Season 2 Episode 2: The American Dream and Franchising



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Welcome to the Restaurant Boiler Room, episode two of season two. I'm your host, Rick Ormsby, Managing Director at Unbridled Capital. Today in the Boiler Room, we talk about January sales in the restaurant industry, a little word about Papa John's progress, a recent Sonic bankruptcy, minimum wage discussions across the industry, some review and notes from the KFC convention, and a note on entrepreneurship and the American dream through franchising.

The Restaurant Boiler Room is a one-stop shop for multi-million dollar merger and acquisition activity and financial complexities affecting the franchise restaurant industry. We talk money, deals, valuations and risk delivered to the front door of franchisees, private equity firms, family offices, large investors, and franchisors on an every other week basis. Feel free to find our content at Unbridled's website at Now let's enter the Boiler Room.

So our first topic for today is the January sales effect that has happened here. I wanted to talk a little bit about that. First of all, before I start that, I guess I'd say this is episode two of season two. So we have made it into our, I guess this is technically our third calendar year, but our second year of doing podcasts. So a big shout out to those of you who are listening and have been listening to this podcast. I'm really thankful for that. Really, really am thankful for it. I get people just stopping me randomly and occasionally at conventions and different places across the country saying that they've been listeners and I'm very thankful for your time and hopefully you found what we've been saying here as insightful. So, thanks again.

Okay. So we look at the January sales and I'm looking at kind of right now at TDn2K. They do a Black Box Intelligence. I talk about this a lot in social media and such, but they do a really nice study that talks about restaurant comp sales and traffic. For January, we had comp sales, that were reported by them, up 2.25%. On a rolling three basis we're up 0.6%. They had comp traffic down seven tenths of a percent and rolling three month comp traffic at negative 2.46%. So at a 2.25% comp sales increase, it's the highest sales growth we've seen in the industry in four years. Pretty cool. Right?

So really pretty excited to see that although there's probably, as you dig into the numbers, what you're going to find, I think, what we probably know in most of the areas of the country, I'm sure some areas have not been this way, but many areas of the country have experienced a pretty mild winter so far. As I sit here in the middle of February in Louisville, Kentucky, I can tell you that we've had an unseasonably warm winter and, for that reason, I think some of the sales have been buoyed by better weather conditions.

For those of you who don't track seasonality too much, seasonality really affects the restaurant business quite substantially, and it's one of the reasons too why most restaurant and franchise businesses look at things in periods instead of months, so that you can compare 28 days versus a month, which in one month might have 31 days and another month might have 30 days, another month, obviously February, might have 28 days, but you can get a picture of 28 day periods. 13 28 day periods a year. And then you can start looking at, since those are the same amount of time, you can start looking at the seasonality between the periods. Right? And you can look at last year's performance against the periods, and you can also look at the seasonality in the same year.

So let me give you an example that ties back to the point I'm making about good weather means good sales. Like if I'm in period four, I can look at what I did in period four last year in sales, across my business, and I can say what my sales have been. How are my comp sales on a period by period, year over year basis? I can also look at my trend versus the last three periods which might tell me a little bit about the momentum of my business but it doesn't naturally tell me what the seasonality of my business is. I can look at January P1 sales versus P6 sales in the middle of the summertime, and if I'm in a upper Midwestern market, I could make the conclusion that my sales are higher in P6 than they are in P1 and a lot of it's probably because it's darn cold outside and people don't want to go out and eat. Right?

So then you take the step further, if you want to do so, of neutralizing your period by period P&L's for the seasonality effect. So if I know for example that in Michigan, let's say, sales are down big in January because it's cold and snowy outside, I might use mathematics and some reasoning and some data to put my seasonality in the month of January at like 0.87. Okay? And then my seasonality in Michigan, this is just a guess, but my seasonality may look, across the periods, may look like 0.87, 0.9 in P2, and then as we keep going in successive periods, it may look like something like this. 0.98, and then 1.02, and then 1.08, and then 1.09, and then 1.1, and then 1.06, and then 1.04, and then 1.0, and 1.0, and 0.99 in December.

