Here's a look back at the news eruptions that shaped the restaurant industry in 2018.
Papa John's meltdown
Other chain executives scratched their heads in bewilderment when Papa John’s founder John Schnatter barked in late 2017 that his brainchild’s sales were being killed by the controversy over NFL players kneeling during pregame airings of the national anthem. How was that connected to pizza orders?
But that was just a preview of the weirdness that would plunge the industry’s fifth-largest pizza chain into an unprecedented meltdown in 2018. The real flashpoint was a revelation that Schnatter had used a racial slur during a media-training session—ironically, on racial sensitivity, a topic the company believed it needed to address after the NFL controversy (the kneeling was a protest against police shootings of African-Americans).
Papa John’s sales and market value immediately plummeted. Schnatter acknowledged the action and apologized, then ricocheted from one bizarre action to the next. He sued the chain—twice. He turned on his handpicked successor as CEO, Steve Ritchie, saying the careerlong Papa John’s employee, and his longtime protege, was responsible for the sales freefall. Schnatter said he’d tried months earlier to get Ritchie fired.
Meanwhile, reports emerged of Schnatter approaching Wendy’s about buying Papa John’s, without involving Papa John’s board or top management. He also went public with his complaints, creating a website that solicited support for his position from Papa John’s employees and franchisees.
Papa John’s sales continued to drop like a rock, and Schnatter refused to stay silent, issuing one jaw-dropping proclamation (he should never have resigned as CEO, for one) after another. It became a well-known fact the chain was looking for a buyer, and media reports identified onetime Wendy’s and Arby’s owner Trian Fund Management, the investment arm of activist investor Nelson Peltz, as a prime suitor. Then came word that Trian—along with every other tire kicker—didn’t want to touch the chain, given its strained position and stigma.
Papa John’s responded throughout the ordeal with efforts to distance itself from Schnatter, culminating in a new ad that replaced “John’s” in the concept’s identity with the names of employees, driving home that the business was a team, not a person. But when that person owns 31% of the company, it’s difficult to drive him away.
So what’s the outcome? Stay tuned for our 2019 highlights to get that skinny.
IHOb—er, IHOP—scores big with a publicity stunt
The pancake chain has long professed a need to cultivate more business outside of its breakfast stronghold. This time, it resorted to the old standby of a publicity stunt, and hit on one for tomorrow’s marketing textbooks. In June, the Dine Brands holding teased social media followers with cryptic suggestions something big was afoot. The taunting was quickly followed by an announcement the brand was changing its name to IHOb, the “b” standing for burger, to call attention to a new line of premium hamburgers.
The move snagged more than 32 billion (that's with a "b") web impressions, according to the chain. Never mind that only one store actually changed its signage, or that the ploy was as transparent as an IHOP front window. The stunt snagged more attention than the latest celebrity breakup, turning IHOP into a darling of millennials—at least for a time.
How long of a time remains the question. Earlier this year, IHOP President Darren Rebelez told Restaurant Business that the chain is continuing to enjoy a boost from the campaign, but did not provide figures.
A new chain giant emerges in Inspire Brands
In a year notable for its restaurant acquisitions, Roark Capital’s newly formed Inspire Brands proved the standout shopper. The company was formed through the purchase of Buffalo Wild Wings for $2.9 billion by Arby’s, a Roark holding with systemwide sales last year of $3.6 billion. News leaks had raised expectations that a deal was in the works. Not so for Inspire’s follow-up purchase, the acquisition of the Sonic Drive-In quick-service burger chain for $2.3 billion.
That deal was completed earlier this month, and Inspire has made no secret of its intention to keep buying chains. The expectation is that Roark will spin off the company through an initial public offering as a new holding company aspiring to the size of a Darden Restaurants or Bloomin’ Brands.
Starbucks’ $14M swipe at racism
A Starbucks manager set off a firestorm of protest when she summoned authorities to arrest two African-American men accused of trespassing at her Philadelphia unit. The duo was waiting for a third man and hadn’t ordered anything while killing time. The manager objected, which led to the arrest of the two noncustomers.
It was all captured on videos that went viral in a flash. But Starbucks was even quicker in its response. CEO Kevin Johnson publicly slammed the arrests as a “reprehensible outcome” and vowed to “fix” the chain’s policies.
That, in turn, led to a half-day shutdown of 8,000 company-run stores for a near-systemwide retraining of staff. The move cost the chain about $14 million in lost sales alone, according to Technomic research.
Policies were rewritten to allow anyone to hang out in a Starbucks or use its bathrooms.
The changes were among a slew of initiatives undertaken by the chain in 2018 for the stated aim of social justice. Starbucks also raised the pay of all 150,000 of its workers and expanded its benefits for transgender employees.
It also closed 150 stores and laid off 5% of its workforce.
McDonald’s switches to fresh beef for Quarter Pounders
Restaurant chains have a long record of throwing up their hands when faced with demands for more wholesome food. If only our volumes and prices would make that feasible, they’d lament, pleading they can’t deliver the impossible. Then McDonald’s—McDonald’s!—switches over in 2018 to fresh beef for its Quarter Pounders. It also started cooking and dressing the signature burgers to order, raising the bar for the quick-service segment.
Steve Ells surrenders Chipotle’s leadership to Brian Niccol
A classically trained chef who set out to upend fast food proved in the end he wasn’t immune to the run-of-the-mill setbacks that can beset quick-service CEOs. Like being replaced.
