MARCH 2012     Courting the Customer      The AlixPartners 2012 Annual Restaurant      and Foodservice Review             ...
2             Courting the Customer             Hungry for convenience and value, consumers                               ...
3               Courting the Customer          FIGURE 2: CONSUMER INCOME, JOBS, AND EXPENDITURES                          ...
4         Courting the Customer          Overall, the restaurant industry experienced a bar-                              ...
5                    Courting the Customer                    SEGMENT BY SEGMENT                    Quick-service Restaura...
6         Courting the Customer         over the past few years, and high unemployment             innovation (e.g., offer...
7         Courting the Customer         concepts intensifies as the gap in check size narrows.                     Fine Di...
8         Courting the Customer         ACCEPTING RESERVATIONS          Of course, everything depends on consumers’       ...
9         Courting the Customer          Meanwhile, the Internet is playing an increasingly     year olds, who cite usage ...
10         Courting the Customer         For more information, please contact:          Adam Werner                       ...
11         Courting the Customer         DISCLAIMER – IMPORTANT INFORMATION REGARDING THIS WHITE PAPER         This white ...
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Annual restaurant-and-food-service-review-2012

  1. 1. MARCH 2012 Courting the Customer The AlixPartners 2012 Annual Restaurant and Foodservice Review INSIDE: Taking the Temperature Segment by Segment Five Key Areas of Focus Trends and Tactics Accepting Reservations Rising to the Occasion© 2012 AlixPartners, LLP
  2. 2. 2 Courting the Customer Hungry for convenience and value, consumers mean reaching customers in new ways, through are on the lookout for high quality, on-the-go social media and mobile marketing, in addition to options, easy ordering, value pricing, speed, and tried-and-true discounting and promotions. But variety. As a result, in the year ahead, operators for nearly all, it will mean using new and innova- will need to focus on brand differentiation and tive menus, tactics, and techniques to compete consumer relevance to drive revenue growth. For and win ‘share of stomach.’ some, this will mean reinvention. For others, it will TAKING THE TEMPERATURE In 2011, sales continued to gain momentum, with Operators continued using limited-time offers December 2011 sales up 8.4% year over year (LTOs), heavy discounting, and couponing as a (YOY). Major segments experienced incremental primary means to drive customer traffic and stem revenue and EBITDA gains by cutting waste and further declines, while some chains looked to selectively re-engineering menus in terms of M&A, store re-imaging, and international sales portions, price, etc. Many restaurants closed and expansion as drivers of growth. Bottom line: there new construction decreased, creating a smaller were winners and losers across all segments, but, playing field, better aligning supply with demand. all in all, 2011 was a good year, with total sales up 5.9% over 2010 (figure 1). FIGURE 1: DINING AND FOODSERVICE SALES 9% 8.4% 8% 7.5% Food services 7.6% 7% YOY% Change and drinking places 7.1% 5.8% 5.9% 6% 5.6% YOY Trend 5.4% 5% 4.9% 5.3% 4% 1.1% 4.3% 2.9% 2.7% 2.9% 3% 1.7% 3.3% 2.2% 2.1% 2.4% 1.0% 2.6% 2% 2.1% 1.3% 1.6% 1.0% 1.1% 1% 0.6% 1.1% 0.2% 0.7% 0.9% -0.1% 0.6% 0% 0.4% 08 09 9 09 09 9 09 10 0 10 10 0 10 11 1 11 11 1 11 c- b- r-0 n- g- t-0 c- b- r-1 n- g- t-1 c- b- r-1 n- g- t-1 c- De Fe Ap Ju Au Oc De Fe Ap Ju Au Oc De Fe Ap Ju Au Oc De Source: U.S. Bureau of Economic Analysis© 2012 AlixPartners, LLP
