RESTAURANT INSIGHTS | Menu Prices ++, The Anti 3G (QSR) - 2023 02 14 16 37 46

MENU Inflation

Menu prices increased 8.2% during the last 12 months.

The Consumer Price Index for Food Away from Home (FAFH) increased by 8.2%, according to data from the BLS. That represented the third consecutive month of decelerating growth after peaking at 8.6% in October – the strongest 12-month gain since 1981. Growth in grocery store prices also slowed in recent months but still remained elevated in historical terms. Grocery store prices increased 11.3%, the 11th consecutive month of double-digit gains. That was down from a 13.5% increase in August, representing the strongest 12-month gain since 1979. Overall consumer prices increased 6.4% in January 2023 – the 6th consecutive month of decelerating growth and the smallest 12-month increase since October 2021. The core CPI (excluding food and energy prices) increased by 5.6%, a full percentage point below the peak of 6.6% registered in September 2022. Within the food-away-from-home sector, full-service menu prices outpaced growth in limited-service prices in recent months. Full-service restaurant menu prices rose 8.1%, while prices for limited-service meals and snacks were up 6.7% (menu-price gains in both segments were down from the growth rates posted earlier in 2022.) Elsewhere in the food-away-from-home sector, the price index for food from vending machines and mobile vendors jumped 13.8%, representing the fourth consecutive month of double-digit gains on a 12-month basis. On a regional level, the Midwest (9.5%) and West (8.6%) regions registered the strongest menu-price gains, with menu prices in the South (7.8%) and Northeast (7.2%) regions rising at lower rates during the last 12 months.

Patrick Doyle is the ANTI 3G 

Adding QSR to the 2H23 shopping list - putting it on the LONG BIAS list. 
For years, 3G has followed a certain playbook by trying to add value by restructuring companies after buying them and imposing a model that’s based on extreme efficiency. The implementation of zero-based budgeting at BUD, QSR, and KHC has led to significant underperformance. That story of restructuring, efficiency, cutting costs, and not investing in brands led QSR (BUD & KHC) to underperform all its QSR peers except PZZA and the S&P 500 over the past 10 years.
Are those days over? 

QSR reported mixed 4Q22 earnings and announced a CEO change. More importantly, we now know how Patrick Doyle will get an ROI on his $30 million investment - he is here to fix the food, build top-line sales & improve franchisee profitability, and accelerate unit growth. QSR 4Q22 Non-GAAP EPS of $0.72 misses by $0.02, and revenue of $1.69B (+9.7% Y/Y) beats by $20M. Global fourth quarter system-wide sales grew 12% and over 13% for 2022. Consolidated comparable sales were up nearly 8% in 4Q22, led by 11% growth at Tim Hortons Canada and Burger King International. Digital sales grew over 30% year-over-year to over $13.5 billion in 2022, representing over a third of system-wide sales. Restaurant growth accelerates to 1,266 net new units, with Popeyes delivering its strongest development year since joining RBI. Comp sales at Tim Hortons reached 9.4%, above the 7.2% analysts' expectation, while Burger King’s 8.4% comparable sales growth came in slightly below the 8.9% consensus. Popeye’s also exceeded expectations with a 3.8% jump in comparable sales exceeding the 3.14% Street consensus.

On the earnings call, Executive Chairman Patrick Doyle talked extensively about franchisee profitability, noting that it will be the centerpiece of RBI's strategy in the future. At this point, it is obvious to say that Burger King franchisees are not going to do remodels at $140k in EBITDA per store. As the company said recently, "We’ve previously announced that we have signed a new spending agreement with 96% of our US franchisees that says if we’re at a minimum of $175,000 of average four-wall EBITDA by the end of 2024, then our franchisees will invest an incremental 50BPS into the advertising fund for 2025 and 2026." 

Since the company is 99% franchised, they need to provide franchise assistance to jump-start the process; the Royal Reset remodel program will provide up to $200mm of funding for remodels, prioritizing restaurants, operators, and remodel that "offer the greatest potential to deliver the highest returns for franchisees." This franchise assistance will limit near-term earnings growth. 

Two important thoughts from Patrick Doyle:

"If you combine great franchisees who are well capitalized with strong unit economics, that's what's going to drive new store growth."

"Previously in my career, I saw the powerful change that’s possible within a corporate culture when we put franchisee profitability at the center of everything we do. But there is cleaning up to do, and along the way, a few people will likely leave the system and transition their restaurants to franchisees who share our long-term mindset for success and growth."

Cleaning up in 2023:

In 2023, sales will be up MSD to $6.7-$6.9 billion, and there will be margin pressure on continued system investments.  With 2023 as an investment year and thus likely a 2-3% decline in EPS to $3.05.  A slowing consumer will not help, limiting global system comps of 2-3% but with similar margin profiles to late 2022. As a result, no rush to buy QSR, with a leveraged balance sheet and some exposure to rising rates.  As of December 31, 2022, Restaurant Brands' total debt was $13.4 billion, and net debt was $12.2 billion. 

More to come.  

RESTAURANT INSIGHTS | Menu Prices ++, The Anti 3G (QSR) - 2023 02 15 8 45 26