Speaker 1: Welcome to Chopping It Up.
Speaker 2: I'm your host, Mike Halon Seen, a restaurant and food
Speaker 2: service analyst at Bloomberg Intelligence. Today we're joined by my
Speaker 2: friend Alan Hickock, senior advisor at BCG.
Speaker 1: Thanks for doing this, Alan, Thank you for the invite.
Speaker 2: For those of you that don't know Alan, he's he's
Speaker 2: got an extensive background in restaurants and food and and
Speaker 2: he's a great resource for me. He's very opinionated, So
Speaker 2: I think this is gonna make for a great episode.
Speaker 1: Why don't you start out by telling.
Speaker 2: The audience a bit about your professional background and what
Speaker 2: you do at BCG.
Speaker 3: Well, I'm a I'm a career consumer guy and i've
Speaker 3: been My power alley is restaurants and food. I've spent
Speaker 3: over thirty years in the industry. Much of my background
Speaker 3: and my participation is on the capital market side of
Speaker 3: the restaurant industry, with deep investment banking experience. I spent
Speaker 3: a bit of time as an equity research analysts a
Speaker 3: long time ago. I have operating expenses. I ran a
Speaker 3: couple of chains and now I'm among other things, I'm
Speaker 3: a senior advisor at Boston Consulting Group and if you're
Speaker 3: not familiar with PCG. We're big where the global leader
Speaker 3: in business strategy. We have enormous amount of muscle. Our
Speaker 3: revenues are north well north at ten billion, so we're
Speaker 3: big globally, and we're very deep in restaurants and food.
Speaker 3: We've worked with the majority of the top twenty five.
Speaker 3: I've actually the majority of the top fifty brands in
Speaker 3: the restaurant industries, so we're well versed on what's topical
Speaker 3: and top of mind.
Speaker 1: Good stuff. Thanks for that. Let's just jump right in here.
Speaker 2: Our GLP one's going to change the restaurant industry as
Speaker 2: we know it?
Speaker 3: Probably not, although there's there's there's a lot of question
Speaker 3: and and the caveat I would just throw out up
Speaker 3: front is that the long term impact is still kind
Speaker 3: of unknown because the studies to date, and we're you know,
Speaker 3: we are a data driven company, but the studies to
Speaker 3: date are limited to short term insights and kind of
Speaker 3: small sample sizes. So I'm destroying that out there because
Speaker 3: we will learn. But you know, GLP what really came
Speaker 3: to my attention not as a user, maybe a should.
Speaker 1: But.
Speaker 3: As I started to see you know, investment, well, there
Speaker 3: is going to be an impact on brands and operators
Speaker 3: and in and investors from an investment perspective. And starting
Speaker 3: a couple of months ago, I started to see published
Speaker 3: research reports from from analysts, you know, speculating on you know,
Speaker 3: perhaps investors should think about lightening their positions in certain
Speaker 3: types of companies.
Speaker 1: And I'm gonna I'm.
Speaker 3: Gonna use Krispy Krean just because it's such an easy target,
Speaker 3: you know, donuts and how does that work with weight loss?
