RESTAURANT INSIGHTS | BIG MAC'S BIG MAKEOVER, TOAST IN TRANSITION, CBRL IS MESSY

Big Mac's Big Makeover: Inside McDonald's Flavorful Revolution

Another topic for the MCD analyst day!

In a bold stride towards culinary innovation, McDonald's is reimagining the essence of its burger crafting, particularly its storied Big Mac. As unveiled by the Wall Street Journal, this sweeping transformation is a cornerstone of their campaign heralding "the finest burgers ever conceived." The initiative, spearheaded by Chris Young, the esteemed senior director of global menu strategy, encompasses over 50 nuanced alterations, each meticulously designed to elevate the sensory delight of juiciness and flavor. This ambitious endeavor, born from the fiery crucible of burger market rivalry, encompasses a comprehensive reevaluation of grilling methodologies, a discerning selection of buns, and a refined approach to ingredient preparation. Initially piloted in the gastronomic proving grounds of Australia, this revolutionary approach is now unfurling across the United States, with the grand completion anticipated in 2024.

Key Highlights:

• Major Overhaul: McDonald's is revamping its burger preparation process to address longstanding quality issues.
• Juicier Burgers: Over 50 modifications are being made to enhance the juiciness and flavor of the burgers.
• Quality Focus: Chris Young highlights the shift towards incorporating quality into their fast service.
• Competitive Response: Changes are partly in response to advancements in the burger market, like those by Five Guys.
• Specific Modifications:
• Grilling Technique: Reducing the number of patties grilled at once for better juiciness.
• Big Mac Sauce: Increasing the amount of sauce on Big Macs.
• Bun Changes: Introducing buttery brioche buns with a thicker bottom for heat retention and more randomly scattered sesame seeds.
• Cheese and Onions: Altering storage and preparation for better melt and juiciness.
• Lettuce and Pickles: Storing in smaller containers for freshness.
• Test Kitchen Innovations: Chef Chad Schafer's experiments in the McDonald's test kitchen led to these improvements.
• U.S. Rollout: The new burger version is being introduced in U.S. locations, starting with the West Coast and Midwest, aiming for nationwide coverage by early 2024.

TOAST IN TRANSITION: NAVIGATING THE EVOLVING LANDSCAPE OF TOAST, INC.'S BUSINESS STRATEGY

Is TOST bottoming? Not yet, and it's premature to embrace a bullish stance fully. Toast's financial performance for 3Q23 presented a tapestry of contrasts: specific metrics surpassed forecasts, notably gross margin, EBITDA margin, and Annual Recurring Revenue, while others, like Gross Payment Volume, didn't quite hit the mark. The firm's outlook for the fourth quarter of 2023 is tinged with caution, falling shy of average predictions. This cautious stance mirrors a blend of internal hurdles and overarching economic apprehensions. Nonetheless, a current of optimism persists regarding the Company's long-term trajectory.

At Barclay's conference, the President and Co-Founder of Toast, Inc., Aman Narang discussed Aman's new role as CEO and the Company's strategic direction. As expected, Aman expressed excitement about his new position and emphasized the Company's commitment to balancing long-term growth with "durable" operating leverage. He reflected on Toast's journey from its early days in a basement to its current scale. Elena Castanada Gomez, CFO of Toast, Inc., provided updates on Gross Payment Volume (GPV) trends and the Company's performance in line with previous earnings reports. She discussed the impact of inflation and transaction volume on GPV per location. The conversation also covered the Company's growth in locations, customer types contributing to this growth, and the effectiveness of its sales and go-to-market teams. The discussion included insights into customer acquisition costs, SaaS Average Revenue Per User (ARPU), and the Company's strategies for upselling and expanding its customer base.

Key Highlights:

