Finance pros tell all at annual RFDC
Speakers at the RFDC included, left to right: James White, CEO of Jamba Juice; Beck Weathers, keynote speaker and Mt. Everest disaster survivor; Aslam Khan, Church’s Chicken multi-unit operator; and Rohini Dey, founder of the Vermilion Group.
Anyone who doubts large, multi-unit operators can wield more power than their franchisors wasn’t at the “success breakfast” featuring three entrepreneurs on the last day of the Restaurant Finance & Development Conference.
Franchisors who want to attract such owners—and who doesn’t?—should note the mindset of such entrepreneurs.
Dennis Monroe of Monroe Moxness Berg law firm, which sponsored the session, teed up his panelists this way. “All three of you were a little bit renegade when it came to your franchisor,” Monroe said. “What was your overall experience as a franchisee?”
Mike Scanlon, a former Applebee’s franchisee, was known for doing his own marketing, “which was brilliant, but drove the franchisor crazy,” Monroe said.
Scanlon said he opened store No. 41 for Applebee’s, and there are more than 2,000 of them now. “Applebee’s was a little tiny organization and didn’t have a lot of support, so we did it ourselves. And it took them a few years to catch up and eventually I hate to say this: They got as good as we were,” Scanlon said.
“One thing franchisors don’t understand is one size didn’t fit all,” Scanlon said. “The renegade thing is really about: ‘This is my business. I pay the bills, not you. I’m the customer—I write checks to you,’” Scanlon said. “A few didn’t understand that, and those who didn’t, I took them off my phone list.”
Anand Gala grew up in the Jack In The Box system, where his mother was an operator. He became an Applebee’s franchisee at 25 years old. “I learned more there than in any other brand,” he said.
“The experiences that you have going through different brands—at Jack In The Box we had E. coli and 40 percent of sales dropped the next day and stayed there for a year,” he recalled about the infamous outbreak in 1993. “There were lessons learned on how franchisor and franchisee relations should be handled and should not be handled. There were many mistakes made, and many lessons learned.
“What hasn’t changed sufficiently are the attitudes of the franchisors. You can have a rotating” roster of “executives going through the door, who truly believe if they hold a title of vice president or COO,” they are in charge. “The days of command and control are over.”
Al Cabrera was one of the largest Burger King franchisees, and he recalls one era of management that wanted to make operators toe the line over installing a new point-of-sales system. “Then they made the unfortunate mistake of suing me,” he said. “They sued first and talked later. They wanted to make an example, and they made a mistake. They sued me, and I said ‘thank you, I’m going to make a lot of money off this lawsuit.’ At the end of the day, they paid me money.”
He praised current Burger King management, whose bonuses depend in part on the profitability of franchisees, a practice Cabrera applauds. He said franchisor/franchisee relations ebb and flow based on whether “good guys” or “bad guys” are in charge.
“You may get a good management team that comes in, then a new management team comes in and maybe they’re just bad guys. We’ve seen it all. It’s a wave. It’s an ocean that you’ve got to navigate.”
All three men have sold parts or all of their operations in recent years, and are on to new ventures but still related to the restaurant business. Asked by Monroe why they stay in the industry despite its challenges, Scanlon summed it up: “I don’t want to give up what I know. It’s still a fun business. It’s still about delighting people.”
Stealing market share
Economists Robert Reich, left, and Arthur Laffer debated minimum wage and much more.
Restaurant analysts Will Slabaugh, Andy Barish and Roger Matthews said the restaurant industry is changing dramatically, even if traffic isn’t growing all that fast.
“Knapp Track shows traffic since the end of 2009 is actually down over 10 percent,” said Slabaugh, an analyst at Stephens. “The pie is sort of stagnant, growing very, very modestly and you get dramatic share shifts within that.”
To compete, restaurants have to be better than their competitors. It sounds obvious, but tell that to the scores of copycat restaurants with surprised executives when the brand doesn’t click. Executives at big brands are surprised, too, as their business-as-usual approach doesn’t bring in new diners.
“You’ve got massive market share moves,” said Roger Matthews, a managing director in Bank of America Merrill Lynch restaurant group. “When McDonald’s goes down 1 percent in same-store sales, that’s $350 million in sales” that becomes available for competitors to scoop up.
A few public company analysts are keeping a close eye on innovative concepts that are hammering the big brands. Bojangles went public in May of 2015 with a relatively large footprint of more than 620 restaurants across the South. It’s directly taking market share from KFC, Popeyes and Church’s Chicken. But it shines on a day part where competitors just don’t get much traction.
“Bojangles is a great southeastern QSR-plus with a really strong breakfast day part—almost 40 percent of their sales are breakfast,” said Barish, an analyst at Jefferies.
The Habit Burger Grill, another example, went public in 2014 and continues to give investors what they want: growth. Slabaugh said taking share from traditional QSR is where the brand really shines.
