annual restaurant-and-food-service-review-2012

MARCH 2012

INSIDE:

Taking the TemperatureSegment by Segment

Five Key Areas of Focus Trends and Tactics

Accepting ReservationsRising to the Occasion

Courting the CustomerThe AlixPartners 2012 Annual Restaurant and Foodservice Review

© 2012 AlixPartners, LLP

Courting the Customer

2


Hungry for convenience and value, consumers

are on the lookout for high quality, on-the-go

options, easy ordering, value pricing, speed, and

variety. As a result, in the year ahead, operators

will need to focus on brand differentiation and

consumer relevance to drive revenue growth. For

some, this will mean reinvention. For others, it will

mean reaching customers in new ways, through

social media and mobile marketing, in addition to

tried-and-true discounting and promotions. But

for nearly all, it will mean using new and innova-

tive menus, tactics, and techniques to compete

and win ‘share of stomach.’

TAKING THE TEMPERATURE

In 2011, sales continued to gain momentum, with

December 2011 sales up 8.4% year over year

(YOY). Major segments experienced incremental

revenue and EBITDA gains by cutting waste and

selectively re-engineering menus in terms of

portions, price, etc. Many restaurants closed and

new construction decreased, creating a smaller

playing field, better aligning supply with demand.

Operators continued using limited-time offers

(LTOs), heavy discounting, and couponing as a

primary means to drive customer traffic and stem

further declines, while some chains looked to

M&A, store re-imaging, and international sales

expansion as drivers of growth. Bottom line: there

were winners and losers across all segments, but,

all in all, 2011 was a good year, with total sales up

5.9% over 2010 (figure 1).

Dec-08Feb-09

Apr-09

Jun-09Aug-09

Oct-09

Dec-09Feb-10

Apr-10

Jun-10Aug-10

Oct-10

Dec-10Feb-11

Apr-11

Jun-11Aug-11

Oct-11

Dec-11

9%

8%

7%

6%

5%

4%

3%

2%

1%

0%

YOY%

Cha

nge

2.2%

2.9%

2.1%

1.3% 1.6% 1.0%

0.6%0.6%

0.4%

1.0%

1.1% 0.2%

1.7%

1.1%

0.7% 0.9%

1.1%

2.4%

2.1%

2.7%

2.6%

2.9% 3.3%

4.9%5.4% 5.6%

4.3%

5.9%5.8%

5.3%

7.5%

7.1%7.6%

8.4%

Food services and drinking places

YOY Trend

FIGURE 1: DINING AND FOODSERVICE SALES

Source: U.S. Bureau of Economic Analysis

-0.1%


3


Consumer spending has reached its highest level

since before the recession, with personal incomes

up 1% and jobs growth improved somewhat by

the close of 2011 (figure 2). In this environment,

overall restaurant sales continue to gain

momentum. But headwinds persist. The high

price of commodities continues to have a negative

impact, and while the close of 2011 saw costs

beginning to subside, ongoing volatility keeps

this issue front-of-mind.

For many operators, these concerns are urgent.

Forty percent of restaurant companies are in

“fiscal danger” (figure 3). While this is lower than in

prior years, it’s higher than the historical 20-year

average of 25%, and we expect store closures

to continue going forward. But, on the positive

side, these closures, coupled with fewer new-

store openings, have helped to create more equi-

librium between supply and demand.

Casual Fast Casual Fine QSR Foodservice

56%

16%

28%

60%

10%

30% 33

%50

%17

%

67%

13%

20%

64%

36%

% of Companies by Distress Category & Segment

Healthy WatchOn Alert

FIGURE 3: DINING AND FOODSERVICE SALES

Total PCEYOY Change

PCE

($B

)

$11,000

$10,800

$10,600

$10,400

$10,200

$10,000

$9,800

$9,600

$9,400

$9,200

$9,000

2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%

-1.0%

-1.5%

-2.0%

-2.5%

-3.0%

YOY%

Cha

nge

Q3-11Q1-11

Q3-10Q1-10

Q3-09Q1-09

Q3-08Q1-08

Q3-07Q1-07

Dec-09Feb-10

Apr-10

Jun-10Aug-10

Oct-10

Dec-10Feb 11

Apr-11

Jun-11Aug-11

Oct-11

Dec-11

Source: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis

700

200

-300

-800Net

Job

Gai

n (0

00

s) Monthly Job Gain

FIGURE 2: CONSUMER INCOME, JOBS, AND EXPENDITURES

Personal Disposable Income(MTM% Change)

Sep-09Nov-0

9Jan-10

Mar-10

May-10

Jul-10

Sep-10Nov-1

0Jan-11

Mar-11May-1

1

Sep-11Nov-1

1

1.0%

0.5%

0.0%

-0.5%

MTM

% C

hang

e

Personal Consumption Expenditures


4


Overall, the restaurant industry experienced a bar-

bell effect in 2011. On the higher end, Fine Dining

saw stronger sales as business travel increased.On

the lower end, Fast Casual, Quick-service (QSR),

and Convenience Stores benefitted as consumers

traded down from Casual in a flight to high value.