  3. 3. 3 Courting the Customer FIGURE 2: CONSUMER INCOME, JOBS, AND EXPENDITURES Personal Disposable Income Personal Consumption Expenditures 1.0% (MTM% Change) $11,000 2.0% MTM% Change Total PCE 0.5% $10,800 YOY Change 1.5% $10,600 1.0% YOY% Change 0.0% $10,400 0.5% PCE ($B) -0.5% 09 v-09 -10 r-10 y-10 -10 10 10 1 11 11 11 11 $10,200 0.0% p- n l p- ov- an-1 ar- ay- ep- ov- Se No Ja Ma Ma Ju Se N J M M S N $10,000 -0.5% $9,800 -1.0% Net Job Gain (000s) 700 Monthly Job Gain $9,600 -1.5% 200 $9,400 -2.0% -300 $9,200 -2.5% -800 $9,000 -3.0% 09 0 0 0 10 0 10 1 1 1 11 1 11 c- b-1 pr-1 un-1 ug- ct-1 ec- eb 1 pr-1 un-1 ug- ct-1 ec- -07 -07 -08 -08 -09 -09 -10 -10 -11 -11 De Fe A J A O D F A J A O D Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Source: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis Consumer spending has reached its highest level side, these closures, coupled with fewer new- since before the recession, with personal incomes store openings, have helped to create more equi- up 1% and jobs growth improved somewhat by librium between supply and demand. the close of 2011 (figure 2). In this environment, overall restaurant sales continue to gain FIGURE 3: DINING AND FOODSERVICE SALES momentum. But headwinds persist. The high price of commodities continues to have a negative % of Companies by Distress Healthy Watch impact, and while the close of 2011 saw costs Category & Segment On Alert beginning to subside, ongoing volatility keeps 67% 64% this issue front-of-mind. 60% 56% 50% For many operators, these concerns are urgent. Forty percent of restaurant companies are in 36% 33% 30% 28% “fiscal danger” (figure 3). While this is lower than in 20% prior years, it’s higher than the historical 20-year 17% 16% 13% 10% average of 25%, and we expect store closures to continue going forward. But, on the positive Casual Fast Casual Fine QSR Foodservice© 2012 AlixPartners, LLP
  4. 4. 4 Courting the Customer Overall, the restaurant industry experienced a bar- This, in part, is making some restaurants less risky bell effect in 2011. On the higher end, Fine Dining investments and/or acquisition candidates going saw stronger sales as business travel increased.On forward. In fact, in 2011, transactions doubled. the lower end, Fast Casual, Quick-service (QSR), Although deals were generally smaller, multiples and Convenience Stores benefitted as consumers appear to be becoming more attractive, returning traded down from Casual in a flight to high value. closer to historic averages, as buyers and sellers The result: the middle segment, mainly Casual reach better alignment on valuation expectations. restaurants, struggled to maintain traffic and over- We are seeing significant successful debt refinanc- all profitability. We expect the continuation and ing and share purchase activity, with cash and ST possible acceleration of this trend to be a major investments improving across all segments. Cash theme for operators in 2012, both across the levels and multiples indicate that 2012 could be a industry and within individual segments. strong year (figure 4). We also expect the trend of de-leveraging and con- Meanwhile, overseas, emerging markets are a serving cash to continue 2012. Many companies significant source of growth, especially for the are using free-cash flow (FCF) to support dividends QSR and Specialty segments. For example, two and buybacks rather than for growth and develop- leading chains report that their emerging-market ment. Others are paying off debt and, in general, locations now constitute 34% and 23% of their hoarding cash to build stronger balance sheets. total units, respectively. FIGURE 4: U.S. RESTAURANT M&A ACTIVITY # of Transactions Transaction Value ($) 60 $12,000 50 $9,641 $10,000 50 $8,280 40 $8,000 30 $6,000 ? $3,950 $3,581 25 20 $4,000 21 17 15 10 13 $1,612 $2,000 $1,810 0 $0 2006 2007 2008 2009 2010 2011 2012YTD Source: The Deal Pipeline, AlixPartners analysis (only transactions w/reported value shown)© 2012 AlixPartners, LLP
