Encouraging Comp Recovery Trends

QSR is Doing More than Holding its Own

  • A large QSR burger operator recently commented to us that their delivery tickets were up +166%, driving “HUGE flow-thru of incremental revenue and cash flow”. The operator went on to state: “I would rather have 15-20% of $20 avg. check than 25% of $7 … simple math”.
  • According to another large QSR burger franchisee utilizing drive-thru only, margins have actually improved due to a reduced menu, larger check sizes and closure of dining rooms which are about 15% to 20% less efficient than the drive-thru. As a result, COGS have improved 100 – 150 bps and labor an additional 200 – 300 bps.
  • The chicken chains continue to amaze, led by Wingstop’s now pizza-like digital mix and Popeyes cult-like sandwiches which are carrying the rest of the menu as well.
  • Mexican is recovering nicely as well with both Del Taco and Chipotle’s digital sales kicking-in.

Pizza Perfectly Suited for Circumstances

  • Contactless delivery resonates better than ever, especially with families together at home looking for affordable, convenient home-meal-replacement options.

Sit-Down Better than Expected

  • Those chains with attractive off-premise solutions have found that they are able to capture incremental business that they fully expect to keep.
  • While sit-down breakfast is understandably facing the largest challenge, this daypart will come back soon enough.

Cofffee Chains Waiting for Increased Mobility

  • This segment is well positioned for a recovery as consumers return to work and look to leading edge digital capabilities & drive-thrus for their caffeine breaks.

Good News from China

  • Since Starbucks reopened stores in late February (98% of company stores in China are open but operating under modified schedules & enhanced safety-related protocols, including limited cafe seating), corporate reports meaningful improvements in China’s comps in commercial, residential and office locations. For the month of April, comps in China were down -35% y/y vs. a weekly low of -90% in mid-February.
  • Starbucks China expects a substantial recovery to flat comps y/y by the end of FY20 based upon the following progression: fiscal 2Q20: -50% (-53% traffic/+6% ticket); 3Q: -25% to -35%; 4Q: -10% to flat; and full year FY20: -15% to -25%.
  • While 80% of China sales have been “stay-in & enjoy”, digital has driven 80% of mix post-COVID. Currently, 83% of stores open offer seating with social distancing in place and consumers continue to dine-in albeit at a lower rate than pre-Covid.
  • Starbucks opened 59 net new locations in China during the quarter and another 7 locations so far in April.

Reopening Schedule by State

McDonald’s – RR Executive Summary

McDonald’s is gaining traction with an extremely ambitious modernization program with many moving parts that include efforts to: retain existing customers by bolstering core strength in family occasions & food-led breakfast; regain lost customers by improving food taste, quality, convenience & value; and convert casual customers to committed by elevating & leveraging the McCafé platform (snacking daypart) while also improving its food health profile. The brand seeks to attract a new, hipper, technophile customer who can afford higher prices. To this end, fresh & healthy menu upgrades include: fresh beef Quarter Pounders (an answer to Wendy’s); McCafe espresso products to better position against Dunkin’ & BK’s push into coffee; Buttermilk Crispy Tenders (an answer to Chick-fil-A); use of more clean ingredients; and an improved health profile for its Happy Meals. Notably, comps have increased +7.5% during the 2 year period through 2019, reflecting very healthy check increases which have benefit from steep price hikes (strategy was to implement price increase on premium products before national value roll-out) and high-ticket sales from kiosks, AI up-selling at the drive-thru & delivery. However, substantial increases in the average check has masked traffic losses from price sensitive customers. This highlights the need for the brand to find a value equation that can work in concert with its check building strategy without driving cannibalization and this may require local value solutions as the chain has identified that 25% of its markets account for half of its traffic losses. Ramping competition in breakfast and coffee represents another important challenge for McDonald’s. It is notable that despite all the added complexities driven by the chain’s upgrades, service speeds are beginning to improve along with record high customer satisfaction scores. Further, 70% of the system has been upgraded to its Experience of the Future (EOTF) remodel platform, improving access by facilitating mobile order & pay, curbside pick-up, self-order kiosks and McDelivery. Taken together, 2019 EBITDAR dollar profits were at a system high, helping with cash flow pressure driven by increasing capex investments and substantial rents. In conclusion, while McDonald’s continues to progress nicely on its modern re-positioning and check building strategy, it must also find a way to leverage value to stem traffic losses without cannibalizing its hard-fought gains in its average check.

Wendy’s – RR Executive Summary

Wendy’s believes that “people deserve better than what they’ve been getting” and its brand objective is to provide: relevant restaurants; food that is fresh, made with honest ingredients & craveable taste; service that is friendly, accurate & fast; and value based upon a competitive price & Wendy’s quality. “Quality is our Recipe” brand positioning is based upon the use of distinctive square burger patties made with 1/4 pound of fresh, never frozen 100% pure North American beef that is seasoned on the grill and served hot & juicy with freshly prepared toppings. The brand has 4x more consumer association with fresh never frozen vs. its top 2 competitors. Its freshness positioning is reinforced by: use of smaller birds which make its chicken fillets more tender & juicy; daily produce prep; mayo on its burgers; and greenhouse grown tomatoes. Premium positioning benefits from: high-end toppings (applewood smoked bacon, asiago cheese & high-end salad toppings); spicy flavor profiles (S’Awesome); and bakery styled buns that “hold the whole thing”. “One more visit and one more dollar” low/high marketing strategy is designed to use value to drive frequency and premium trade-up to drive check. The brand’s strength in social media is marked by aggressive pushbacks and comebacks (particularly as it relates to McDonald’s), earning its “Clapback Queen” designation. Menu strategy is to: reinforce its hamburger quality leadership; raise consumer expectations with its chicken products; drive unique visits through salads & beverages; innovate with on-trend flavors; and offer a multi-faceted approach to price/value. Its design to value strategy seeks to offer products with competitive entry price points (incorporating flexible regional pricing) that are operationally simple and margin friendly and its popular 4 for $4 platform is permanent & helps drive lunch traffic with new news from changes to entree choices. Breakfast is performing well, driving +16% comps during the 1st week of its launch (1st week of March) and its breakfast mix sustained at 8% throughout April, helped by an admirable 50% awareness level. Notably, Wendy’s digital mix doubled to 5.5% during 1Q20, driving large ticket delivery orders. All-the-same, the system’s long-term comp growth under-performance reflects a historical challenge to translate its premium positioning into a higher check. In conclusion, Wendy’s is executing well against a solid strategy that is likely in time to translate the brand’s premium QSR+ positioning into a higher check and higher sales.

Thinkin’in It Through

Where’s the Beef??