The result: the middle segment, mainly Casual

restaurants, struggled to maintain traffic and over-

all profitability. We expect the continuation and

possible acceleration of this trend to be a major

theme for operators in 2012, both across the

industry and within individual segments.

We also expect the trend of de-leveraging and con-

serving cash to continue 2012. Many companies

are using free-cash flow (FCF) to support dividends

and buybacks rather than for growth and develop-

ment. Others are paying off debt and, in general,

hoarding cash to build stronger balance sheets.

This, in part, is making some restaurants less risky

investments and/or acquisition candidates going

forward. In fact, in 2011, transactions doubled.

Although deals were generally smaller, multiples

appear to be becoming more attractive, returning

closer to historic averages, as buyers and sellers

reach better alignment on valuation expectations.

We are seeing significant successful debt refinanc-

ing and share purchase activity, with cash and ST

investments improving across all segments. Cash

levels and multiples indicate that 2012 could be a

strong year (figure 4).

Meanwhile, overseas, emerging markets are a

significant source of growth, especially for the

QSR and Specialty segments. For example, two

leading chains report that their emerging-market

locations now constitute 34% and 23% of their

total units, respectively.

60

50

40

30

20

10

0

$12,000

$10,000

$8,000

$6,000

$4,000

$2,000

$0

FIGURE 4: U.S. RESTAURANT M&A ACTIVITY

2006 2007 2008 2009 2010 2011 2012YTD

1721

1315

25

50

$3,950

$9,641

$3,581

$8,280

# of TransactionsTransaction Value ($)

$1,612

Source: The Deal Pipeline, AlixPartners analysis (only transactions w/reported value shown)

?$1,810


5


$1.0

22

$1,

243

$1,

396

$1,

525

$1,

676

$1,

550

$1,

585

$1,

656

Quick-service Restaurant (QSR) financials

suggest 5% YOY revenue growth, largely driven

by the success of just a few concepts. Internation-

al operations continued to be a major contributor

to revenue growth in this segment, with domestic

and international sales growth YOY differing by

as much as 30% for some companies. Breakfast

continues to be a bright spot, with sales picking

up in this and other segments last year.

Still, we see continued challenges ahead for

QSR companies. The number of visits has fallen

SEGMENT BY SEGMENT

$22,

184

$24

,624 $

28,6

98

$31

,294

$33

,277

$32

,861

$32

,230

$31

,922

$32

,782

11.0%

16.5%

9.0%

6.3%

-1.2%

-1.9%

-1.0%

2.7%

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0

Casual Dining ChainsYOY% Change

2003 2004 2005 2006 2007 2008 2009 2010 LTM

Casual Dining Sales History1,800

1,600

1,400

1,200

1,000

800

600

400

200

0

Fine Dining ChainsYOY% Change

2003 2004 2005 2006 2007 2008 2009 2010 LTM

Fine Dining Sales History35%

30%

25%

20%

15%

10%

5%

0

-5%

-10%

11.7%

12.3%

8.8% 9.3%

9.9%

2.3%

-7.5%

4.5%

Sale

s ($m

m) 20,000

18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

02003 2004 2005 2006 2007 2008 2009 2010 LTM

Fast Casual Sales History

35%

30%

25%

20%

15%

10%

5%

0

-5%

Fast Casual DiningYOY% Change

60,000

50,000

40,000

30,000

20,000

10,000

0

Sale

s ($m

m)

$39,

082

$41

,637

QSR DiningYOY% Change

$43

,753

$46

,272

$50

,159

$51

,943

$50

,803

$52

,305

$55

,361

2003 2004 2005 2006 2007 2008 2009 2010 LTM

QSR Sales History

6.5%

5.1% 5.8%

8.4%

3.6%

-2.2%

3.0%

5.8%

35%

30%

25%

20%

15%

10%

5%

0

-5%

FIGURE 5: SALES HISTORY BY SEGMENT

35%

30%

25%

20%

15%

10%

5%

0

-5%

Sale

s ($m

m)

Sources: CapIQ, company reports, AlixPartners analysis

$5,6

66

$7,

257

$8,

777

$10

,746 $13

,295

$14

,908

$14

,627

$16

,141

$17

,79028.1%

-1.9%

21.0%

22.4% 23.7%

12.1%10.3%

10.2%

Sale

s ($m

m)

$1,

142


6

© 2012 AlixPartners LLP

over the past few years, and high unemployment

continues to eat away at traffic, especially in the

important 18-24 year old demographic. Higher

Convenience Store foodservice quality and the

perceived health consciousness of Fast Casual

offerings are also taking a toll.

