RESTAURANT INSIGHTS | GALACTIC BITES & GOLDEN ARCHES | BROS FACING THE STORM | JACK'S BROKEN

Galactic Bites and Golden Arches: Unveiling the Cosmic Charm of McDonald's Newest Venture, CosMc's

Love this idea from MCD.

On the 3Q23 earnings call, Christopher J. Kempczinski, President and CEO of McDonald's Corporation, unveiled an intriguing twist in the company's strategic narrative. During the latest earnings discourse, Kempczinski highlighted an avant-garde venture, christened 'CosMc's.' While inheriting the brand's iconic essence, this nascent brainchild of McDonald's promises to flaunt a distinct flair of its own. The pilot phase of CosMc's is slated to commence in a select few locales, marking a limited geographical footprint in 2024. According to the NY Post, intriguingly, the concept draws inspiration from a character in McDonald's lore – a six-armed alien-robot hybrid named CosMc, who became a denizen of the mythical McDonaldland after developing a taste for its burgers and fries. This character, along with other McDonaldland icons like Grimace and Ronald McDonald, was a staple of 1980s McDonald's advertising.

As the anticipation escalates, McDonald's plans to unfurl more details about this innovative concept and other format revolutions at the much-awaited Investor Day, scheduled for December 6th. Meanwhile, the digital grapevine is abuzz with speculation and sneak peeks. Twitter and the New York Post have been hot on the trail, unearthing intriguing facets of CosMc's. A Twitter denizen, fortuitously present at the scene, captured snapshots of a menu that diverges markedly from McDonald's traditional offerings, bearing a closer resemblance to the fare at BROS. Nestled in Bolingbrook, Illinois, this experimental store remains a mystery yet to welcome patrons. The Snackolator, a prominent snack influencer, recently speculated in a TikTok video – a sensation with nearly half a million views – that CosMc's will focus more on takeout than dine-in experiences.

CosMc's appears to be a cornucopia of novel beverage options, an all-day breakfast menu brimming with untried delights and a quartet of drive-thru lanes – a testament to McDonald's innovative spirit. Observing the recent Quick Service Restaurants (QSRs) trends, it's evident that beverage-led concepts are reigning supreme. This new venture by McDonald's not only aligns with current market dynamics but also holds the potential to enrich its existing franchisees. Should CosMc's not capture the market as anticipated, its most successful ideas could still be assimilated into the broader McDonald's network, ensuring no innovation spark goes unignited.

BROS Facing the Storm: Tackling the Decline in Traffic and Reviving Fortunes in 2024's Turbulent Business World

BROS has many problems, but the new MCD concept above is not one of them. 

As 2024 looms on the horizon, Christine Barone, the newly appointed CEO, bubbles with enthusiasm at the Barclays conference over the burgeoning trajectory of the enterprise. She shines a spotlight on the robust pillars underpinning their success: a brand that resonates with zeal, a team ablaze with passion, and a rewards program that has reaped remarkable dividends.

The company is channeling substantial resources into marketing endeavors and astute real estate investments, tweaking its game plan to stay on an upward curve amidst the capricious economic climate. Barone also tackles head-on the swirling myths about their operational blueprint, underscoring the potency of their in-house expansion strategy instead of the franchising route and the distinctiveness of their brand ethos and customer service. Despite navigating through a thicket of challenges, her gaze is firmly set on uncharted territories, buoyed by the belief in their rewards program as a magnet for customer engagement and a catalyst for business proliferation. 

However, lurking in the shadows is a formidable challenge: the dwindling foot traffic in their stores. She is orchestrating a complex symphony of strategies to reverse the downward spiral of store visits. This multifaceted crusade includes harnessing the power of their rewards program, fine-tuning customer visit frequencies, customizing tactics for varying market stages, mining data for consumer insights, stirring the pot with innovative product offerings, recalibrating their media outreach, honing operational efficiency, and plotting their market expansion with strategic finesse. Yet, despite this whirlwind of activity, a troubling trend persists – a relentless slide in in-store traffic!

