McDonald's is engaged in an extremely ambitious modernization program with many moving parts. Brand strategy is built around its Velocity Growth Plan which is designed to: retain existing customers by bolstering core strength in family occasions & food-led breakfast; regain lost customers by improving food taste, quality, convenience & value; convert casual to committed customers by elevating & leveraging the McCafé platform and enhancing its snack & treat offerings. While this system upgrade is still in its early innings, strong 2017 comps with positive traffic for the first time in a long time suggest that these strategic initiatives are working. In any case, we think McDonald's could not lose by simply returning to its value roots which it has done very well (check is -19% below segment average which reflects that price value is a key accessibility strategy foundational to the brand’s identity). The menu emphasizes value with many options at different price points starting as low as $1 and increasing in single dollar increments until the 2 for $4 breakfast LTO price point. Building on this foundation, McDonald's is stretching with its: fresh beef initiative which helps the brand finally address the better burger segment; new Buttermilk Crispy Tenders which helps build the brand's chicken credentials; and the re-introduction of its espresso products which keeps McCafe in the game. On top of this, McDonald's is bolstering its access and convenience with its Experience of the Future, mobile order & pay and delivery initiatives. Fortunately, all-time high unit level sales and cash flow can help fund all these investments (including the remodels). However, it is important to note that the system's operational complexity is already challenged by capacity constraints given a very high AUV and can only be aggravated by all these new initiatives. Notably, speed comes a close second to value in terms of brand equity for this iconic chain and its drive-thru times are already challenged which is a concern given that this old fashioned channel still drives the vast majority of its business. In conclusion, while McDonald's means to take no prisoners, it must remain aware that at the end of the day, the game is its own to win so long as it can execute as advertised and only time will tell if its eyes are bigger than its stomach.



IHOP is building upon its breakfast heritage leadership (particularly around "world famous" pancakes) with strategic improvements that include: plans to move towards everyday value; improved marketing; remodeling progress; efforts to expand off-premise sales channels; and ongoing efforts to enhance the guest experience. We particularly appreciate its plans to explore an everyday value platform with the potential to increase frequency while moving the brand away from its historical special occasion positioning. New marketing should help break through the clutter with consistent messaging (pancake focus) and offbeat humor while strength in social media and new IHOP N’ GO online ordering platform plays well to the brand's younger demo (compared to peers). Off-premise prospects especially benefit from the concept's 24 hour accessibility. A reinvented in-restaurant experience and operational improvements have driven higher guest satisfaction scores (up +500 bps during 2017), thus adding further to the brand's all important total value proposition. Having said all this, we still must wait to see how well these strategic improvements move the needle given the system's sales deterioration over the last 2 years. In conclusion, while we like IHOP's directional improvements and solid execution (helping to reinforce the brand's iconic foundation that extends deep below the consumer landscape), we are particularly interested in how the chain is able to address everyday value in a margin friendly way given the apparent necessity of this strategy in the current operating environment.  


4Q Same Store Sales


Chili's Bar & Grill

Chili's has finally decided on a repositioning that makes it simple to understand what the brand is all about. This refined brand positioning centers around getting friends & family together over improved burgers, ribs & sizzling fajitas and includes a 40% reduction in low-mixing menu items along with quality improvements across signature items (burgers, ribs & fajitas). A 10/17 ad says it best: "We're focused on 1 thing burgers, ribs & fajitas. We're reeling in our menu cuz it got out of hand. We had a moment of self actualization." Noticeable signature menu improvements include: fajitas with 48% more meat; Texas Size Ribs with 30% more meat offered at same price; and Bigger Big Mouth Burgers (half-pound with handcrafted smashed patties). Also, Chicken Crispers (another core category) was upgraded with the use of all-natural chicken and the custom combo section was replaced with Smokehouse combos (bone-in chicken, ribs & jalapeno sausage). An added benefit is that menu simplification is driving faster & hotter food with a 50% reduction in frequency of problematic 15+ minute tickets. Impressively, preference has increased +40% across these signature entrees. The brand is also executing around its goal of offering more compelling price points with value LTO platforms that include: popular $22 Dinner for 2 (pricing increased by 10% to help pay for food investments); Oldtimer Burger With Cheese for $6.99; Bigger Fajitas for $10.99; and 3 Course Meal for $10. Lunch benefits from 10 lunches for $7 offer and innovation around burgers, ribs & fajitas which track dinner menu improvements. We like the catchy "Oh Chili's is back. Baby back, baby back." jingle which provides an effective platform to message about core signature items. With that being said, it remains to be seen whether this repositioning will drive sufficient traffic and sales growth to cover this very substantial investment in food costs. It is possible that a shift to higher quality positioning will ultimately provide the brand permission to increase pricing and check in-line with the segment average which we think is necessary to justify this new strategy. In conclusion, while the chain's new course is quite sensible, there is still the fundamental issue of whether it will improve the brand's overall value/quality equation sufficiently in the eyes of today's consumers to ignite long-term traffic/comp growth. 


Jack in the Box

Jack in the Box's brand positioning benefits from: flavorful, unique & craveable foods; product innovation; breakfast & late night strength; and penetration in fast-growing Hispanic demo. Although this regional system has 70% of its stores located in California and Texas, the brand enjoys the 2nd largest QSR hamburger share in 8 of its top 10 markets. While the chain's cooling comps reflect difficulty in keeping-up with price competition given an elevated West Coast cost structure, its ability to offer a new tiered low-priced value platform as a primary media message when needed will help the chain better compete with a plethora of single items priced under $5 in the market. The brand's popular 2 for $1.19 tacos & Monster Tacos also represent good value, are unique to QSR burger chains and work well with Hispanic customers. Menu positioning further benefits from: better burger positioning reinforced by Buttery Jack burger platform and Double Jack; all day full menu availability; and +75% outperformance of new product intros, reflecting the brand's commitment to innovation. However, this regional chain's small scale (8th largest marketing budget & use of less efficient local ad channels) and exposure to higher West Coast labor and real estate costs means that competing around price is neither easy nor desirable. For this reason, the brand's pivot to value defined by sub $5 prices (as opposed to historic use of bundled value offers) can only be used as a temporary traffic boosting strategy. In conclusion, while Jack in the Box has made progress improving its menu and operations while also playing catch-up on mobile and with a new remodel, the key issue will be how the chain deals with value over the long-term given an unfair cost disadvantage on the West Coast.