E Restaurant Fundamentals Themes Underway In 2018


Yes, the algos are there and keyed in on words like “same store sales, miss, beat, guidance, upgrade and downgrade” etc. But there will always be long term and short term plays.  The romance and hope behind restaurant ownership hasn’t faded; restaurants are after all always investable, they are an important social and needs fulfillment outlet of rising people and cultures everywhere. But money does not grow on trees, it takes some considerable work to develop one’s portfolio, manage the brand on a national or international framework and keep franchisees, debt and equity investors happy.

Confusion about playing the long game: Sales results from some brands recently have shocked some investors, what with two or three years downturns here and there, a weak December/January there and the like. But no one should be surprised: US and international consumer trends are variable and change at a moment’s notice. People want to go out to eat, but there is no biological imperative that they do. The guest-visits have to be earned, and it takes time to build the right business to do so.

Some investors have wondered if franchising is the answer to any short-term problem. What they are really looking for is a short-term stock catalyst, something that the brand can quickly do to step around consumer brand challenges. That is a romantic hope; some restaurant concepts are more franchisable than others. Talking to a potential investor recently, they hoped that “local franchisee management” could market more efficiently and turn around the recent bout of same store sales problems. Generally not so; we all know the essence of franchising is control of the brand experience, consistency, conformity (that’s why the contracts are written the way they are); that then attract hopefully well capitalized franchisees, who have a great brand economics platform to work, and can grow. In the U.S., most forms of “local marketing” have been transformed into “national marketing.”  That spells corporate control, the franchisors hire (and change) advertising agencies precisely to flex those national muscles. Unfortunately, this has eroded allowable franchise risk taking and innovation that gets noticed; we wonder if MCD's Egg McMuffin could be invented by franchisee Herb Peterson in 2005 as opposed to 1985 due to how the business culture has changed.

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Disclosure: The author has no positions in any stocks mentioned.

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Bruce M. Knoth 6 months ago Member's comment

Nice. Also an interesting tidbit about $CAKE.

Angry Old Lady 6 months ago Member's comment

Nice pun.