 

Takeaways From the Q&A:

 Positive Themes

1. Strong Rewards Program Engagement: The company's rewards program, with features like digital stickers and app personalization, is highly engaging. This unique approach incentivizes repeat purchases and enhances the user experience, leading to higher customer loyalty and retention.
2. Data-Driven Strategy: Using data to understand customer behavior is a significant positive. By analyzing different customer cohorts and their interactions with the rewards program, the company can tailor its offerings and marketing strategies more effectively, potentially improving traffic and sales.
3. Operational Focus and Innovation: The emphasis on operational efficiency and innovation, especially in product offerings, is a strong positive. Improving service speed and introducing new products can enhance customer experience and drive more frequent visits, contributing to overall growth and market presence.

Negative Themes

1. Challenges in New Markets: While the company is expanding into new markets, there is an inherent challenge in establishing brand presence and loyalty in these areas. The differentiation in rewards program penetration between new and established markets indicates potential hurdles in quickly building a solid customer base in new locations.
2. Wage and Cost Pressures: The discussion about wage investments and managing labor costs, especially in the context of minimum wage increases in certain regions like California, highlights potential financial pressures. Balancing wage increases with profitability and pricing strategies could be challenging for the company.
3. Market Saturation and Cannibalization Risks: The company's aggressive expansion and infill strategy in existing markets could lead to market saturation and cannibalization. New stores might take away sales from existing ones. This could potentially limit the overall growth potential in certain areas and requires careful management to ensure sustainable expansion.

 Other notes:

• Excitement for 2024: Anticipation for continued growth and investments in marketing and real estate. Awareness of the unpredictable economy and the need for business flexibility.
• Business Model Misconceptions: Clarification on choosing company-owned growth over franchising and the uniqueness of their brand. The availability of trained personnel primarily limits the company's growth. They emphasize internal growth, with each market being opened by an experienced operator. The company also carefully considers the pace and order of market entry to optimize brand growth.
• Market Expansion: Optimism about entering new markets and the brand's reception in these areas. The company observes different penetration levels of the rewards program in established markets compared to newer ones. In new markets, they focus on establishing the brand as a digital, loyalty-driven entity. The company balances expanding in existing markets with entering new ones. They strategically place stores to optimize market penetration and brand presence.
• Financial Strategy: Recent financial moves include upsizing the credit facility and conducting a primary equity offering. These steps have improved the company's liquidity and balance sheet, preparing it for continued growth. Going into 2024, the company is in a strong position with healthy margins, allowing flexibility in managing investments and pricing strategies.
• Wage Investments and Pricing Strategy: The company proactively manages wages to maintain employee satisfaction and competitiveness. They have conducted extensive pricing studies to balance customer expectations and operational costs, especially in response to wage changes in markets like California. Pricing decisions are based on comprehensive data, including customer perception, competition, and unique product offerings. The company aims to balance traffic growth with profitability.
• Strong Brand and Team: Emphasis on a passionate team and a strong brand driving growth.
• Rewards Program and Personalization: The rewards program accounts for significant transactions, indicating customer loyalty. The company's app includes a rewards program and unique features like redeemable digital stickers, allowing users to personalize their app experience. This personalization extends to their drinks as well. A significant portion of transactions, around 65%, are conducted through the rewards program. This rate has remained steady even as the company experiences rapid growth and adds new stores.

• Customer Behavior and Sales Drivers: The primary goal is to drive customer frequency rather than increasing the average ticket size. The company analyzes customer data in various cohorts to understand behavior changes and adapt strategies. There's a strong focus on improving operations, such as throughput and speed of service, to enhance customer experience and drive sales.
• Labor and Management: The company has a pipeline of 325 operators ready for new sites, indicating a strong internal growth and development system. They also focus on creating a positive work environment for their employees.