  5. 5. 5 Courting the Customer SEGMENT BY SEGMENT Quick-service Restaurant (QSR) financials as much as 30% for some companies. Breakfast suggest 5% YOY revenue growth, largely driven continues to be a bright spot, with sales picking by the success of just a few concepts. Internation- up in this and other segments last year. al operations continued to be a major contributor to revenue growth in this segment, with domestic Still, we see continued challenges ahead for and international sales growth YOY differing by QSR companies. The number of visits has fallen FIGURE 5: SALES HISTORY BY SEGMENT 60,000 QSR Sales History 35% Fast Casual Sales History QSR Dining Fast Casual Dining $55,361 YOY% Change 30% YOY% Change 50,000 20,000 35% $52,305 $51,943 Sales ($mm) Sales ($mm) $50,803 $50,159 25% 18,000 30% $46,272 28.1% $17,790 $43,753 40,000 16,000 $41,637 $16,141 20% 22.4% 23.7% 25% $39,082 14,000 $14,908 $14,627 20% $13,295 30,000 15% 12,000 21.0% 10,000 15% $10,746 8.4% 10% 10.3% 20,000 6.5% 8,000 $8,777 5.8% 12.1% 10% 10.2% $7,257 5.8% 5% 6,000 5.1% 5% $5,666 10,000 4,000 3.6% 3.0% 0 2,000 0 -2.2% -1.9% 0 -5% 0 -5% 2003 2004 2005 2006 2007 2008 2009 2010 LTM 2003 2004 2005 2006 2007 2008 2009 2010 LTM Casual Dining Sales History Fine Dining Sales History 35,000 35% 1,800 35% Casual Dining Chains Fine Dining Chains 1,600 30% $33,277 $32,782 YOY% Change YOY% Change $1,676 $32,861 $32,230 30% $1,656 $31,922 30,000 $31,294 $1,585 $1,550 $1,525 Sales ($mm) 1,400 25% $28,698 25% Sales ($mm) $1,396 25,000 1,200 20% $24,624 $1,243 20% $1,142 $22,184 20,000 16.5% 1,000 15% 12.3% $1.022 15% 9.9% 800 10% 15,000 9.0% 10% 11.7% 8.8% 9.3% 4.5% 11.0% 600 5% 6.3% 2.3% 10,000 2.7% 5% 400 0 5,000 -1.9 % 0 200 -5% -1.2% -1.0% -7.5% 0 -5% 0 -10% 2003 2004 2005 2006 2007 2008 2009 2010 LTM 2003 2004 2005 2006 2007 2008 2009 2010 LTM Sources: CapIQ, company reports, AlixPartners analysis© 2012 AlixPartners, LLP
  6. 6. 6 Courting the Customer over the past few years, and high unemployment innovation (e.g., offering wine and beer on tap continues to eat away at traffic, especially in the in select markets), convenience, and price with important 18-24 year old demographic. Higher driving growth in this segment. Convenience Store foodservice quality and the perceived health consciousness of Fast Casual While Casual Dining’s five-year compound annual offerings are also taking a toll. growth rate remains negative (at -0.4%), 2011 was a turnaround year for many operators in this segment. Speaking of which, the Fast Casual segment Sales began to rise as consumer confidence remains relatively small (less than 6% of market strengthened, operators employed new market- sales, compared to QSR at 40% and Full Service ing tactics and smarter menu pricing, and supply at 54%). Year-over-year growth is robust, fueled and demand became better aligned. But, despite by both same-store sales and new-unit growth. this slight gain, declining overall traffic continues to This increase is likely tied to the perception of present a challenge. High fuel costs have taken healthy food choices, which appeals to a broader a toll, forcing operators to raise prices to drive in- customer base. We also credit a focus on creased comps. And the competition from Fast Casual FIVE KEY AREAS OF FOCUS 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.© 2012 AlixPartners LLP
  7. 7. 7 Courting the Customer concepts intensifies as the gap in check size narrows. Fine Dining experienced two consecutive Looking ahead, we expect Casual Dining operators to years of positive growth, with 2.1% CAGR since achieve growth by stealing market share as opposed 2007. In 2011, the increase in Fine Dining sales to growing organically. Menu innovation and social was spurred in large part by YOY growth in media marketing, along with traditional mainstream business travel expenditures. This trend will advertising, are important levers to drive traffic in this likely continue, given that U.S. business travel segment; LTOs, low-calorie meals, and heavy dis- is expected to grow by 6.4% over the next 12 counting appear to be the favored marketing tactics. months to reach 2007 levels. International travel, expected to grow 4.5% in 2012, will also provide a boost. TRENDS AND TACTICS • EMERGING TREND EFFECTIVE ACTION • onvenience, value, and quality are key. Custom- C Reengineer menus to offer new products, beverages, and service offer- ers demand high quality, on-the-go options, easy ings. Base decisions on systematic