• Aman Narang's New CEO Role: He is embracing the challenge with a focus on maintaining the Company's strategic direction and leveraging his experience from Toast's early days. TOST aims to balance long-term growth with durable operating leverage, emphasizing consistent mission and purpose.
• GPV Trends: Managed by CFO Elena Castanada Gomez, showing moderation due to inflation, focusing on maintaining GPV per location stability.
• Location Growth: Driven by strong performance in the U.S. SMB market, diverse customer types contribute to growth.
• Customer Acquisition Costs: Maintaining a mid-teens payback period, optimizing the balance between customer acquisition and profitability. Aman Narang mentions the regionalization of the sales team and the collaboration between new business and upsell teams. This strategy could potentially lead to more efficient customer acquisition and retention processes. By focusing on upselling to existing customers, Toast might be able to reduce the relative cost of acquiring new revenue, as upselling typically involves lower costs compared to acquiring new customers.
• Leveraging Data for Targeted Sales: Using data to make the sales team smarter about targeting and focusing on opportunities suggests an approach to increase the efficiency of the sales process. By using data analytics to identify the most promising leads or upsell opportunities, Toast can potentially reduce the time and resources spent on less productive leads, thereby optimizing CAC.
• SaaS ARPU Dynamics: Managing new and existing customer contributions with strategies for upselling and expanding customer base. (See below for more thoughts on this.)
• Financial Planning for 2024: Focused on growth, recurring gross profit, and operating leverage, with a long-term goal of achieving 30% to 35% adjusted EBITDA margins.
• Stock-Based Compensation (SBC): Elena emphasized Toast's commitment to reducing stock-based compensation as a percentage of recurring revenue. The Company has altered its equity granting practices and is focused on managing dilution and SBC more effectively. Significant hiring post-IPO has influenced SBC, but this impact is expected to decrease over the next few years. Toast is making SBC management more transparent across its executive team, treating it like any other expense in the P&L.
• New Product Development and Roadmap: Aman discussed the Company's focus on efficiency, interoperability, and leveraging data for customer insights. Toast's product development is driven by customer feedback and aims to expand the types of restaurants it can serve. The Company also focuses on fintech products to simplify operations for restaurant owners.
• Toast Now App: Toast Now is a mobile app for restaurant owners to track their business in real-time. It has seen significant uptake, with features like sales tracking, labor costs, delivery updates, and menu management. The app has increased customer engagement and is part of Toast's strategy to drive product growth.
• Upsell Team Operations: The upsell team at Toast focuses on existing customers, leveraging deep relationships and data to target opportunities effectively. The team works closely with the customer success team to identify and address customer needs, enhance overall customer experience, and explore upsell opportunities.

From Aman Narang's comments, we can infer a few critical points about the SaaS ARPU dynamics for Toast:

Narang underscores the pivotal role of customer feedback in sculpting Toast's product development path. The spotlight on innovations like the Toast Go device and a strong focus on interoperability and seamless integration unveils a strategy to bolster product value. By providing tools that streamline operational efficiency for its clientele, Toast is poised to augment the allure of its platform, potentially catalyzing an uptick in Average Revenue Per User (ARPU). His discourse on harnessing data to bolster customers' incremental demand reflects a commitment to delivering analytics and insights. This not only adds value but also enhances ARPU through value-added services. Expanding the customer base remains a cornerstone strategy, aiming to diversify the platform to cater to various dining establishments, including quick-service restaurants, hotels, cafes, and bakeries. While this expansion could initially lead to a varied ARPU across different segments, it also signifies a growing and evolving customer base. Introducing fintech solutions, notably in payment processing, unveils avenues for new revenue streams. Integrating these services allows Toast to elevate its ARPU by offering more holistic solutions. Overall, the strategy balances enhancing customer experience and value, a critical factor in driving revenue growth. This equilibrium is especially vital in Software as a Service (SaaS) models, where customer retention and expanding services per user are key ARPU drivers.

Positive Themes

Commitment to Efficiency and Cost Management: Elena Castanada Gomez highlights Toast's focus on managing stock-based compensation and driving leverage in this area. This indicates a strong commitment to financial discipline and cost management, which is crucial for long-term sustainability and profitability.

Customer-Centric Product Development: Aman Narang emphasizes the importance of customer feedback in shaping Toast's product roadmap. This customer-centric approach in developing products like the Toast Go device and enhancing platform interoperability demonstrates Toast's dedication to meeting the evolving needs of its clients, which can lead to higher customer satisfaction and retention.

Strategic Expansion and Diversification: The Company's efforts to expand its platform to serve a broader range of customers, including various types of restaurants, and its focus on developing fintech solutions indicate a strategic approach to growth and diversification. This can help Toast tap into new markets and revenue streams, enhancing its growth potential.

Negative Themes

Challenges in Stock-Based Compensation: While there is a commitment to managing stock-based compensation, the need to address this issue suggests that it has been a significant cost factor for Toast. High levels of stock-based compensation can concern investors, as it may lead to dilution and impact profitability.

Dependence on Upselling for Growth: The emphasis on upselling to existing customers for growth might indicate a potential challenge in acquiring new customers or expanding market share. While upselling is an efficient growth strategy, over-reliance on it may limit the Company's growth potential in new customer segments.

Complexity in Product and Service Integration: As Toast expands its offerings and integrates more services, such as fintech solutions and data analytics, there could be challenges related to the complexity of the platform. Ensuring seamless integration and maintaining ease of use for a diverse customer base can be challenging and may require significant resources and continuous innovation.

Cracker Barrel's Fiscal 2024 Forecast: A Road Paved with Good Intentions or a Path to Uncertainty?

In its latest financial disclosure, Cracker Barrel Old Country Store, Inc. (CBRL) presented mixed results for the first quarter of 2023. The Company reported a Non-GAAP EPS of 0.51, falling short of expectations by 0.25, and a revenue of 823.8 million, a slight decrease of 1.9% year-over-year, missing estimates by 4.32 million. A closer look reveals a nuanced picture: a modest 0.5% dip in comparable store restaurant sales and a more pronounced 8.1% fall in comparable store retail sales. The Company observed a 7.1% decline in restaurant foot traffic, counterbalanced by a 6.6% increase in the average check, driven by a 6.8% price hike and a 0.2% unfavorable mix.

