We spent the week at the Restaurant Finance and Development Conference. We’ve already written about a few topics from the event, including a comprehensive look at the state of the financing markets, whether the IPO market will come back and Greg Flynn’s thoughts on casual dining.
Here are a few more takeaways from the event.
Yes, California’s $20 wage hit traffic. In April, fast-food chain restaurants started paying their workers at least $20 per hour, the result of AB 1228, a legislative compromise that put regulation of those restaurants into the hands of a committee.
Unsurprisingly, the result led to higher prices and lower traffic. According to Revenue Management Solutions, California fast-food restaurants have increased prices 6.5% this year, compared with 3.3% at all states.
Consumers there are eating out less often and ordering less when they do. Traffic in California at fast-food restaurants is down 3.8% this year, according to RMS, compared with a 1.8% decline in all states.
Greg Flynn, who is based in San Francisco and owns Flynn Group, the country’s largest franchisee, called it “silly” for the state to form a labor board with “very self-interested people coming up with calculated solutions not supported by the market.”
But he added, “You can still make money in California. We do. You just have to drive much higher volumes.”
Speaking of Greg Flynn … The operator of Applebee’s, Arby’s, Taco Bell, Panera Bread, Wendy’s and Pizza Hut acknowledged that he doesn’t really look at franchise disclosure documents, or FDDs. Those are the massive disclosure documents that all franchises are required to publish and provide to prospective franchisees.
“I’ve never read a full FDD,” he said. “There’s nothing really good in it.”
Yeah, we don’t either. We just skip to the good parts. But the comment does illustrate one of the challenges with those documents: Most franchisees don’t read them, because they’re long, complicated and loaded with legalese.
Ozempic is changing everything. GLP-1 drugs, such as Ozempic, are taking the world by storm. Traditionally used to treat diabetes, the medications help people lose weight, which is driving up their usage. One to two percent of Americans are on those drugs, said Danilo Gargiulo, analyst with Bernstein.
That is expected to rise exponentially, to 10% within five years. “You’re going to be seeing a 1% headwind on traffic compounding over five years,” Gargiulo said. “There’s likely going to be some traffic challenge.”
But how they eat has also changed. Ozempic users consume light protein and avoid greasy, fried food that’s high in carbs or sugar. They don’t order as many desserts or sides or alcohol. That could put some pressure on brands to offer healthier options.
“Start thinking of offering smaller portions appealing to GLP-1 users,” Gargiulo said.
Franchisee valuations take a hit. While there is a sense of improvement in the restaurant industry, it’s notable that it hit bottom earlier this year.
Dennis Geiger, analyst with UBS, said that franchisee valuations fell in the first half of this year, ranging from about 4x to 7x EBITDA, or earnings before interest, taxes, depreciation and amortization.
Maybe more notable is the chains at the top of that range. Taco Bell valuations remain the highest in restaurant franchising, followed by McDonald’s, Wingstop, Wendy’s, Dunkin’ and Popeyes.
At the bottom? Carl’s Jr., Firehouse Subs, Subway, Corner Bakery and Hardee’s.
The Ruby Tuesday’s rule. The quote of the week belonged to Alex Sloane, cofounder of the private-equity firm Garnett Station Partners, has invested heavily in restaurants and recently created Authentic Restaurant Brands, which operates Pollo Tropical, Primanti Bros., Mambo Seafood and P.J. Whelihan’s. Sloane founded the firm with his friend Matt Perelman, and it generally focuses on long-term investments.
They are mindful of ensuring that their brands have enough liquidity to go on offense. And the group is mindful of ensuring the brands they acquire can maintain their own culture because they understand the mistakes firms can make when they buy a company.
“All brands are one or two private-equity decisions from becoming Ruby Tuesday,” Sloane said. Ruby Tuesday is a casual-dining chain that is about a quarter of its peak size after years of decline.
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