So you can kind of see, on an average year, how the impact of weather affects someone's period over period financials. But in this particular case, and I'm rambling a little bit, when you have nice weather, you're going to have higher sales. And so the country right now, I think, is largely benefiting from strong sales so let's not get too excited about a 2.25% comp sales number in January, which clearly is an awesome number, even though we look at the comp traffic still being down 0.73%.

And using the same argument, seasonality works the opposite in warm places like in Phoenix, maybe, and down in Florida, where you have a big influx of snowbirds, you might actually have the seasonality in P1 and P2. January, February months being really high. It might be like 1.05. Right? You might over index your average year by 5%. I don't know, but something like that in those months. Then in those locations, in the summertime, they may actually under index what they do throughout the average of the entire year. And so you just got to be cognizant of that.

Something I would point out in the studies. It looks like the strongest region of the country was the Mid-Atlantic which, per TDn2K says, sales were up 5% and traffic up 2.3% in the Mid-Atlantic in January. That's pretty darn good. Clearly there's something in play there. Probably weather was the mildest, relative to last year, in that area. And then Texas continues to deliver fairly weak performance in January. They were down about a half a point in sales, comp sales, and 2.2% down in comp traffic. So Texas continues to show, which obviously it was a bellwether state, right, for almost every economic indicator, has shown some weakness on the restaurant side over the last several years. Okay. That's the first point.

The second point we wanted to ... the second topic for today was to talk a little bit about Papa John's. So Yum came out with his Q4 earnings and Pizza Hut was down 4%. Domino's, I believe, just showed a plus 1.5% same store sales results. And so Papa John's doesn't report Q4 results until later this February. Keep in mind, we're not giving investment advice here, but I'm just kind of noting that Papa John's, from the clients and friends that I know in the brand, seems to be regaining momentum. 2017 Q4 and clearly 2018 Q4 were really bad when they started having all the PR issues. And so they're lapping some really, really low numbers from not just last year, but from two years ago.

However, just from having casual conversations, it feels to me that their same store sales are turning around nicely with the new management in place and some new products in place. I don't know where they're going to land, clearly, but with some of the struggles in the other pizza brands, it looks like Papa John's might be able to take advantage of the current marketplace a little bit. They just introduced, and you may have seen it in the Superbowl with Shaq, I believe, the Papadias. Right? I haven't had the product yet, but I hear pretty good things about it. It's meant to open up the lunch menu and timeframe. They talk about it as being part pizza, part sandwich. If you look at it, it looks a little bit like a quesadilla, which may be why it is Papadia. Right? Just keep an eye on Papa John's and the Papa John's turnaround, and maybe some slight renewed optimism in that brand with the new leadership, new product innovation, and just maybe a little bit of momentum coming off of the heels of some really rough times.

Okay. Minimum wage. I wanted to talk about this today. So I'm looking at minimum wage. I'm going to just read a couple of kind of factoids from, which is a really cool website. It's the Economic Policy Institute and it tracks minimum wage across all the states, and it's just something to note. Here's some factoids. As of January of 2020, right, so when we crossed the threshold of 2020, there were 26 States and Washington DC have changed their minimum wage laws since 2014. That's number one. Number two, the effective minimum wage has increased in 29 states and DC since January 2014. In number three, 44 localities, localities, these are cities or counties or municipalities, have adopted minimum wages above their state minimum wage, and as I look at the list here, lot of them are in California. Right? So that's one.