Speaker 3: And and you know, you know, the research was suggesting, well,
Speaker 3: you should lighten up because with g l P there
Speaker 3: is going to be of you know, an impact on
Speaker 3: these type of companies as the demand for their products
Speaker 3: goes down. I think that's way overblown, and I'll give
Speaker 3: you some data to support that. Now. G LP drugs
Speaker 3: are driving shifts and consumer behavior which impacts you know
Speaker 3: you're thinking or you know for a QSR and consumer demand,
Speaker 3: and as the penetration of g LP drugs grow, that
Speaker 3: will affect calorie consumption. But it's quite small. Quite frankly,
Speaker 3: you know, the best data that we've seen say that
Speaker 3: you know, you know, at you know, full penetry of
Speaker 3: the sort of total addressable market you know, it might
Speaker 3: be ten percent of Americans and that's by you know,
Speaker 3: the year twenty thirty versus you know, maybe one percent,
Speaker 3: you know, one and a half percent or so using
Speaker 3: them today. And the reason for that is and these
Speaker 3: scenarios are based on patient adoption of the drug, but
Speaker 3: there are a couple of natural governors on adoption. Number
Speaker 3: one is right now, it's an injectable drug, and there's
Speaker 3: a number of them out there, but they're injectable. Number two,
Speaker 3: they're expensive, you know, and I don't know what the
Speaker 3: current pricing is, but I would say, you know, last
Speaker 3: I saw you know, over one thousand dollars you know,
Speaker 3: per per month. So it's expensive. And insuring companies have
Speaker 3: something to say about this because in many cases they're
Speaker 3: asked to pay for them, and that that's appropriate. If
Speaker 3: if it's you know, like a type two diabetes situation
Speaker 3: or you know, a customer that has obesity markers and
Speaker 3: this is you know necessary. But if it's you know,
Speaker 3: cosmetic or this is maybe the right word, but vanity
Speaker 3: use to just simply lose weight. That's where I think
Speaker 3: it is going to be a little less sticky. So
Speaker 3: where does it influence you know, consumer's behavior. Well, it
Speaker 3: has a disproportionate influence on snacks versus meals. So what
Speaker 3: we've seen is that the drug reduces snacking and in
Speaker 3: particular sweetened salty packaged foods, but not so much on
Speaker 3: poultry and red meat because they're immune to changing dietary preferences.
Speaker 3: But you know, sodas and sugary drinks are affected. But
Speaker 3: in many cases that's offset by the availability of you know,
Speaker 3: lower calorie and diet options. So the the impact is
Speaker 3: over indexes on well, consumer occasions, over index on meals
Speaker 3: and they under index and snacking occasions.
Speaker 1: That's just number one.
Speaker 3: And still when you think about the you know, the
Speaker 3: restaurant industry, I mean, what's really drives you know, fast
Speaker 3: food demand in particular, it's convenience, tastes, social connections. The
Speaker 3: use of these drugs at this kind of penetration level
Speaker 3: is really not going to have I don't think much impact.
Speaker 3: And in particular with QSR, which you know, in many
Speaker 3: cases is a lower broadly speaking of lower income demographic
Speaker 3: that has the lowest adoption rate of these drugs today,
Speaker 3: and the drug cost is going to likely be prohibitive,
Speaker 3: you know, at least in the short to short to
Speaker 3: medium term and when you think about adoption, Okay, so
Speaker 3: sort of you know, limited, moderate, or mass over this
Speaker 3: you know seven year period that we're looking at up
Speaker 3: to twenty thirty. You know, the limited adoption is maybe
Speaker 3: twelve million users and mass adoption of thirty six which
Speaker 3: would be about ten percent of the population. But interestingly,
Speaker 3: even at ten percent adoption ten percent of the population,
Speaker 3: the estimate of total caloric consumption reduction is less than
Speaker 3: two percent.
Speaker 1: Yeah. Yeah, yeah, we did that math.
Speaker 2: So you know, so what we'd like to say is like,
Speaker 2: you know, McDonald's can't figure out how to re engineer
Speaker 2: a smaller burger two and a half, you know, decrease
Speaker 2: the size of the burgers two and a half percent
Speaker 2: by twenty thirty. I mean, I think just because of inflation,
Speaker 2: they've been shrinking as it is. So yeah, that's that's
Speaker 2: an interesting point. I still have some more questions too.
Speaker 2: You know, is there some sort of a new bias
Speaker 2: in this right in East coast bias or a bias
Speaker 2: for people on the coast right where people can afford this,
Speaker 2: and we see people that we know that are on
Speaker 2: this drug, and we think this is gonna you know,
Speaker 2: so the investment community thinks this is going to be
Speaker 2: a massive issue, when maybe people in Middle America may
Speaker 2: not care as much.
