3Q20 INVESTOR CALLS: KEY POINTS & ANALYSIS

  • The innovation and resiliency of the chain restaurant industry was on full display during reported 3Q20 results as these leading players bounced back from the depths of government mandated lockdowns that essentially shut-off the US economy. Unfortunately, some part of the chains’ resurgence came at the expense of the independent restaurants that lacked scale to weather the perfect storm.
  • However, people still must eat, and further, social humanity can only live in isolation for a short time so it was inevitable that consumers would come back to the table. All-the-same, uneven government restrictions did have the effect of changing market share, picking economic winners and losers.
  • At first, it was the grocery stores that stole the food distribution show. However, as consumers realized that there are humans operating grocery stores just like restaurants, people turned their attention to the drive-thrus. This was just fine with the QSRs because they soon discovered that it was more cost efficient to run their stores without dining rooms so long as they could drive sufficient traffic through the drive-thru. Additionally, the QSRs discovered that they could sustain sales with reduced advertising and simplified menus, further boosting margins on top of strong comp gains.
  • Things were not so simple for the sit-down chains, especially those in the family segment which are oriented to the breakfast daypart. However, these players learned to pivot to off-premise with cost effective take-out as well as with less cost effective 3rd party delivery. Further, as their dining rooms began to re-open, they found that a good chunk of their newfound off-premise sales remained.
  • The lockdown clearly accelerated digital implementation. However, the industry must remember it is ultimately in the hospitality business and that digital cannot replace the human touch.
  • In the end, the industry is working hard to return to normal – a better normal based upon new learnings.

 

Digital/Off-Premise Overview

  • Those chains with superior digital/off-premise capabilities continue to create competitive moats as consumers crave contactless convenience more than ever.
  • Digital ordering platforms are generating higher tickets because they can be tied with suggestive selling, but they also provide many conveniences like one-click re-ordering and contactless payments. Further, these platforms facilitate cost effective, customized promotions that help to drive traffic and sales with less reliance on the shot-gun blast approach of costly traditional media.
  • Customers on-the-run can place their orders, receive notification of when it is ready for pick-up and then decide whether to receive their order via drive-thru, curbside or perhaps in pick-up bins inside the store.
  • Another key advantage for digital is that it provides labor cost savings as restaurant staff are not required to take orders for digital customers.
  • Delivery is perhaps another story because of the channel’s elevated cost structure. However, the chains are learning and adapting as it relates to using the DSPs to their best advantage in a cost-effective way.

Casual Segment Overview

  • Casual continues to recover as dining room opening trends are generally improving (over the long-term) while players have largely been able to hold-on to strong post-lockdown off-premise sales.
  • The chains have largely found that dine-in demand exceeds limited capacity even in markets which have reported increased covid cases. Further, because of limited capacity, the chains have not had to spend as much on marketing or discounting, helping margins.
  • In the end, the chains are finding that the 6’ separation rules are capping seating capacity at 50% no matter what the actual capacity limitations are set at. The installation of booth separators can help add capacity and many chains are pursuing this strategy.
  • Also, some of the chains are seeking to leverage excess kitchen capacity by rolling-out “virtual” brands that are marketed by the DSP partners.
  • Chili’s results reveal the potential for segment players with comps down just -7% for the quarter, with September’s sales down just -1.4%.

Family Segment Overview

  • Family segment players remain the hardest hit segment as these dine-in, sit down chains primarily address breakfast (while they continue expanding to other dayparts).
  • Also, digital works less well for this segment which typically addresses an older clientele.
  • Outdoor seating works well for this demo, particularly in temperate climates (not too hot or too cold). To this end, the chains have been erecting tents in their parking lots to expand exterior seating. Winterized tents will be used in colder climates when appropriate.

QSR Burger Segment Overview

  • The QSR burger segment has been performing well, propelled by drive-thrus, digital, increasing consumer mobility and delivery to a lesser extent.
  • Jack’s check growth was astounding, driven by add-ons and upsells to a wealthier demo (trade-down?).
  • Wendy’s strong results benefit from traction with its new breakfast program, menu innovation and digital growth.
  • McDonald’s strong results reflected its new marketing pivot to “brand advocacy” from pop culture icons.
  • Burger King’s muted results reflected a more conservative approach which steered away from menu innovation and towards menu simplification.
  • Taken together, this suggests to us that consumers are back to demanding what they were used to pre-lockdown in terms of compelling marketing and attractive new news.
  • While value and discounting has not been a big theme, we believe this will become an important consideration going forward.

Pizza Segment Overview

  • Pizza continues to roll in this current operating environment given very affordable menu options well suited to larger groups and leading-edge digital ordering which compliments its no-contact take-out and delivery solutions.
  • Additionally, Papa John’s is adding menu innovation which is creating compelling new news.
  • The relevant question is whether this segment will succeed at retaining their market share once the industry returns to normal.

Chicken Segment Overview

  • QSR chicken remains the strongest performing segment for another quarter, reflecting consumer appreciation for: 1) all things wings in good times & bad; 2) chicken in buckets/boxes that not only works well for off-premise but also for larger groups at home; and 3) Popeyes’ Chicken Sandwiches!

Mexican Segment Overview

  • Mexican turned-around lagging 2Q results with a very strong 3Q performance.
  • Chipotle’s digital performance was notable even while the chain restores its dine-in sales.
  • Del Taco’s strong value offers around its new Crispy Chicken platform were sufficient to offset the ongoing closure of its dining rooms.
  • Taco Bell also jump-started sales with an improved focus on value and innovation.
  • Similar to the QSR burger segment, a return to the fundamentals of menu innovation and value has restored sales growth for a historically strong segment.

Coffee Segment Overview

  • While coffee is tied to a very ritualistic morning routine that has been completely upended by the lockdown, segment sales are beginning to recover as consumer mobility continues to ramp-up.
  • Dunkin’s results were particularly strong at stores with drive-thrus (typical for its new, developing markets). This contrasts with the typical walk-in coffee format.
  • Starbucks’ sales also began to improve as the chain increased seating capacity, although results were much stronger at suburban drive-thru sites which will become the focus of the system going forward as it trims its exposure to urban markets which have been the most difficult to operate in post-lockdown.