Number four. There are 29 states and DC that have a minimum wage higher than the federal minimum wage. Number five. The minimum wage is indexed for inflation in 18 states and DC meaning it is automatically adjusted each year for increases in prices. And then number six. There are seven states that have no minimum wage law or a minimum wage below the federal minimum wage. The federal minimum wage applies in all of these states. And this is Alabama, Georgia, Louisiana, Mississippi, South Carolina, Tennessee and Wyoming. As I scan through this website, they try to update who's making increases in minimum wage on a year by year basis. And I'll just note a couple of states. Right? Like Washington State, it looks like here, jumped from $12 an hour to 13,50 on January the 1st of 2020. It looks like California jumped from $12 to $13 on January 1st. Arizona went from 11 to 12. Colorado went from 11,10 to 12.

Interesting, and then as you head back East, you've got a 10 to 11 in New Jersey, 11,10 to 11,80 in New York, and Massachusetts 12 to 12,75. DC is now at $14 as of 2019. The last thing I would just kind of note here on minimum wage is you've got two states that ... in Missouri and Arkansas, that have made some pretty big steps in minimum wage increases. So for Missouri in January of 2020, they went from 8,60 to 9,45 and Arkansas went from 9,25 to $10. So just another theme and another item to watch as we hear kind of the pundits in the franchise space talking about the cost of labor and its impact on restaurant and franchise in general. P&L's. If you're in a situation where your sales are mildly up or flat, and your transactions are down, and your wage pressures are there, and you're fighting for every dollar of EBITDA that you can get, just important to note as we think about staffing and restaurant valuations and kind of the next wave and the next cycle of where we go in the restaurant industry. Okay? So that's a minimum wage.

The third topic I wanted to chat about a little bit was a Sonic franchisee who declared bankruptcy. This is reported by the Restaurant Business Online. This is Jonathan Maze and it was reported a couple of days ago. And it said a large Sonic franchisee declares bankruptcy and the franchisor plans to buy 73 Sonic locations from the franchisee, SD Holdings, which operates also MOD Pizza and Fuzzy’s Taco Shops. And so the article here that Jonathan writes talks about that SD Holdings was facing unsustainable debt loads and made the note of the area of their location in the south east still with Sonic being a largely ... having car hops and things, the seasonality in the wintertime may be a difficult cash management time for Sonic franchisees, in general, if you're not in warm climates.

But I would make the comment, because I do know Sonic as a brand fairly well, that things are ... if you saw this, on the surface you might be a little worried or concerned about the Sonic brand, but I don't think this spreads or has tentacles into the rest of the system. Sonic, in my view, has been fairly healthy. It has a lot of established and stable franchisees. The brand just does really, really well in its core markets. These stores were largely in North Carolina, Tennessee, Virginia and Alabama and obviously, in that brand, the farther you get away from its core of Oklahoma and Texas, the more I think the AUVs and the performance kind of lag or struggle a little bit.

But overall, I just make the comment that the Sonic brand, I think, has a lot of optimism. They were just acquired obviously by Inspire Brands. There's a lot of positivity about the digital platform there. The future. The product innovation, the management and just prospects for the future so I wanted to point out the negative in the bankruptcy and it looks like corporate is going to step in and buy these stores, but also to point out the positive of where I think the brand might be headed with the new management team and the new focus at Inspire.

Okay. Number four. KFC convention. So just came back from the KFC convention in Nashville last week, which was really a nice time. And their theme was banding together in leading the way. And they talked about new products, new technology and new assets. And I think all three are kind of in focus for Kevin Hochman and his team this year. And so I was kind of excited to hear that they've got a couple of new products that are coming out this year that I think is going to, hopefully, have some tentacles into the success of the business as they look to go six years in a row of positive same store sales increases. Hopefully they'll come out with some sort of an answer to the sandwich that Popeye's is largely been killing it with the sandwich. I think they just had incredible comps that just came out recently. I think it was plus 30% same store sales increases.

So, and I know that's had an impact on everyone in this industry, but I believe KFC is probably going to have an answer to it at some point. KFC is talking a little bit about the technology. Obviously delivery and their app, and I think there's a new sales channel that they and their other franchisors are looking to exploit and understand in this wild west of how to deliver food effectively and measure it and have control of it and get customers and keep customers without discounting too much and giving things away for free in this new kind of app and delivery based world. So hopefully that's an area that they're focusing on and it seemed like it is.

