News Worthy of Scrutiny from WHO & CDC

  • How will the industry act on new revelations from the experts?

WHO Discourage Lockdowns

  • Dr. David Nabarro, the WHO’s Special Envoy on Covid-19, recently pleaded in an interview: “We really do appeal to all world leaders: stop using lockdown as your primary control method”.
  • “The only time we believe a lockdown is justified is to buy you time to reorganize, regroup, rebalance your resources, protect your health workers who are exhausted, but by and large, we’d rather not do it.”
  • Lockdowns just have one consequence that you must never, ever belittle, and that is making poor people an awful lot poorer.”

CDC Study Calls Into Question Effectiveness of Masks

  • According to a CDC study published 9/11/20: “In the 14 days before illness onset, 71% of case-patients and 74% of control-participants reported always using cloth face coverings or other mask types when in public”.

Source: https://www.cdc.gov/mmwr/volumes/69/wr/mm6936a5.htm?s_cid=mm6936a5_w

Unemployment by Age Groups

  • The unemployment total count has improved dramatically from a 23MM peak in April, steadily declining to 12.6MM in September.
  • The age composition (outlined in chart below) is important as it relates to how the restaurant industry should approach value.

Source: BLS

New Build Costs in Flux

  • According to our discussion with a national chain, new build costs are up +5% to +10% due to higher contractor, labor & raw materials costs. Costs in the North East are running highest with South East inflation slightly more modest. Inflation is expected to be temporary.
  • Closures of independents translate into relocation & conversion opportunities for growth minded chains.
  • Many chains will consider pivoting to smaller, more cost-effective footprint formats optimized for off-premise, but not all.
  • Higher tech investments are pressuring long-term cost trends.
  • Most development requirements & franchisor incentives have been extended through 2021 and include both initial fee discounts and reduced royalty & ad fees.
  • Slowing new build AUV growth reflects fading novelty of new flagship building designs introduced several years ago.

Source: RR’s 2020 New Build Cost Report (outline)

Arby’s – RR Executive Summary

Arby’s strong and unique positioning is based upon a credible, affordable NY deli format (with a drive-thru) that bakes beef roasts and freshly slices all other roasts in-house to create fast-crafted, made-to-order hot deli sandwiches. “We Have the Meats” lineup includes a full selection of roast beef, beef brisket, corned beef, turkey, chicken & gyro and Arby’s sandwiches are distinguished by generous stacks of quality meat toppings (big, meaty sandwiches) with leading-edge protein variety which extends well beyond Arby’s core roast beef heritage. Market Fresh sandwiches & salads further expands the concept’s appeal to more upscale, health conscious consumers (eliminating the veto vote). The bottom line is that Arby’s brand positioning provides a compelling alternative to competitors focused on burgers, chicken-only, cold-cut subs and veggie-heavy fast casual offerings. Marketing is well-done and on-message and the chain’s innovative LTOs drive trial and add variety. Notably, YTD 9/20 system comps are up low double digits, reflecting the strength of a popular QSR drive-thru during the current operating environment. Having said all this, the system would likely benefit from a more effective value proposition that does not impede its overall premium positioning as its sales performance is vulnerable to regular cycles of QSR discounting. Also, more progress on mobile ordering could help sales growth, especially given the brand’s increased orientation towards a younger demo. In conclusion, while Arby’s is very well positioned as a QSR player that can serve as a credible alternative to a NY deli, the brand may benefit from more emphasis on sustainable value (that does not impede its premium positioning) and digital ordering progress which is a must in our current operating environment.

Denny’s – RR Executive Summary

Denny’s unique “America’s Diner” brand positioning provides the promise of everyday value with craveable, indulgent products (comfort food) served around the clock in a friendly and welcoming atmosphere. Its “See You at Denny’s” messaging is designed to prompt consumers to check out the brand’s ongoing makeover which includes a menu overhaul using higher quality ingredients to go with remodeled stores featuring a more comfortable dining space. The chain’s core menu equity reflects: everyday value; LTO innovation; warm, friendly “come as you are” atmosphere; and 24/7 availability. Essentially, menu positioning largely reflects the idea that consumers want to indulge when they dine-out and Denny’s is happy to oblige with its well-known signature menu items including its famous Original Grand Slam platter. Efforts to move its positioning beyond serving breakfast all-day are helped by increased credibility with platforms like its burgers, melts & skillets that address lunch and dinner. The brand’s value position benefits from its: $2468 platform; value LTOs (rotating offers at the $2/4/6/8 price points; $5.99 Super Slam; the new $6.99 Super Duper Slam Served With All-You-Can-Eat Buttermilk Pancakes); senior discounts; and kids eat free deals. Denny’s On Demand platform is gaining traction post-lockdown and appeals to a younger demo attracted by 24/7 off-premise access. Long-term sales tailwinds include: off-premise growth; improved menu offerings; improvements in foodservice & environment which are driving higher guest scores; upselling facilitated by Delight and Make It Right service model; better management of ticket times through training for quicker problem resolutions; and remodeled stores. Having said all this, it is notable that Denny’s post-lockdown comps have been hard hit because of its positioning as a sit-down brand with a core competency around breakfast (the most challenged daypart) and, according to our unit economic recovery model, the chain’s full-year 2020 AUV is estimated to decline by -32% y/y. 31 closures during 1H20 mostly represented low performing AUV stores (part of the reality of a 60+ year old system) and additional closures are expected in the near-term. In conclusion, Denny’s turnaround and comfort food appeal well supports the brand’s positioning as a shell-shocked country returns to its love affair with eating-out with friends and family.