Speaking of which, the Fast Casual segment

remains relatively small (less than 6% of market

sales, compared to QSR at 40% and Full Service

at 54%). Year-over-year growth is robust, fueled

by both same-store sales and new-unit growth.

This increase is likely tied to the perception of

healthy food choices, which appeals to a broader

customer base. We also credit a focus on

innovation (e.g., offering wine and beer on tap

in select markets), convenience, and price with

driving growth in this segment.

While Casual Dining’s five-year compound annual

growth rate remains negative (at -0.4%), 2011 was a

turnaround year for many operators in this segment.

Sales began to rise as consumer confidence

strengthened, operators employed new market-

ing tactics and smarter menu pricing, and supply

and demand became better aligned. But, despite

this slight gain, declining overall traffic continues to

present a challenge. High fuel costs have taken

a toll, forcing operators to raise prices to drive in-

creased comps. And the competition from Fast Casual

1 Stay focused on the needs and expectations of core consumer groups to avoid alienating or confusing them. Avoid introducing new lines that are out of touch with existing brand value and equity. Further, keep to a minimum the number of new decisions you require of a core customer in terms of customization.

2 Prioritize. Place fewer but bigger bets. A ‘shotgun’ approach to growth is not nearly as effective as focusing the organization on the game-changers. Problems with the former can include cannibalized product lines, organizational burnout, turnover, and inflated Capex costs.

3 Track performance along with each of the initiatives. Don’t underestimate the operational complexity associated with certain changes. Failing to get this right can result in slower service time and table turns, higher labor costs, new product equipment needs, and IT issues.

4 Establish a robust loyalty program to yield consumer insight and tracking. Use analytics to drive menu developments, programs, and promotions that will enhance one-to-one marketing.

5 Create a balanced sourcing model (local, regional, and global), pursuing local opportunities when they can be marketed or the customer perceives additional value. Local sourcing is not always an optimal solution. You can encounter difficulty delivering mainstream products through a new supply chain. Menu variances, sustainability, and food traceability challenges can arise.

FIVE KEY AREAS OF FOCUS


7


concepts intensifies as the gap in check size narrows.

Looking ahead, we expect Casual Dining operators to

achieve growth by stealing market share as opposed

to growing organically. Menu innovation and social

media marketing, along with traditional mainstream

advertising, are important levers to drive traffic in this

segment; LTOs, low-calorie meals, and heavy dis-

counting appear to be the favored marketing tactics.

Fine Dining experienced two consecutive

years of positive growth, with 2.1% CAGR since

2007. In 2011, the increase in Fine Dining sales

was spurred in large part by YOY growth in

business travel expenditures. This trend will

likely continue, given that U.S. business travel

is expected to grow by 6.4% over the next 12

months to reach 2007 levels. International

travel, expected to grow 4.5% in 2012, will also

provide a boost.

•

• Convenience, value, and quality are key. Custom-ers demand high quality, on-the-go options, easy ordering, value pricing, speed, and variety.

EMERGING TREND

Reengineer menus to offer new products, beverages, and service offer-ings. Base decisions on systematic data-driven assessments of all menu items required. Provide easy access to products and value-added services, and take advantage of technology in ordering, payments, and communica-tion with customers.

• In marketing, mass media is changing its focus somewhat, while social networking’s influence is accelerating.

Differentiate messaging (other than price) and implement local store and mobile marketing. Offer comprehensive guest-loyalty programs and mine resulting data for insights about individual consumers. Diversify marketing and media strategies and include a clear and cohesive social media plan.

• Brand differentiation and consumer relevance are driving revenue growth. Older brands will con-tinue to reinvent themselves in a variety of ways.

Explore non-traditional revenue streams, such as flexible formats, remodels, and conversions. Consider new day-part mixes and consider repositioning other categories, like beverages. Look for other ways to innovate, including extended hours, new delivery options, and the application of technology.

• Discounting and promotions will be common-place, but not everyone will play. Innovative techniques will win “share of stomach.”