And then their new assets. I mean, I think KFC is really about the future of the American Showman asset program. If you've been to one of the 4,000 plus KFC's across the country, I think about half of them now have been remodeled to the new image and, clearly for 2020, the drive will be on for the brand to continue to increase those numbers, to get the whole system there in the near term. But you should check the KFC stores out. I think they're warm and inviting, and it's a pretty cool and modern take on the Colonel, and nice dining rooms, and maybe a simplified menu board as well. So those are kind of some of the areas.

I would say that Mike Kulp of KBP Foods won the AKFC President's Award, which is a big award given to one franchisee each year. So kudos to Mike for all his good work at KBP. They're a big, successful and consolidating KFC franchisee. I won't name by names, but the Colonel's Legacy Award was handed out to a wonderful lady who's been in the business for a long time and she came up, on behalf of her family. Four generations of her family were on the stage, and she received the Colonel's Legacy Award. And I was really touched by these bigger threads and themes that you saw with her on the stage, but you also see in the restaurant business, that reminds me of what a special place it is. Right?

Like you just look at four generations of a family that have been invested and been in love with whatever the brand is. In this case, it's KFC. It could be any brand, but they have put their ... they've dedicated a lot of their lives and a lot of their blood, sweat, and tears to this over a long time. Right? Over 40 years or more. And so it's kind of a beautiful thing to see. As I get older I appreciate, and I hope you will too and I think you probably do, the beauty of consistency. It's easy to do one thing once, well, or to look pretty or famous on Facebook once, but where the rubber meets the road is when you can put your boots on every morning and you can do something consistently well with passion and energy over a long amount of time. I'm always up for hearing stories like that because it gives me motivation and it makes me proud to be a part of the franchise industry when I see it. Enough of my soap box.

Okay. Number five. Today, I wanted to talk a little bit, Jim McKenzie, who is the president of the ... franchisee in Indiana and President of the KFC Franchise Association this year, came out with a really nice article that was in the recent AKFC magazine. And it was about recognition and at the KFC convention they said, "Hey." There's some guy talking. He said, "Think of every morning of three things to be grateful for," which I thought was a cool idea, "and then after that text someone or call someone each day to thank them or encourage them." And he said those two things will make a huge difference in your life. I thought, "Okay, that's really neat." So I've written those down. I've been trying to keep up with them.

But Jim writes something similar about just recognizing and encouraging people. And so I'm going to just paraphrase his words here, but he says, "Every one of us works hard to find, hire and retain top talent and I'm fairly certain that we would all state that our employees are our most valuable asset. Hiring is only the start of the new employee's journey with us and, once hired, we need to work hard to keep them happy, productive, and loyal. And ironically, once we've hired employees, we don't always do a great job of keeping them. It's not uncommon for a restaurant to terminate up to 40 employees per year and turnover represents a significant challenge for most of us and is slowly costing us thousands of dollars. And data suggests that turnover cost is typically 30% of an employee's annual compensation."

So I mean, his article goes to say that 65% of Gallup poll said that 65% of people are not recognized for the work that they do, and that 50% of employees would stay with their current employer if they were recognized for their performance in some manner. And so, he then talks a little bit about making sure we recognize frequently, and be specific, and tie it back to our goals as an organization. But it's not an easy thing to do to recognize. Right? We don't know where to start. It costs time and money, and may be distracting or unfamiliar to us, and it may seem inauthentic if we don't do it often, but I just would just highlight that I think recognition is a huge part of making a successful organization.