Taste the Challenge: JACK IS Navigating the Spicy Terrain of Restaurant Acquisitions and Market Fluctuations

This becomes a SHORT on strength. 

The JACK discussion at Barclays revolves around the company's fiscal 2024 CapEx spend, growth strategies, and refranchising plans. The CapEx guidance for fiscal 2024 is set between $110 million to $120 million, a significant increase from the previous year's $80 million. This increase is primarily allocated to new restaurant growth and brand development (and likely lower ROI). The company plans to open more restaurants in 2024, following the opening of two in 2023. Additionally, investments are being made in remodeling older stores and upgrading IT infrastructure, including a new POS system and digital capabilities. The company also focuses on refranchising, particularly with the Del Taco system, aiming for a more asset-light model. They seek the right partners for growth and are not rushing the process. The discussion also touches on the broader consumer environment and the company's strategies for increasing wages and prices, especially in California.

Key Highlights:

• CapEx Increase for Fiscal 2024: The CapEx budget is between $110 million and $120 million, up from $80 million in 2023, primarily for new restaurant growth and brand development.
• New Restaurant Openings: More than two company restaurants are planned for 2024, building on the growth strategy initiated in previous years.
• Remodeling Older Stores: An investment of $5 million to $10 million is allocated for remodeling, with remodeled stores showing a 10% to 15% increase in AUV.
• IT and Digital Investments: Upgrades include a new POS system and enhancements in digital capabilities, including loyalty programs.
• Refranchising Strategy: Focused on the Del Taco system, aiming for an asset-light model with a careful selection of partners for sustainable growth.
• Consumer Environment and Pricing Strategy: Addressing the challenges of increasing wages and prices, especially in California, focusing on meeting consumer demands and maintaining competitive pricing.
• Leadership and Culture: Emphasis on the importance of leadership and company culture in driving growth and success.
• Innovative Product Launches: Plans to introduce breakthrough products in fiscal 2024, with recent successes like Boba Tea.
• Franchisee Support: Providing guidance and tools to franchisees to manage rising costs and maintain profitability.

The company navigates a complex market environment with strategic pricing, data-driven franchisee guidance, operational improvements, and a focus on expansion and refranchising. They are also committed to transparency with investors and are cautiously optimistic about their growth and performance in existing and new markets. That said, JACK has significant issues:

Pricing Strategy and Market Impact: The company has undergone significant price increases, around 8% to 10%, for two consecutive years. This strategy, especially in a significant market like California, is expected to impact customer traffic negatively. The company is cautious, using algorithms and models to predict traffic trends and make pricing decisions. Outside California, traffic trends are expected to improve, but in California, the impact of price increases on traffic is uncertain. The company guides franchisees on pricing, offering data-driven insights for more localized, strategic pricing decisions. The company has invested in its pricing team and tools to provide franchisees with detailed competition and pricing data. This guidance helps franchisees make informed decisions about pricing at a local level. Franchisees have been receptive to this data-driven approach.

Operational Improvements and Expansion: The company focuses on operational improvements and expansion into new markets, which is difficult to achieve. They have seen successful new openings in markets like Salt Lake City and Louisville, with stores performing above average. The company also expanded into states like Florida, Montana, Idaho, and Arkansas. The JACK brand had tried this before and failed. The company knows the competitive challenges in new markets, especially from established brands. However, they are confident in their model, citing sustained high performance in new store openings.

Franchise Model and Growth Strategy: The company is moving back towards a more franchise-heavy model, focusing on an asset-light strategy. So why did they buy Del Taco? This involves refranchising, where new franchisees are expected to take on expensive debt to open additional stores and commit to remodels.

Restaurant Margins and EBITDA: The company acknowledges a gap in restaurant margins and EBITDA between Jack in the Box and Del Taco, attributing it partly to the selection of high-performing stores in California during refranchising. Again, buying Del Taco was a mistake. They see opportunities to improve Del Taco's margins through synergies, better menu management, and operational efficiencies, but it will never approach JACK's margins.