Speaker 3: Oh well absolutely, I mean again, it's you know, the
Speaker 3: the the use, adoption and just simple you know, wherewithal
Speaker 3: to take these drugs, at least right now is greatly
Speaker 3: influenced by income and wealth. Now that now, that could
Speaker 3: that that could change. You know, if insurers or employer
Speaker 3: coverage increases and they're you know, there are compounding pharmacies
Speaker 3: that are creating their own formulations and they're you know,
Speaker 3: aiming for around you know, two hundred a month in
Speaker 3: a pill form versus a thousand plus and an injectable product,
Speaker 3: so that there is potential for greater adoption. I've changed
Speaker 3: the pill or other low cost forms, but at least
Speaker 3: right now, no, But yeah, you know, if you think
Speaker 3: about you know, higher wealthier demographic areas, yeah, absolutely, there's
Speaker 3: going to be more chatter about it, There's going to
Speaker 3: be more use. And but again, you know, broadly speaking
Speaker 3: for America at large, I have a hard time believing
Speaker 3: there's going to be widespread adoption. You know, more than
Speaker 3: you know, the sort of ten percent that we're predicting right.
Speaker 2: Now, I was gonna say that I'd have to imagine
Speaker 2: that a risk to this thesis would be side effects.
Speaker 2: Right if over time people start experiencing, you know, some
Speaker 2: side of some unwanted side effects that that that this
Speaker 2: would you know, impact adoption of this drug, right.
Speaker 3: Well, I agree with that, especially since we have just
Speaker 3: concluded a very interesting national adoption of brand new drugs
Speaker 3: and we're finding out that these are not riskless and
Speaker 3: there's already you know, sort of anecdotal you know, discussions
Speaker 3: about side effects for the way laws of drugs. So
Speaker 3: but again that falls into that opening caveat that I had,
Speaker 3: which is, you know, we just simply have limited data
Speaker 3: right now in terms of you know, how this is
Speaker 3: all going to work and limited data sets. But absolutely
Speaker 3: the potential for meaningful side effects is going to be
Speaker 3: a big part of that calculus.
Speaker 2: Yeah, I know what, And you and your team did
Speaker 2: a great report that that you shared with me, so
Speaker 2: thanks for that. But what I found really interesting was
Speaker 2: that you know, to your point, you mentioned that there's
Speaker 2: a lot less snacking and that there's a lot less
Speaker 2: alcohol consumption, right, and I understand that these drugs work
Speaker 2: very quickly, right. But you know, if anyone with a
Speaker 2: weight problem just stop snacking and stop drinking alcohol, I
Speaker 2: feel like you can make massive progress and maintain that
Speaker 2: progress over time if you keep those habits.
Speaker 3: Right. Yeah, and and and that's a you know, an
Speaker 3: important point because the largest negative calorie impact in terms
Speaker 3: of consumption, you know, for the folks that are using
Speaker 3: these drugs as some snacks alcohol products with sugar, and
Speaker 3: in those general categories well snacks, alcohol, alcohol, you know, cookies,
Speaker 3: you know, confections, you know, the the change in consumption
Speaker 3: is like sixty to sixty five percent negative. But if
Speaker 3: you look at and this intuitively, this you'll I mean
Speaker 3: this is true, but intuitively you'll understand it if you
Speaker 3: look at the categories like fruits and vegetables, poultry and fish,
Speaker 3: those increase fruits and vegetables is like plus forty percent.
Speaker 3: In poultry and fishes plus twenty percent. So I mean
Speaker 3: that makes sense because you're you know, you're actually thinking
Speaker 3: and acting on you know, tactics to eat healthier and
Speaker 3: lose weight, so you know, off, you know, so poultry
Speaker 3: and red meat, I don't think that there's going to
Speaker 3: be a significant impact on demand yes, there will be
Speaker 3: on sugar and snack options. But in the restaurant industry,
Speaker 3: once again, you know, it's it's more about meals and snacks,
Speaker 3: and so does we have options with diet And you
Speaker 3: know there will probably be a lingering hangover with carbs
Speaker 3: because they're just painted as being the enemy by a
Speaker 3: lot of folks. It doesn't the impact across food categories
Speaker 3: is widely dispersed, which makes sense.
Speaker 2: Okay, cool, So so your customers aren't going to be
Speaker 2: adding GLP penetration to their site selection models anytime soon's
Speaker 2: I was.
Speaker 1: Like, I don't think so, all right, I could.
Speaker 3: We'll find some other things you know in that location
Speaker 3: location location idea other than GOP adoption.
Speaker 1: Yeah cool, all right, so you did?