Steve Ells surrendered his day-to-day leadership of Chipotle Mexican Grill in March to Brian Niccol, who is far less picky about following convention. He’s already tried new menu items, from bacon to nachos—the sort of menu additions Ells disparaged—and flirted with discounting. He’s also relocating the chain from nonconformist central, aka Denver, to the fast-food mecca of Southern California. The transfer of power marked a significant shift to tradition by the self-professed disruptor.
Subway’s list of problems proves a foot long
For the first time in 53 years, leadership of the once high-flying chain moved outside the DeLuca family. Suzanne Greco, the sister of founder Fred DeLuca, surrendered the CEO’s role to Trevor Haynes after sales and traffic slid and franchisees yelped. The decline had started before DeLuca’s death, when the chain dropped its offer of a footlong sub for $5. It was also beset by new competition from fast-growing upstarts promising top quality, such as Jersey Mike’s and Firehouse Subs.
As conditions worsened, the chain resurrected the footlong deal—for $4.99. Franchisees yelped even louder because of the pressure on their margins.
The close of 2018 finds the 44,000-unit chain at a crossroads. It’s come up with a new, more contemporary look for units while aiming for greater off-premise sales through delivery and format changes intended to facilitate takeout. But it has yet to name a new CEO or come up with a deal packing the same drawing power as the $5 footlong.
Straws are crushed
The environmental villain of 2018 proved to be the plastic drinking straw. Through heart-wrenching social media videos, a concerned public illustrated the danger posed to ocean life and the environment in general by a foodservice amenity more common than forks.
The industry was remarkably responsive. One after another, chains and independent groups promised to stop automatically offering any sort of straw, and to provide a biodegradable version if one was requested.
California lawmakers decided to help the voluntary effort by mandating that full-service establishments no longer provide a plastic drink straw unless it’s requested by a patron.
It’s an imperfect solution, as advocates for the disabled quickly observed. Some persons with disabilities aren’t able to use a paper straw. Limiting their choice to that option is technically a violation of the Americans with Disabilities Act, the advocates pointed out with considerable harrumph. It’s a hitch that’s still being addressed.
Joint employer refuses to die
Like the horror movie villain who just won’t perish, the joint employer issue kept rearing back from certain death in 2018, terrifying franchisors and franchisees far more than any axe-wielding guy in a hockey mask likely would. The matter, a redefinition of when franchisors are legally liable for the employment practices of franchisees, looked as if it was dead when the year started. Then a process problem, a potential conflict of interest within the ranks of the National Labor Relations Board (NLRB) rather than anything to do with the policy, reinstated a strict definition that could have exposed franchisors to lawsuits on a widespread basis.
The NLRB, as reconstituted by President Trump’s appointments, tried to hammer a stake through the controversial matter by issuing a new, more narrow definition of joint employer in September. But franchising advocates warned the whipsawing from one standard to another won’t end until a definition is set in law through legislation. Otherwise, they say, the standard could be re-rewritten as early as 2021 if a Democratic president is voted into the White House in 2020.
Dunkin’s new flavor
One of the restaurant industry’s oldest franchisors is Dunkin’ Donuts, a chain that started selling the baked treats referenced in its name back in 1950. The chain announced this year that it’s veering from that heritage by dropping “Donuts” from its identity, a move that fits the brand’s strategic shift in emphasis to beverages.
That’s just one of the milestone changes signaled this year by the 12,000-unit behemoth, the nation’s eighth-largest restaurant chain. It also disclosed plans to pattern the brand after a test unit that opened late in 2017 with such innovations as an eight-tap cold coffee dispenser and a drive-thru lane reserved for the pickup of prepaid app orders. That changeover will be led by McDonald’s alumnus Dave Hoffmann, who assumed the CEO’s post from a retiring Nigel Travis.
McDonald’s draws franchisees’ wrath
The year delivered an extraordinary fight card of franchisor-franchisee battles. Dismay within the ranks led to calls for the ouster of Jack in the Box CEO Lenny Comma and demands for a seat on the public company’s board. Tim Hortons operators and franchisor Restaurant Brands International seemed to conduct a good portion of their interactions in the presence of lawyers. Applebee’s squared off with one of its largest franchisees, the bankrupt RMH Franchise Holdings, over control of 163 stores, while relations between Subway and its operators could have been grist for a reality TV show.
But the prime example of the mounting strife, a possible side effect of the asset-light philosophy that has swept the business, is the firefight that erupted between McDonald’s and its franchisees. Usually, weak finances are the trigger for any war between field operations and the home office. But McDonald’s has been riding high financially, outperforming the quick-service sector with traffic gains and a steady stream of same-store sales gains. These should be salad days for the Golden Arches.
Instead, franchisees have objected to the franchisor’s Experience of the Future remodeling initiative, which calls for $6 billion in investments for such innovations as self-ordering kiosks and new interiors. McDonald’s has agreed to pick up 55% of the cost, but franchisees say the balance is still too much for them to absorb. Plus, sales lost while stores are closed for the upgrade are exceeding projections, as the home office acknowledges.
The operators who make up virtually all of the 14,000-unit chain today have resorted to forming an independent franchise group, a first for the McDonald’s system.
The franchisor has addressed the concerns by lengthening the renovation time frame by two years, to 2022. But strings are attached: Operators who take advantage of the delay will have to pony up a bigger share of the expense.
The dispute promises to be a contender for our list of 2019 news developments.