-market performance. The goal is to move Applebee’s away from the perception that casual dining food is processed, microwaved or comes from a package in order to tap into growing demand for real bars and upscale burger restaurants. To this end, its menu strategy seeks to: re-establish culinary culture around broadly appealing, mainstream America flavor profiles that: embrace variety (something for everyone); restore abundant & indulgent value; include guest-driven, ops-validated innovation; and address quality & value gaps. This includes a return to crowd favorites like riblets and low cost bar drinks (which had been removed as part of its failed upscale positioning). Fortunately, new brand leadership recognizes that value for the money is critical given that the brand's core middle-income customer base remains financially strained (value seekers drive 50% of transactions) and the brand's value positioning benefits from its signature 2 for $20/$25 platform and a return to low price drink deals. While long-term system comps have badly underperformed, recent sale trends are outperforming. All-the-same, the system must still deal with the affects of its cumulative sales decline which includes a system low unit level EBITDAR margin and, correspondingly high closure rates. In conclusion, while Applebee's has embarked on a sensible reboot to re-establish its roots as a relevant value player in traditional American fare, stakeholders will require patience as the system works hard to recover from a rather substantial fall.


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.
  • 2017 aggregate systemwide sales growth slowed and was below the 10-year historical average due to weak net unit growth and only a modest same store sales increase.
  • Consistently low aggregate annual gross unit development rate (+3.7% average from 2008 – 2017) for the $1B+ chains remains well below pre-recession levels (+5.6% average from 2003 – 2007).
  • Actual 2017 new unit development fell short of initial year projections for the first time since 2007.
  • Coffee/bakery and fast casual unit development continue to lead the industry.
  • Closure rates spiked to the highest level since 2009 which reflects that the 2017 store-level EBITDAR average for the $1B+ chains was at the lowest level since 2008.
  • 2017 closures were notably pressured by sub-sandwich (4.4%) and casual segment (3.1%) weakness.
  • The 2017 franchise transfer rate exceeded the development rate for the 6th year in a row, which reflects: a continued move towards franchisee consolidation (in search of scale based cost efficiencies); high construction costs; and the difficulty in securing acceptable sights. 


Unit Economics

  • RR’s Industry Data Report on Unit Economics provides: (1) FYE 2017 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 2017 EBITDAR margin for the $1B+ chains declined -60 bps due to higher labor costs; (2) higher rent expense based on our lender survey suggests 2017 EBITDA (post G&A) also contracted; (3) franchisee leverage levels increased, but coverage ratios remain solid with lenders reporting minimal delinquencies; and (4) 2018 EBITDAR margin pressure reflects expectations that moderate sales growth will be insufficient to keep pace with higher labor & commodity costs. 



Popeyes has successfully extended its unique Louisiana brand positioning beyond fried bone-in chicken to the popular categories of boneless chicken tenders and shrimp. While its signature bone-in is distinguished by a dry rub of Louisiana seasoning, 12 – 72 hours of marinating & hand breading, brand positioning also benefits from a healthy cadence of new product news (usually unique, bold innovation around tenders and shrimp) to drive trial & traffic to go with operational & service improvements. Although 2017 sales turned negative for the first time since 2009 (which likely reflects KFC's strengthening position and weakness in Popeyes' value positioning as the brand was slow to react to heightened QSR discounting), its 1Q18 comp rebound reflected a better balance between value and premium offers relative to previous quarters. Prospects of better 2018 chicken prices should help the chain maintain a strong value positioning at least for the near-term even though this emphasis maybe antithetical to the brand's long-term premium positioning. In any case, the brand's growth roadmap includes: (1) reinforcing its unique Louisiana heritage; (2) building passionate teams (reflecting the belief that people drive restaurant profitability); and (3) routine excellence with a commitment to consistent operational excellence. Re-imaging is essentially complete (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 remains well situated having created its very own Louisiana flavor QSR category which adds a useful something extra to its core bone-in platform.  


Papa John's

Papa John's has well established its core menu equity around quality ingredients (Better Pizza. Better Ingredients.) and PJ's clean label ingredient initiative helps the cause. We like its 2018 strategic priorities which include: re-establishing brand differentiation by telling its quality story in a more relevant narrative; providing value that supports customer action; customer facing tech investments to improve product marketing, customer connection & digital ordering; in-store tech investments to increase unit efficiencies & profitability; and labor investments designed to attract the best employees. The chain is well positioned to build on the fact that 60%+ of its sales come from its online ordering platform which helps increase average ticket, frequency and customer satisfaction. To this end, new consumer insight & analytical capabilities will be applied to its Papa Rewards loyalty program and the goal is to leverage digital to customize 1-to-1 marketing capable of delivering the right offerings to the right customers at the right time. The brand recognizes that it's time to stop thinking in TV scripts, rather acting and marketing like an e-commerce company. Also, while Papa John's has historically focused on pizza, the brand is considering the addition of new food categories which will improve menu diversification and variety in order to better compete with the broad offerings available from 3rd party delivery aggregators as well as Domino's. However, the brand has work to do to reignite sales after a PR snafu with the NFL aggravated an already weakening sales trend. The big picture is that it is difficult for Papa John's to continue positioning itself around premium quality as opposed to value while facing such difficult pricing competition from peers, regional players, grocery stores and QSR sandwich players. While the brand has begun to search for a price point deal to connect to an everyday value positioning in the same way that Domino's "owns" the $5.99 price point, we will have to wait for a final decision while we also wait to assess the effectiveness of its new creative. System challenges are further reflected by an actual decline in 2017 net unit counts with the rate of growth for gross development steadily decreasing over the last 5 years (with 2018 development goals the lowest in 10+ years). In conclusion, while it appears that Papa John's has the right plan in place to build a more relevant infrastructure around its well established quality positioning, stake holders should consider that it could take some time for this turnaround to gain traction.