data-driven assessments of all menu ordering, value pricing, speed, and variety. items required. Provide easy access to products and value-added services, and take advantage of technology in ordering, payments, and communica- tion with customers. • n marketing, mass media is changing its focus I Differentiate messaging (other than price) and implement local store and mobile somewhat, while social networking’s influence is marketing. Offer comprehensive guest-loyalty programs and mine resulting data accelerating. for insights about individual consumers. Diversify marketing and media strategies and include a clear and cohesive social media plan. • rand differentiation and consumer relevance are B Explore non-traditional revenue streams, such as flexible formats, remodels, driving revenue growth. Older brands will con- and conversions. Consider new day-part mixes and consider repositioning tinue to reinvent themselves in a variety of ways. other categories, like beverages. Look for other ways to innovate, including extended hours, new delivery options, and the application of technology. • iscounting and promotions will be common- D Set prices based on analytics rather than on perceived requirements or competi- place, but not everyone will play. Innovative tive response. Apply selective pricing increases and sophisticated tiered pricing techniques will win “share of stomach.” with an eye toward regional differences. •Nutritional transparency and healthy-choice Continue to introduce progressive menu options, especially for kids, and options will become more prevalent. provide more disclosure in terms of calories, allergens, etc. Combine a fresh and healthy image with a value offering. • ommodity-cost spikes and volatility are likely C Develop enhanced procurement capabilities focused on risk mitigation, menu to continue. innovation, and kitchen operations. Offer LTOs linked to seasonal products. • upply chain execution is becoming more critical. S Perform value-chain analysis to optimize global and localized components Supply networks strive for safety and efficacy with and to balance consumer appeal and cost. Renew the focus on store-level an increased focus on traceability and sustainability. operations.© 2012 AlixPartners, LLP
  8. 8. 8 Courting the Customer ACCEPTING RESERVATIONS Of course, everything depends on consumers’ ‘extremely’ or ‘somewhat’ important when choos- willingness to open their wallets. And in the U.S., ing a restaurant, while 62% said that nutritional consumers remain cautious, with 74% saying information on menus affects their ordering deci- they feel the same or worse about their personal sions—up a whopping 50% over last year. economic situation as they did a year ago . 1 Accordingly, they expect their dining-out frequency But quality is still king. Sixty-five percent of con- to remain the same or decline slightly in all seg- sumers cite food quality and taste (65%) as the ments. Interestingly, the reasons for cutting back most important area of potential innovation and seem to be less about finances and more about improvement, followed by overall price (55%) healthier eating (figure 6). Additionally, 44% and healthy options (16%). of respondents rated healthy menu options as FIGURE 6: CONSUMERS’ REASONS FOR DINING OUT LESS OFTEN IN THE NEXT 12 MONTHS 51% 54% Current finances / need to cut back 63% 66% 50% Want to eat healthier 42% 36% 44% Restaurant meals are too expensive 40% 49% 42% 33% Concern over future financial situation 28% 48% 55% Plan to purchase ready-to-eat meals from 7% grocery stores in lieu of restaurant meals 8% 9% 7% Restaurant food is poor quality 6% 5% 3% Q1-2012 6% Q4-2010 Too far to drive 4% 8% Q1-2010 4% Q1-2009 5% Restaurant food is too predictable 6% 7% 6% 3% Poor or unfriendly service 2% 3% 3% 3% Do not like the atmosphere 2% 6% 2% Do not enjoy the experience 2% 3% 3% 2% 1 AlixPartners 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. © 2012 AlixPartners, LLP