Cracker Barrel sets its sights on fiscal 2024 with ambitious goals. The Company forecasts total revenue to be 3.4 to 3.5 billion, including opening two new Cracker Barrel stores and between 9 and 11 new Maple Street Biscuit Company units. The Company anticipates commodity inflation in the low-single digits and hourly wage inflation in the mid-single digits. Regarding profitability, the Company projects a GAAP operating income between 95 million and 115 million and an adjusted operating income of 130 million to 150 million, factoring in the additional week in the fiscal year 2024. Capital expenditures are expected to be between 120 million and 135 million.

Julie Felss Masino, stepping into the role of President and CEO, faces a challenging landscape. She noted improvements in in-store traffic during the quarter, possibly influenced by seasonal factors, and highlighted significant investments in marketing, enhancing the guest experience, and launching the Cracker Barrel Rewards loyalty program. Despite headwinds in the retail sector, the Company has managed its inventories effectively and is concentrating on value and sales enhancements. A notable highlight was a record-breaking Thanksgiving week, with sales surpassing 110 million. The Company's strategy focuses on seasonal offerings and catering, bolstered by targeted marketing campaigns and optimized media mix. Masino stressed the importance of guest satisfaction, maintaining brand relevance, and delivering shareholder returns. She also discussed a strategic transformation initiative to ensure the Company's long-term success.

Key Highlights:

• Financial Performance: Q1 revenue of 823.8 million with an industry-low 2.3% operating margin.
• Marketing and Guest Experience: Increased media spending by 20% (and traffic still missed), refined messaging, and focused on guest experience and staffing.
• Cracker Barrel Rewards: Successful launch of a new loyalty program, exceeding enrollment expectations.
• Retail Challenges: Sales declines in most categories, but effective inventory management.
• Thanksgiving Success: Record sales of over 110 million during Thanksgiving week.
• Catering and Seasonal Focus: Emphasis on catering growth and seasonal favorites.
• Strategic Partnerships: Collaboration with Dolly Parton to promote Cracker Barrel Rewards.
• Strategic Transformation Initiative: A comprehensive review to drive long-term value creation and market share. Commitment to improving guest experiences and evolving the brand.

In this transformative endeavor, Cracker Barrel embarks on a journey of proactive reinvention. This is not merely a response to the immediate struggles but an imperative positioning the Company for enduring expansion in the ever-evolving marketplace. The Company finds itself in the nascent stages of this metamorphosis, aptly termed the "Diagnostic Phase." This embryonic stage is marked by an exhaustive dissection of the Company's present operational framework, its challenges, and the latent opportunities. This involves a deep dive into the nuances of consumer behavior, the ebb and flow of market dynamics, and the introspection of internal mechanisms. This aims to pinpoint potential areas ripe for innovation and growth. The conviction is that a radical overhaul of the operational blueprint is imperative. We believe this should strategically align the Company for an eventual acquisition by a private equity firm. However, the discourse in the recent conference call seemed to merely graze the surface, hinting at a rudimentary understanding rather than a profound insight:

1. Engagement with a Consulting Firm: Cracker Barrel has engaged a top-tier consulting firm to provide an external, expert perspective. This partnership is crucial for challenging institutional assumptions and enhancing internal capabilities with unbiased, professional insights.
2. Focus on Key Business Aspects:
• Dinner Daypart: Special attention is being given to improving the dinner service, recognizing it as a critical time for attracting and retaining customers.
• Technology Deployment: Implementing new technologies to enhance employee and guest experience, making operations more efficient and customer interactions more engaging.
3. Leveraging Data and Analytics: Utilizing data-driven strategies to better understand customer preferences and behaviors. This approach helps tailor services and marketing efforts more effectively to meet customer needs.
4. Refining Brand Strategies and Positioning: Revisiting and updating the brand's positioning in the market to ensure it remains relevant and appealing to its target audience. This might include revising marketing messages, visual branding, and overall brand communication.
5. They are identifying Growth Drivers: Pinpointing the most impactful areas for growth, such as expanding into new markets, enhancing product offerings, or improving customer service standards.
6. Defining Required Capabilities and Enablers: Understanding what resources, skills, and technologies are necessary to achieve the identified growth and improvement goals.
7. Execution with Excellence: Ensuring the strategies and plans are implemented effectively and efficiently, focusing on achieving the set objectives and KPIs.
8. Continuous Review and Adaptation: Regularly assess the effectiveness of the strategies and be flexible to adapt as per the changing market dynamics and customer preferences.
9. Stakeholder Engagement: Keeping the board, teams, and shareholders actively engaged and informed about the progress and developments of this strategic initiative.