RESTAURANT INSIGHTS | BJRI, MCD & DNUT

BJ's Restaurants Teams Up with PW Partners for Cost-Saving Strategies

BJ's Restaurants, Inc. has partnered strategically with PW Partners, LLC.; this collaboration aims to optimize BJ's cost structure and enhance operational efficiency, ultimately leading to more substantial margins. So, what does this partnership mean for BJ's shareholders:

1. Enhancing Efficiency: By working with PW Partners, BJRI aims to streamline its operations and identify areas where costs can be optimized without compromising the quality of food or service. This could lead to significantly improved profitability.
2. Industry Expertise: Patrick Walsh of PW Partners brings restaurant industry experience, especially with BJRI. This means that the recommendations provided to BJ's will be informed by deep industry knowledge and best practices, ensuring that any changes implemented are well-suited to the unique challenges and opportunities of the restaurant business.
3. Focus on What Matters: The cooperation agreement between BJ's and PW Partners shows that both parties are committed to working together towards a common goal. By withdrawing its director nominees for the upcoming annual meeting, PW Partners has signaled confidence in BJ's management and willingness to focus on making BJ's more profitable.

Below is a breakdown of the critical components of this agreement:

Services Provision

• PW Partners is engaged in offering recommendations on cost reduction and efficiency improvements to the company and its board.
• These services will be provided from the agreement's execution date until a specified termination date under the conditions outlined in the agreement.

Confidentiality and Access

• PW Partners and its representatives are bound by a confidentiality agreement executed concurrently with this service agreement.
• The company agrees to provide PW Partners with necessary access to its restaurants and other properties, including examining records and discussions with executive officers, to enable PW Partners to analyze its cost structure and recommend cost reduction strategies.

Compensation

• As compensation for the services, PW Partners' representative, Patrick Walsh, will receive restricted stock units (RSUs) valued at $175,000, based on the company's common stock price at the agreement's execution. These RSUs will vest upon the earlier termination date, or a change of control event, provided PW Partners has met its obligations under the agreement.

Voting Commitment

• PW Partners commits to voting its shares under the company board's recommendations at shareholder meetings, with certain exceptions allowed based on recommendations from institutional shareholder advisory firms or in the case of extraordinary transactions.

Standstill Provisions

• PW Partners agrees to several restrictions on its actions regarding acquiring and disposing of the company's securities, nominations for board elections, proposals for company restructuring, and other specified corporate governance actions up to the termination date.

Mutual Non-Disparagement

• Both parties agree not to disparage each other publicly and to limit their public statements that could be detrimental to the other party, with certain exceptions for legal requirements and private communications.

No Litigation

• The agreement includes a commitment by both parties not to initiate or support legal proceedings against each other, with certain exceptions for enforcing the agreement, counterclaims, and fraud-related claims.

Sweet Deal or Sticky Situation? Unpacking the Krispy Kreme-McDonald's Partnership Concerns

While Krispy Kreme's (DNUT) ambitious plan to double its access points by 2026 through a partnership with McDonald's (MCD) has generated enthusiasm in the stock price, skepticism remains warranted until more details emerge.

The bulls will say that the extensive testing phase will mitigate risks for both companies. However, so little detail was made available that it is not easy to conclude the partnership's potential benefits. Several key questions remain unanswered. First, the number of McDonald's locations participating in the partnership is unclear. A limited rollout would significantly temper the potential impact on Krispy Kreme's sales and brand exposure. Second, even if the partnership is widely adopted, the actual sales benefit for Krispy Kreme is uncertain. McDonald's customers may not necessarily translate into significant additional revenue for DNUT, mainly if the offerings are limited or the collaboration fails to attract new customers. Will new consumers be coming to MCD? Finally, the capital investments required to support this expansion could be substantial, which is a negative for DNUT. MCD franchisees are unlikely to incur any additional cost in this agreement. If Krispy Kreme needs to invest heavily in production capacity, distribution, or marketing to accommodate the partnership, the return on investment may be less attractive than initially anticipated. Until these critical questions are addressed, it is prudent for investors and analysts to maintain a cautious outlook. While the potential for Krispy Kreme to double its access points is intriguing, the impact on its financial performance and long-term growth prospects remains speculative.

Here are the key takeaways from the PR:

For Krispy Kreme

1. Market Presence Expansion: The deal with McDonald's is poised to increase Krispy Kreme's footprint in the U.S. market substantially. By leveraging McDonald's vast network of locations, Krispy Kreme can nearly triple its domestic access points, significantly boosting its visibility and potential sales.
2. Stock Surge: The announcement of the deal led to a dramatic increase in Krispy Kreme's stock price, underscoring the market's optimism about the partnership's potential to drive growth for the doughnut chain. Is this premature?
3. Operational Commitments: Krispy Kreme is responsible for the daily delivery and removal of unsold doughnuts, indicating a commitment to freshness but also adding logistical challenges. The company has pledged to enhance its logistics to meet the demands of the partnership, highlighting its dedication to the success of this venture.
4. Strategic Shift: The deal reflects Krispy Kreme's broader strategy to operate more like a consumer packaged goods company, aiming for widespread distribution and sales growth beyond its traditional retail stores.

For McDonald's

1. Menu Diversification: McDonald's gains a popular sweet treat to complement its savory breakfast offerings, addressing previous challenges in incorporating successful sweet baked goods into its menu. This diversification could help attract a broader range of customers and meet demands for more variety in breakfast options.
2. Customer Satisfaction: Early tests of the Krispy Kreme doughnuts at McDonald's locations have shown results "beyond expectation" in customer satisfaction, indicating a promising addition to McDonald's menu.
3. Minimal Implementation Barriers: The rollout of Krispy Kreme doughnuts in McDonald's locations requires minimal investment and training for franchisees, making it a relatively straightforward addition to their operations.

Industry Implications

1. Sweet Treats Competition: The fast-food industry in the U.S. is witnessing a growing emphasis on sweet breakfast and snack options, as seen with recent offerings from Wendy's and Subway - this deal positions McDonald's competitively in this space.
2. Long-Term Rollout Concerns: The two-and-a-half-year timeline for the nationwide rollout introduces uncertainties, especially considering the fast-paced nature of the industry and potential competitive responses.
3. Supply Chain and Demand Concerns: There are concerns among McDonald's franchisees about Krispy Kreme's ability to meet potential high demand, highlighting the importance of robust logistics and supply chain management in the success of the partnership.