Franchising Follows Consumer Preferences

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Wall Street tells us more about ourselves than perhaps we really want to know. The pandemic has challenged and brought out the best in dining, and particular quick service restaurants. The changes are not only on consumer preferences, but also in the legal structure. In order to meet the customer demands, not only did the customer experience need to change, but also the capital structures needed to change. Restaurant chains are looking more, and acting more, like tech companies. That seems today to be the formula to raise the money necessary to run and grow a restaurant chain. Let’s look at how consumer tastes steer Wall Street preferences.

The Reality of Restaurant Management.

Every restaurant has staffing shortages. The “big quit” due to Covid-19 concerns affects restaurants perhaps more than in any other industry. Restaurant workers seek higher wages and better working conditions. Unions are seeking to organize the workers of the brands and obtain legal changes to the labor law environment to accomplish these goals. Demand for a higher minimum wage scares the restaurants, many of which have suffered during the pandemic, while other restaurants has exceeded expectations. Consumers are finicky, and they want the customer experience and the quality of food despite the challenges to management in the labor environment.

Franchise Companies Listen to Consumer Preferences.

Mobile and on-line ordering saved many restaurants. With the labor concerns causing short staffing, efficient ordering saves “face time” interacting with staff and, if properly implemented, improves speed of service. During the pandemic, many consumers rather interact with an efficient touch screen than be exposed to a human order taker or service person. More than ten minutes in drive through line, or more than five minutes at a counter, irks consumers. Consumers then balk if their food is not ready within two minutes of their ordering at a quick service restaurant (a “QSR”). In order to expedite the through put of restaurant ordering and presentation, restaurant management companies are implementing digital ordering efficiencies, training and kitchen equipment necessary to satisfy consumers.

Changing the Human Interaction.

Many restaurants are discounting orders by 10% if you order on-line to increase efficiency and to reduce labor costs. Some consumers welcome the opportunity to receive a discount. Others crave the human interaction. For those that crave the human interaction, restaurants spend more time than ever in educating the order takers to maximize the human customer experience. The goal is to increase accuracy, reduce the waiting, avoid lines and maximize satisfaction. This enhanced order taking training is coupled with email and text offers personalized to the consumer. Through the use of loyalty programs, the data collected can tell how Kim likes his/her plant based burger with the fixings and side. Kim merely enters his/her telephone number, email or card provided, and the last order is available for reference. Some folks like this but the restaurant must make sure it is not too creepy.

Consumers love curb-side pick-up, and so do restaurants. It melds ordering efficiencies with presentation opportunities. Expect restaurants to make building changes, or even change their systems to accommodate third party delivery, drive through, curb-side pick-up, or counter-pick up. For example, the sit down restaurant entrance works with an adjacent “ghost kitchen” which enlarges the sit down kitchen capacity, but also accommodates the omni-channel delivery of the food. For those seeking the restaurant sit down experience, they park and enter the main entrance. For those picking up the food, they go to the side entrance for curb-side service, counter-service, drive through pick-up or digital ordering and pick-up. The ghost kitchen may belong to the restaurant proper, or may be a non-branded kitchen, which is owned by a third party, and supplies food to several restaurants.

Now restaurants have increased their concentration on environmental, societal and governance (“ESG”) concerns, and wear it proudly. Ben and Jerry’s Ice Cream was advocated for societal changes. As will be seen, Wall Street rewards ESG conscious behaviors.

Fund Raising to Exceed Consumer Preferences.

Sweetgreen, SG on the NYSE, had a very successful IPO with 140 units. Now a Wall Street favorite, Sweetgreen walks and talks like a tech company, claiming a scalable business plan and a commitment to its consumers. Its’ low calorie salads have created long lines for diet conscious patrons to experience this new take on salad as entrée brand.

Sweetgreen is trading with an enterprise value over $3 billion and has about a 20% growth rate of number of outlets this past year. This company has a history of losses and is still not profitable. For the first nine months of 2021, it lost $49 million and is priced about 10 times its gross trailing sales. and has been growing units by about 20% per year. Despite the numbers, many Wall Street analysts lover the company, predicting 2000 units before long. Other restaurant analysts have expressed doubt.

The company promises sustainability, and supporting local agriculture and health. As stated in their SEC filing, Sweetgreen has 200 “domestic food partners.” which is more partners than it has locations. One of its three founders, Jonathan Newman, likens Sweet Greens to a food platform and cites its unique relationship with Uber Eats as an additional differentiator.

Sweet Greens is saying all the right things and can prodigiously raise money. But consolidation of brands in platform companies creates the economies of scale to pay for the enhancements consumers want and need.

Burger Fi is the product of a special acquisition company (“SPAC”) which investors fund on a blank check basis for acquisitions, and which has now acquired Anthony’s Coal Fired Pizza. Inspire Brands Inc. has in its portfolio Dunkin’, Arby’s, SONIC Drive In, Jimmy John’s and others. The Roark Capital Group, a private equity company and investor in Inspire Brands, has its own portfolio investments in The Cheesecake Factory, CKE Restaurants, Culver’s, Driven Brands (Meineke, to name one) Focus Brands (Auntie Anne’s, Carvel, Schlotzkey’s to name a few), Anytime Fitness, Massage Envy, and others. Restaurant Brands International owns Tim Hortons, Burger King, Popeyes and others.

Consolidated brand platforms are able to invest in the technology, centralize management, use economies of scale and implement best practices across their brands, without having to go constantly to market when consumer preferences dictate change. They have sufficient and predictable cash flow which allows traditional bank financing unavailable to many in the restaurant space. Consolidation will be the future of restaurant brands and franchising as long as the human connection remains and the companies pay attention to ESG concerns.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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