“They can set down in a parking lot with a McDonald’s, Wendy’s or Burger King and take share all day long,” said Slabaugh. “To me, the defined quality there is great price value and higher quality. So I’m offering you something better for a cheaper price oftentimes or I can trade you up to a higher price.”
Habit is also well positioned in the labor war relative to its closest competitors. “Also, they pay more than the other guys,” said Slabaugh. “And the employees tend to reflect that.” Wingstop, which went public in June of 2015, is among the many emerging brands delivering for an equity market that is “starved for growth,” according to Bank of America’s Matthews.
“It’s a brand that is really connecting with consumers and doesn’t have to go after the A+ real estate that everybody else is looking for,” said Barish. “It has 18 percent unit growth and mid-single-digit comps.”
When economists do battle
Sharon Soltero, Pacific Premier Franchise Capital, discussed the art of the deal.
Who knew economists could be so entertaining? In a debate to open the conference November 9 in Las Vegas, Arthur Laffer and Robert Reich mixed it up in a lively session, from a conservative and liberal point of view, respectively.
Laffer is best known for the Laffer Curve, which demonstrates the tradeoff between tax rates and actual tax revenue. He’s called the father of supply-side economics and advised President Ronald Reagan and Prime Minister Margaret Thatcher.
Reich, a professor at the University of California-Berkeley, was secretary of labor under President Bill Clinton, and just published his new book, “Saving Capitalism for the Many, not the Few.”
Said Reich: “It is absolutely true average wages are going up, but there is a big difference between average and median. The median wage is actually going nowhere. This is a potential problem, because you need enough people who can buy stuff.”
Laffer said “it has been a disastrous 14 years” for the economy, and added for a strong economy you need five things: a low-rate, broad-based flat tax; spending restraint; sound money; free trade; and minimal regulation.
“Then get the hell out of the way and let the private sector solve the economy,” he said, to great applause.
Laffer, in fact, got the most applause from the conservative-leaning crowd of restaurant operators and financiers, gathered at the Wynn in Las Vegas. “You cannot tax an economy into prosperity,” Laffer said. “People respond to incentives. It’s not Democrats or Republicans. If you tax people who work, and you pay people who don’t work, do I really have to say the next sentence to you?” Again, the crowd roared its approval.
Reich shot back with the thing he likes best about Laffer: “You can be so forceful and so persuasive—and so wrong.”
Day in the life of a CFO
CFOs who would traditionally make their decision on the bottom line are now becoming integral parties in technology upgrades and testing. CFOs spoke about their increasingly technical roles during the conference, exploring the philosophies of a technology move and how to keep track of all the nuts and bolts while searching for return on investment.
“Hopefully the CFOs play as significant a role in evaluating the benefit of a technology as much as the cost and how you’re going to pay for it,” said Michael Jacobs, a partner at Corner Table Restaurants.
Creating a spending philosophy before a technology upgrade is central to today’s CFOs. Brent Johnson, CFO at Giordano’s, said as they try to re-brand with a heavy focus on catching up with the industry technologically, his strategy puts simplicity out front. Johnson isn’t spending too far ahead of the curve.
“We’re looking for things that aren’t out there so far that we’re going to over pay, because technology proves over and over again that it becomes more and more cheap as technology evolves,” said Johnson. “We’re not the last adopter, but I don’t want to be the first adopter.”
Nick Wagner, CFO at Snooze an AM Eatery, said he still looks at the sticker price first, but then examines new tech.
“I go to the last page of the RFP, start there and work backward,” said Wagner. He said there are always two investments as far as he’s concerned: the product, and the maintenance.
“We try to minimize the IT investments for flexibility and see if it can drive sales and improve operations,” said Wagner, who said they shy away from hardware as much as possible.
Smart CFOs are looking for complete integration. Keeping all that data in one place means updates won’t break any systems and makes it easier to find actionable data with one source. But that means a little more work since different platforms just won’t play nice. “The word integration has meant different things to different people,” said Jacobs.
He said vendors will say just about anything to get a new client, even if they can’t deliver. “Anytime I’ve asked a software vendor, ‘Does your system integrate with this other system,’ I’ve always gotten, ‘Yes, of course it does,’” said Jacobs. “I learned very, very rapidly that they didn’t know what integration meant to me, or they were lying.”
He said a single database is critical; everything else is the equivalent of Duct tape and bailing wire.
“I think folks are realizing that nobody can do it all,” said Johnson, who tries to limit vendors, but makes sure to make integration central to negotiations, even if it costs more. “Your best chance to push the integration is before you sign the contract. But the first person who asks for integration is usually the first person to pay the toll.”
Small operators, outsized hopes
“There are a lot of cool concepts out there,” said Doug Pak, owner of Stir Crazy.