Set prices based on analytics rather than on perceived requirements or competi-tive response. Apply selective pricing increases and sophisticated tiered pricing with an eye toward regional differences.

• Nutritional transparency and healthy-choice options will become more prevalent.

Continue to introduce progressive menu options, especially for kids, and provide more disclosure in terms of calories, allergens, etc. Combine a fresh and healthy image with a value offering.

• Commodity-cost spikes and volatility are likely to continue.

Develop enhanced procurement capabilities focused on risk mitigation, menu innovation, and kitchen operations. Offer LTOs linked to seasonal products.

TRENDS AND TACTICS

• Supply chain execution is becoming more critical. Supply networks strive for safety and efficacy with an increased focus on traceability and sustainability.

Perform value-chain analysis to optimize global and localized components and to balance consumer appeal and cost. Renew the focus on store-level operations.

EFFECTIVE ACTION


8


Of course, everything depends on consumers’

willingness to open their wallets. And in the U.S.,

consumers remain cautious, with 74% saying

they feel the same or worse about their personal

economic situation as they did a year ago1.

Accordingly, they expect their dining-out frequency

to remain the same or decline slightly in all seg-

ments. Interestingly, the reasons for cutting back

seem to be less about finances and more about

healthier eating (figure 6). Additionally, 44%

of respondents rated healthy menu options as

‘extremely’ or ‘somewhat’ important when choos-

ing a restaurant, while 62% said that nutritional

information on menus affects their ordering deci-

sions—up a whopping 50% over last year.

But quality is still king. Sixty-five percent of con-

sumers cite food quality and taste (65%) as the

most important area of potential innovation and

improvement, followed by overall price (55%)

and healthy options (16%).

ACCEPTING RESERVATIONS

1AlixPartners surveyed 1,000 adults in the U.S. on January 3-4, 2012 on several dining-related topics including frequency, destination, spend-ing, selection criteria, trends, and the influence of social media.

Q1-2012Q4-2010Q1-2010Q1-2009

Current finances / need to cut back

Want to eat healthier

Restaurant meals are too expensive

Concern over future financial situation

54%63%

42%

44%40%

49%42%

28%48%

7%8%

9%7%

6%5%

3%6%4%

8%4%5%

6%7%

6%3%

2%3%3%

51%

66% 50%

36%

33%

55%

3%2%

6%2%2%3%

3%2%

Restaurant food is poor quality

Too far to drive

Restaurant food is too predictable

Poor or unfriendly service

Do not like the atmosphere

Do not enjoy the experience

Plan to purchase ready-to-eat meals from grocery stores in lieu of restaurant meals

FIGURE 6: CONSUMERS’ REASONS FOR DINING OUT LESS OFTEN IN THE NEXT 12 MONTHS


9


Meanwhile, the Internet is playing an increasingly

important role in driving consumer behavior. The

impact of digital media as an influencer is growing

exponentially, especially among 18-24 and 25-34

year olds, who cite usage at 35%-60% respec-

tively. This group turns to the Internet primarily

to find locations and get directions (64%) and find

discounts or coupons (52%).

RISING TO THE OCCASION

In 2011, the industry began a modest and slow

recovery. Consumer confidence remained uneven

and easily impacted by the events of the day. Brutal

price competition perpetuated an already difficult

operating environment, marked by commodity-

price volatility, across all segments. In 2012, we

expect these challenges to continue. Consumers

remain focused on value and quality and are in-

creasingly interested in healthy-food options.

Operators will need to carefully adjust their strat-

egies to meet the challenges posed both by the

overall economic environment and the changes in

consumer behavior. Successful operators will be

those who focus on the needs of their customers

and position and promote themselves as best able

to fill those needs. Operationally, operators must

focus on five key areas: customer needs, prioritized

investments, operational clarity, data-based loyalty

programs, and balanced sourcing. Those that do

will manage through the continued uncertainty

we expect to see in 2012 and enter 2013 strongly.

Those that don’t risk being left behind.


10


For more information, please contact:

Adam Werner

Managing Director

[email protected]

+1 (312) 705-3911

Eric Dzwonczyk

Managing Director

[email protected]

+1 (212) 845-4017

Kurt Schnaubelt

Director

[email protected]

+1 (212) 297-1585

AlixPartners conducts a broad range of surveys and research in industries around the globe. To learn more

about our publications, or to contact the AlixPartners professional nearest you, please visit www.alixpartners.com.

AlixPartners is a global firm of senior business and consulting professionals that specializes in improving

corporate financial and operational performance, executing corporate turnarounds, and providing litigation

consulting and forensic accounting services when it really matters—in urgent, high-impact situations.


11


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