A lot of people listening to this podcast are 30 somethings who may be managing a franchise or restaurant business, and they're backed by a family office. For those types of people, especially, who come from maybe a Wall Street background or have gotten their MBA and kind of did what I did. Right? Kind of went up through the ... kind of like some public companies and some more corporate finance background. I think, in general, when we jump into this space, and I speak for myself, but I'm also speaking for those who fit that profile, and really for all of us, we tend to look at businesses, unfortunately, as EBITDA. Number of units. Remodeling dates. Lease expirations. What are we doing with the franchisor? What's the next promotion? How am I going to increase my EBITDA over the last year? What are my EBITDA margins? What are the cap rates that affect my business? How do I ... ?

These financial triggers, that's kind of the way I speak. Half the time I speak through an Excel spreadsheet. But this business is a people business and I would just encourage you all, like I encourage myself, to slow down and remember that EBITDA does not happen if you don't have satisfied clients and customers, and you can't have satisfied clients and customers, if you don't have employees who want to do their job. And one of the ways to have employees who want to do their job is to recognize them and thank them for the work that they do when it is genuine, sincere, and it ties back to the goals and objectives and values of your company.

I'm not perfect at this. It's clearly something that I'm working on. I kind of famously give out a basketball every once in a while and I call it the Nothing But Nylon Award or Nothing But Net Award, depends on what I want to say at the time. And I'll write something encouraging on a basketball in a Sharpie pen and hand it to somebody and recognize them for a job well done. It's some of the small things like that that I'd encourage you to do and think about to make you a more effective leader, because there's more than just money associated with these businesses.

And that probably on my soapbox takes me to just the sixth point which is that franchisees, at their core, are entrepreneurs. That's what they are. And again, looking back on a longevity of successful operations of doing the small things that help you get better, keeping the passion in the business, much like a relationship, a marriage, or anything, like keeping fresh and relevant and passionate and waking up every day to do the right thing and to treat your customers the right way.

I have all the respect in the world for successful franchisees because they are the model, really, of American entrepreneurship all across the country. And I don't want that quiet mantra and that quiet belief to go away as we become, as an industry, more institutionalized with larger franchisees and larger companies. Right? Let's remember to keep the entrepreneurial passion in these businesses that they have had ever since it was one Ma and Pa in ... outside of Omaha, Nebraska, operating one Taco Bell restaurant and when there were afraid to death that they wouldn't be able to make payroll, or they couldn't afford their next purchase of food to make their employees. Right? But they cared so much that they stood in and they did it over and over again.

I'll leave you with a little bit of an analogy from the book Atomic Habits, by James Clear. I've just been reading it. He uses the analogy of an airplane that takes off from Los Angeles headed to, I think he said DC. Washington, DC. And it's one of these things where, if you take off at a certain angle from LA to DC, you can make all kinds of little maneuvers along the way that don't seem like they make much of a difference in the total destination, but if you point that airplane just a little bit, a little bit to the left or right of your intended target, it's going to end up making an enormous difference on the outcome of where you're going to find yourself on the east coast. Right?

And so by that simple analogy, in our business, whether you're financing restaurants, whether you're operating non-restaurant franchises, whether you're a franchisee who's been there for 50 years, or whether you just got into the brand or you're seeking to jump into this business, think about what the habit of doing things slightly better with slightly more passion, what that does to impact your future. It may not be noticeable at first, but it builds on itself and, over time, you'll find yourself sitting in North Carolina instead of sitting in DC when you take off for LA, if that makes sense.

So thanks so much for entering the Restaurant Boiler Room today. You can find our podcasts on iTunes, Google Play, Stitcher, TuneIn and Spotify. If you like these podcasts, please listen, rate and review. I also encourage you to visit our website at for the best franchise M&A and financial resources in the industry. Our website includes podcasts, videos, white papers, and a list of our M&A transactions. Please note that neither Rick Ormsby nor Unbridled Capital LLC give legal, financial or tax advice. These podcasts represent opinions that have been prepared for informational purposes only. We expressly disclaim any and all liabilities that may be based on such information, errors therein or omissions therefrom.