Small- to mid-sized restaurant operators are a bullish bunch, with 69 percent of respondents to a new survey expecting top-line growth in 2016 and a mere 4 percent worrying about a decline.
The average expected increase is a giddy 22 percent among those predicting growth. “That’s truly optimistic,” said John Nicolopoulus, who leads the restaurant practice for accounting firm RSM in Boston, which administered the survey.
The breakdown is more sober but still robust. The median projected growth rate for all restaurant segments is a healthy 9.7 percent. Quick-service operators forecast 9 percent growth in 2016, while fast-casual operators expect 5.9 percent.
Casual dining operators project “a surprising 12 percent” boost in revenue in 2016, said Nicolopoulus. “That casual dining column includes bars and taverns.
We all know bars and taverns are really hot right now,” he said, to explain robust optimism in a category with slim year-over-year revenue gains of late.
RSM, formerly called McGladrey, surveyed 150 restaurant operators, half of whom hold the title of CEO or COO. Some 75 percent of respondents own five to 30 units, meaning the survey shines a spotlight on the smaller, nimble operators, many in emerging brands, that are attracting an outsized share of capital and attention today.
Doug Pak, who operates more than 50 Hardee’s and 70 Papa John’s stores, runs a technology business and also owns an Asian chain called Stir Crazy, believes the good feelings among smaller operators are justified. “There are a lot of cool concepts out there, five- or 10-unit chains that are growing very fast.
It’s very, very exciting,” he said, speaking on a panel November 10 at the conference, in a session designed to dissect the survey results.
He notes a dichotomy, with a handful of large “tier one” brands that have scale and buying power continuing to do well, and he cited Papa John’s 8 percent growth rate in 2015 as an example. So the biggest brands have scale, the smallest players are hip. “And everybody in the middle—and we have some investments in that—it’s hard,” he said, to gain attention from consumers and investors alike.
60-minute data dump
Like speed dating in the restaurant finance world, nine experts provided wisdom from their unique corners of the restaurant industry.
Baird’s Chris Sciortino said the restaurant world is at an extraordinary period for capital availability with a similarly extraordinary supply of early-stage concepts deserving (and receiving) investments.
Calming the fury, Todd Jones of GE Capital Franchise Finance reminded that “this time is not different”—that old-school financial ratios still matter. He predicted prolonged low interest rates, modest inflation, high multiples and an increase in M&A activity.
Former McDonald’s exec Robert Donovan reflected on the genesis of Chipotle, and advised the audience not to fall in love with the product in the process of starting or purchasing their next brand.
With the headline of “Obamacare is here to stay,” Franworth’s David Barr said those expecting significant changes in its implementation must wait for a change in the government’s executive branch.
David Maloni, president and chief commodity strategist at the American Restaurant Association, predicted easier times for protein price watchers. “Fast-casual and ethnic restaurants are benefitting, while wing restaurants and steak places are still hurting,” he said.
Paul Sill at Forum Analytics explained how mobile-geospatial data can provide businesses a raft of data about customer routines and preferences.
Damon Chandik of Piper Jaffray said that although “we’ve seen the return of the restaurant IPO,” a slowdown of China’s economy and other international disruptions could put the brakes on Wall Street debuts in the coming months.
From Hilco Global, Navin Nagrani said companies going through bankruptcy provide the best real estate opportunities. He recommends developing a list of potential chains that may have an upcoming restructuring.
Chris O’Cull, a consumer and retail analyst at KeyBanc Capital Markets, spoke to how tablets can make staff more productive while also improving the guest experience.
Celebrity chefs weigh in on tipping
Eric Ripert of Le Bernardin says tipping helps motivate extraordinary service.
Eric Ripert, chef and co-owner of Le Bernardin, had a different take on the hot issue of eliminating tipping, which opponents say will mean raising the cost of menu items. Ripert, who was part of a celebrity chef panel, said the state and local governments are the only winners if tipping is eliminated, because they will be collecting more sales taxes on higher food bills.
Restaurateurs with percentage rent leases also will take a hit because the revenue on which they pay rent will be artificially inflated because of the higher prices due to the elimination of tips, said Sam Goldfinger, CFO of the One Group, a restaurant company.
Rohini Dey, owner of the Vermilion Group, said that while she’s not against tipping, she thinks the real issue is how to repeal laws that don’t allow tips to be shared with the back of the house. While the front of the house gets the glory, it’s the kitchen where the skill and dedication of the cooks should be rewarded in the same manner as the servers, she pointed out.
Tipping is also an incentive for servers to take good care of guests, said Ripert. The French chef added that in his travels overseas, he’s noticed restaurants that don’t have tipping often don’t offer up-and-beyond service. Extraordinary service is compulsory in fine dining, he added.
But all is not doom and gloom. “I remember when smoking was banned,” Goldfinger said. “I thought, ‘there goes the industry.’ There’s always something. As an industry we’ll figure it out.”