Brands are being pulled in all directions but there are consistent messages coming out of earnings season, both in terms of shortcomings and triumphs.
— Danni Santana
One by one, restaurant chains have served up quarterly earnings to investors over the past month.
The conclusion: companies are betting big on delivery, simpler menus, and store redesigns to boost sales. Meanwhile, some just continue to fight with franchisees and nag about higher labor costs. These are the key takeaways from a busy restaurants earnings season.
Franchisees Rebel Against Brands
Emphasized by: Jack in the Box, Papa John’s, and McDonald’s
Skift Take: It’s a mess. But McDonald’s arguably has the easiest path to rectifying its relationship with storeowners.
Fresh off company earnings Monday, Jack in the Box was hit with a complaint submitted by its franchisee association to the California Department of Business Oversight. In it, owners cited an Oct. 8 letter from the brand asking independent landlords to transfer their lease agreements from Jack in the Box Inc. into a newly formed subsidiary, Jack in the Box Properties LLC, Nation’s Restaurant News reported.
Property owners who decline to do so will be subject to not receiving assets or payments for rent, franchisees said, citing the letter. Jack in the Box currently handles 1,800 master-lease agreements, which it sublets to franchisees.
The latest news comes after franchisees called for CEO Leonard Comma’s head last month. Storeowners are also keen on the board of directors replacing a number of other individuals who have contributed to the restaurant’s lackluster performance in recent quarters.
Same-store sales only just returned to plus territory in the summer, at 0.5 percent. The company reported the same figure for the period ending Sept. 30, while also missing on revenue.
“We appreciate the unwavering passion [franchisees] have for the Jack in the Box brand,” said Comma, on the company’s earnings call with investors Monday. “While we’re currently managing through some issues with the association regarding most of our franchisees, we believe our mutual interests are very much aligned. We understand their concerns about issues our industry is facing such as rising labor costs, traffic, and market share in a hypercompetitive environment. We know that Jack in the Box can’t be successful if our franchisees are not successful.”
Much like Jack In The Box, Papa John’s issues with franchisees also stem from the C-suite. The Pizza chain’s sales are still suffering following racist remarks made by former CEO John Schnatter in May, which led to a 6.1 percent sales decline in the first half of 2018. Things only got worse in the third quarter for the company.
For the period ending Sept. 30, Papa John’s reported a 9.8 percent decline in U.S. sales and a 15.7 percent drop in revenue. The company also spent north of $10 million in “special charges” alone to remove Schnatter from its marketing materials and provide financial assistance to domestic franchisees to mitigate store closings. The aid, in the form of royalty reductions, was not enough to keep the restaurant’s owners’ association from lawyering up, however.
Finally, in McDonald’s case, the company is in a tug-of-war with franchisees over reconstruction projects and delivering financial results for storeowners now. Both earnings and revenue declined from a year ago, thanks to higher labor costs and tech expenses on new digital order kiosks, curbside pickup, and improved drive-thru experiences at 12,000 stores.
Lack of early returns even forced disgruntled owners to meet in October to discuss the formation of an independent franchisee association. McDonald’s expects to complete construction of its U.S. restaurants by the end of 2019.
“We’re at that kind of grind it out stage at the moment where we’re putting significant investments into the restaurant and adapting to changes in that,” said Steve Easterbrook, McDonald’s CEO. “We still have hard work ahead, but we’re seeing an encouraging response from customers in restaurants where many of these improvements are already completed. This is in line with our experience in other McDonald’s markets, such as Canada, the U.K. and Italy.”
In-Store Vs. Off-Premise Sales
Emphasized by: Applebee’s, IHOP, Chili’s, Starbucks, Wendy’s, Potbelly, and everyone really
Skift Take: Foot traffic across the industry continues to lag, but delivery is the saving grace for restaurant chains’ bottom lines. Turns out, convenience really matters to consumers. Who knew?
Red Robin and Potbelly each reported at least 10 percent increases in online orders for the third quarter. Wendy’s also said on its conference call with investors that average check sizes are up to two times higher on delivery orders compared to dine-in. Meanwhile, Applebee’s, one of the few restaurant chains flourishing on both fronts, enjoyed a 37 percent jump in off-premise sales, according to President John Cywinski.
Some chains, like Shake Shack, are deepening their digital experience. The burger chain only just began taking web orders outside of its customer app in late October. Now the company is juggling online orders with its app, delivery, and the installment of self-order kiosks in its stores next year.