  9. 9. 9 Courting the Customer Meanwhile, the Internet is playing an increasingly year olds, who cite usage at 35%-60% respec- important role in driving consumer behavior. The tively. This group turns to the Internet primarily impact of digital media as an influencer is growing to find locations and get directions (64%) and find exponentially, especially among 18-24 and 25-34 discounts or coupons (52%). RISING TO THE OCCASION In 2011, the industry began a modest and slow overall economic environment and the changes in recovery. Consumer confidence remained uneven consumer behavior. Successful operators will be and easily impacted by the events of the day. Brutal those who focus on the needs of their customers price competition perpetuated an already difficult and position and promote themselves as best able operating environment, marked by commodity- to fill those needs. Operationally, operators must price volatility, across all segments. In 2012, we focus on five key areas: customer needs, prioritized expect these challenges to continue. Consumers investments, operational clarity, data-based loyalty remain focused on value and quality and are in- programs, and balanced sourcing. Those that do creasingly interested in healthy-food options. will manage through the continued uncertainty we expect to see in 2012 and enter 2013 strongly. Operators will need to carefully adjust their strat- Those that don’t risk being left behind. egies to meet the challenges posed both by the© 2012 AlixPartners, LLP
  10. 10. 10 Courting the Customer For more information, please contact: Adam Werner Eric Dzwonczyk Kurt Schnaubelt Managing Director Managing Director Director awerner@alixpartners.com edzwonczyk@alixpartners.com kschnaubelt@alixpartners.com +1 (312) 705-3911 +1 (212) 845-4017 +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.© 2012 AlixPartners, LLP
  11. 11. 11 Courting the Customer DISCLAIMER – IMPORTANT INFORMATION REGARDING THIS WHITE PAPER This white paper regarding The AlixPartners 2012 Annual Restaurant and Foodservice Review (“White Paper”) was prepared by AlixPartners, LLP (“AlixPartners”) for general information and distribution on a strictly confidential and non-reliance basis. The recipients of the White Paper accept that they will make their own investigation, analysis and decision relating to any possible transactions and/or matter related to such and will not use or rely upon this White Paper to form the basis of any such decisions. Accordingly, no liability or responsibility whatsoever is accepted by AlixPartners and its employees, partners or affiliates for any loss whatsoever arising from or in connection with any unauthorized use of the White Paper. This White Paper may be based, in whole or in part, on projections or forecasts of future events. A forecast, by its nature, is speculative and includes estimates and assumptions which may prove to be wrong. Actual results may, and frequently do, differ from those projected or forecast. Those differences may be material. Items which could impact actual results include, but are not limited to, unforeseen micro or macro economic developments and/or business or industry events. The information in this White Paper reflects conditions and our views as of this date, all of which are subject to change. We undertake no obligation to update or provide any revisions to the White Paper to reflect events, circumstances or changes that occur after the date the White Paper was prepared. In preparing this White Paper, AlixPartners has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise provided to us. AlixPartners has not audited or verified the data reviewed in connection with the preparation of this report. This White Paper is the property of AlixPartners, LLP, and neither the White Paper nor any of its contents may be copied, reproduced, disseminated, quoted or referred to in any presentation, agreement or document with or without attribution to AlixPartners, at any time or in any manner other than for the internal use of the recipient, without the express, prior written consent of AlixPartners.© 2012 AlixPartners, LLP

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