RESTAURANT INSIGHTS | DRI, SBUX China, NYC Commissions Caps, UBER & The EU

Darden Earnings

DRI is scheduled to report 1Q24 earnings tomorrow BMO: As a reminder, industry sales are slowing, so guidance could come down slightly:

• 1Q24 Top line: Comps +3.8% vs 4.2% LY (1Q24 - Olive Garden +5.1%; Longhorn +6.1%; Fine Dining (1.3%).
• Revenue $2.709B vs. $2.446, up 10.7%; EPS $1.74 vs. $1.56, up 11.7%
• Food and beverage costs 31.5% (-100bps); Labor costs 32.3% (up 20bps) and Restaurant margin 18.9% vs. 18.5% LY; Operating margin 10.1% vs. 10.0% LY;

STARBUCKS CHINA EXECUTIVE CHANGES

We are SHORT SBUX partly due to concerns about the recovery in China (the company bought a downgrade yesterday for the same reason). The CEO's changes the other day suggest the new CEO is trying to invigorate new energy into the region. 

Following Mr. Schultz's leaving the SBUX BOD, Starbucks has unveiled another major executive reshuffle, this time for its China business. Is the CEO looking for new leadership in China? Effective October 2, 2023, Molly Liu will ascend to the position of executive vice president and co-chief executive officer of Starbucks China. Liu's promotion comes after her successful stint as the company's chief operating officer since 2021 and her previous role as vice president of Digital Ventures. Liu's has been working with Belinda Wong, leading Starbucks China's growth strategy. Liu's journey with Starbucks began in 2012, and has occupied several leadership positions since. Notably, under her direction as the head of Digital Ventures, the company rolled out "Starbucks Delivers" and "Starbucks Now" - two digital services responsible for 48% of the company's China sales in 3Q23. Liu was also the force behind the Starbucks Rewards program, which has over 20 million active members today. As COO, Liu played a crucial role in expanding the company's retail footprint and introducing innovative coffee beverages. The PR quotes Liu: "Belinda and I have worked together for over a decade, and I'm thrilled to partner with her. We aim to enhance further the unique moments we share with our Chinese customers." Meanwhile, Belinda Wong will keep her dual roles as the chairwoman and CEO of Starbucks China (she has been in that role since 2011.) The company has ambitious plans under her leadership, targeting 9,000 outlets spread over 300 cities by 2025. This expansion is predicted to generate over 10,000 new job opportunities each year. 

Restaurant COmmission CAPs

NYC to face lawsuit over commission caps

DoorDash, Grubhub, and Uber Eats have been granted permission to proceed with a lawsuit against New York City over its decision to cap the fees these meal-delivery platforms can charge restaurants. Based in Manhattan, US District Judge Gregory Woods declined the city's motion to dismiss the case on Tuesday. The companies argue that the 15% fee cap limits their ability to negotiate contracts freely, which could lead to increased costs for consumers and reduced earnings for restaurants and drivers. This cap was first introduced in May 2020 as a temporary measure to support restaurants during the COVID-19 pandemic but was made permanent in August 2021. Jitse Groen, the CEO of Just Eat Takeaway (owner of Grubhub), critiqued the cap as being both "unprecedented and unconstitutional," pointing out that such price controls can elevate delivery fees and decrease order volumes. Despite Grubhub's readiness to collaborate with the City Council, Groen expressed the necessity to resort to legal action.

Uber’s Stance on EU’s Proposed Gig Economy Regulations

While today's news is focused on the EU this issue comes up in the US from time to time especially in CA with the introduction of Assembly Bill 5 (AB5). NJ, PA, MA, NY, and IL are other states where the issue has come up.  While reclassifying drivers address labor concerns, it introduces significant operational, financial, and strategic challenges for gig economy companies.

The European Union is finalizing the Platform Work Directive, which aims to improve the working conditions of gig economy workers. Uber's regional general manager for mobility operations in Europe, Anabel Díaz, has voiced concerns over the potential impact of these regulations on Uber's operations and pricing in Europe. While the EU aims with the Platform Work Directive to improve conditions for gig workers, companies like Uber express concerns over their potential challenges. Regulators will likely find a balance that ensures better working conditions for gig workers while allowing companies to operate sustainably and provide affordable customer services.

UBER'S Key Points:

1. Potential Increase in Prices: Uber warns that the company may have to increase its prices by up to 40% if the regulations are implemented. This can be attributed to the increased costs associated with reclassifying gig economy workers and providing them with benefits akin to traditional employees.

2. Reduction in Job Opportunities: Díaz suggests that reclassification of Uber drivers and couriers might lead to a decrease in job opportunities by 50%-70%. This is because the company would need to spread work hours among fewer workers to maintain employment costs.

3. Service Limitation Concerns: There is a possibility that Uber might cease its services in various cities across Europe due to these regulations. The cessation would likely be a consequence of operational constraints and increased costs.

4. Wait Times for Customers: As the number of drivers decreases, customers might experience longer waiting times for their rides.

5. Impact on Profitability: Interestingly, Díaz does not foresee these regulations affecting Uber's profitability in Europe. She cites Uber’s growth in countries like Germany and Spain, where they operate under a third-party employment model, as evidence of its adaptability.

6. Flexible Work Arrangements: Díaz emphasizes the importance of flexible work arrangements. She believes that many gig workers prefer self-employment because of its flexibility. Thus, she urges EU lawmakers to consider regulations that respect this preference.

7. Current Classification: At present, the majority of gig workers in the EU are classified as self-employed. This classification means that they do not have access to the same labor rights and benefits as regular employees.