“So here’s the reality. None of this is easy,” Randall Garutti, Shake Shack’s CEO & director told investors this month. “These additional channels can, at times, complicate our kitchens and, at peak times, create certain flow issues in the front of house. But we love the fact that we’re broadening the ways in which guests can experience Shake Shack. Our strategy remains one where we will roll out these channels thoughtfully so we can test, learn and iterate in order to do them really well in the long term.”
Menu Modifications Boost Sales
Emphasized by: Dunkin’ Donuts, Starbucks, and Chipotle
Skift Take: Menu changes are the best way to keep things fresh for customers. In the case of these three companies, creating diversity for coffee lovers, simplifying snack menus, and introducing new offerings to market for on-the-go buyers helped them stand out.
Starbucks’ new cold brew, draft coffees, and refresher teas helped the coffee giant boost U.S. fourth-quarter sales by 4 percent year-over-year, ending its long slump in the market, the company reported on Nov. 1. Not to be outdone, rival chain Dunkin’ Donuts announced a 1.3 percent boost in same-store sales of its own, on the back of new cold brew and frozen drinks as well as its new $2 Dunkin’ Run menu. The changes guided the company to its strongest afternoon performance in two years, CEO David Hoffmann said.
“The success of cold brew and frozen beverages is a meaningful achievement as we strive to grow our beverage business outside of what we’re most known for,” Hoffmann said, in a conference call with investors, Oct. 25. “Our loyalists continue to be extremely strong. The name of game now is going after ‘switchers’ in the marketplace, and turning those switchers into loyalists as well.”
Chipotle introduced queso to its menu in the third quarter, which along with small price increases, helped the company post a 4.4 percent improvement in comparable store sales for the period. The Mexican-food chain is currently testing a number of menu items to sustain that growth, including quesadillas, nachos, bacon, lemonade and a Mexican chocolate milkshake. No time table was given on when these food items would be rolled out.
New Store Designs
Emphasized by: Denny’s, Burger King, and IHOP
Skift Take: For those diners actually looking to dine-in, many will notice a new décor and more technology on workers’ tool belts, as companies accelerate store revamp projects.
Denny’s, Burger King, and IHOP all believe they can boost sales by changing their restaurants’ outdated look and feel. The latter’s Rise N’ Shine remodel program, as an example, is banking on “no wait tools” to predict more accurate seating times for customers on weekends, and equip servers with tablets and wireless credit card readers for faster bill payment. To date, 800 IHOP restaurants, or approximately 47 percent of its domestic U.S. footprint, have completed the transition.
The new “Burger King of Tomorrow” restaurant program follows a similar technology theme. Burger King has launched a pilot in its Miami company-run restaurants with features such as double drive-thrus, new outdoor digital menu boards, internal kiosks, and a more open kitchen for staff, according to CEO Daniel Schwartz.
Denny’s, on the other hand, is more concentrated on the look of its stores. The diner chain completed 59 remodels of franchised and company-operated restaurants in the third quarter, as part of its Heritage Remodel Program launched last year. They include new hardwood floor tiles, contemporary booths and tables, and new light fixtures. Currently, 78 percent of Denny’s stores have completed construction, with 80 percent of the company’s entire store portfolio expected to finish by the end of the year.
“Our Heritage remodel program continues to perform well, consistently receiving favorable guest feedback and generating a mid-single-digit range sales lift,” said John Miller, Denny’s chief marketing officer, on Denny’s earnings call Oct. 30.
Labor’s Impact on Operating Costs
Emphasized by: Del Frisco’s, Potbelly, and Cheesecake Factory
Skift Take: Minimum wage hikes for fast-food workers are taking their toll on restaurant brands. In response, chains are nagging and using technology to offset costs.
Neil Thomson, CFO of Del Friscos, on labor’s impact on revenue: “Restaurant operating expenses as a percentage of revenues increased by 50 basis points to 53.2% from 52.7% in the year-ago period, slightly offset by improved labor efficiency.” The aforementioned efficiency is due to labor reductions and the “implementation of new systems and processes,” he continued.
Without new store opening hiccups and remodel projects, labor would have reduced by 240 basis points for Del Frisco’s, according to Thomson. These are the margin levels restaurants chains are gunning for.
As an example, Labor accounted for 31 percent and 35 percent of total revenue for Potbelly and The Cheesecake Facotry, respectively in the third quarter. Each company credited this to increases in hourly labor. The Cheesecake Factory also reported 6 percent inflation on wages.
“We will seek additional efficiencies in our restaurants to help offset pressure on the labor line, and we will also further enhance our market-based pricing strategy in higher wage geographies to support our objective of maintaining flat restaurant level margins,” Matthew Clark, EVP and CFO of The Cheesecake Factory, told investors.
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