Speaker 2: You We're on a panel about generative AI at at
Speaker 2: r f DC. You know, chat EPT and these large
Speaker 2: language models have really shined a light on AI, probably
Speaker 2: made most Americans aware that AI existed, right. You know,
Speaker 2: I tell people that I know that I've been relying
Speaker 2: on research from a from an AI, a machine learning
Speaker 2: company since twenty sixteen, and people's minds are blown.
Speaker 3: You know.
Speaker 2: McDonald's investor Day, their management talked about how AI will
Speaker 2: be used to support their gms and their hourly workers.
Speaker 2: It's going to be the backbone for their their customer
Speaker 2: facing software where and right now, there's a lot of
Speaker 2: hype about generative AI. So I'm not completely versed on
Speaker 2: generative AI. I'm sure a lot of people that are
Speaker 2: listening in aren't. So can you talk a bit about
Speaker 2: it and what you think it's.
Speaker 1: Going to do for the restaurant industry.
Speaker 3: Yeah, well, well, first of all, there is a distinction
Speaker 3: between AI and gen AI, which we'll talk about briefly
Speaker 3: at a high level. But I think that my advice
Speaker 3: to operators and brands when it comes to this is
Speaker 3: buckle up because it's coming and it's gonna you know,
Speaker 3: it could come pretty it could come pretty fast. And
Speaker 3: why because there are some great tool sets available here
Speaker 3: for operators and they make sense and it's you know,
Speaker 3: it's just sort of next gen technology that you know
Speaker 3: will be an integrated part of your you know, tech stack.
Speaker 3: But it's coming because it works. And the first waves
Speaker 3: started a few years ago. And this is AI, not
Speaker 3: jen Ai, because jen a jen Ai is new, but
Speaker 3: it start started a few years ago as a response
Speaker 3: to changes in consumer behavior. And so you know, restaurant
Speaker 3: brands have made investments and you know, commercial use cases
Speaker 3: sort of usually top line oriented like third party delivery,
Speaker 3: and you know, thinking about ways to improve your marketing
Speaker 3: and in many cases changed the nature of interactions with customers.
Speaker 3: And and and especially when you think about the pressures
Speaker 3: that restaurant brands are experience seeing today, which is, as
Speaker 3: we all know, well above average and not normal. To
Speaker 3: protect the unit level economics, it's probably smart to build
Speaker 3: on the foundations established in the first way the data
Speaker 3: platforms and point point the activity and point some of
Speaker 3: the investment more towards operations focused use cases like things
Speaker 3: you know that can you know, directly impact profitability, like
Speaker 3: you know, just through a couple of inventory optimation, optimization,
Speaker 3: you know, and things like that. You know, where we
Speaker 3: know that there are going to be significant use cases
Speaker 3: that can can affect profitability. Now, there there's a lot
Speaker 3: of glamour and myth, you know when people talk about
Speaker 3: ai and jen ai and and you've seen it, and
Speaker 3: you know the popular press cheese we're not even going
Speaker 3: to need humans anymore. Well, that's not going to happen,
Speaker 3: but it is going to have an impact on you know,
Speaker 3: you know, the company's human capital, as there is increasingly
Speaker 3: a shift in focus from transactional activities to strategic you know,
Speaker 3: sort of knowing the what to knowing the how, and
Speaker 3: most workforces are under skilled and.
Speaker 1: The how and how.
Speaker 3: I think the consensus and how this you know, gets
Speaker 3: rolled out and adopted. Obviously it's going to the big
Speaker 3: brands first, right, I mean, this is big right now,
Speaker 3: it's big brand sandbox because it's expensive, and I mean
Speaker 3: and the idea that well, it's expensive in it. And
Speaker 3: I think there's sort of four common myths. And one is,
Speaker 3: you know, there's an illusion of instant savings, you know,
Speaker 3: and this promise of efficiency gains, you know, is attractive,
Speaker 3: but organizations are often not ready because they don't they
Speaker 3: don't have their digital capabilities up to snuff.
Speaker 1: Yeah.
Speaker 3: And then the second myth is, you know, it's related
Speaker 3: to the confusion between AI and gen Ai. Most a
Speaker 3: I use cases are still going to be traditional and
Speaker 3: it's it's it's great for you know, you know, customer
Speaker 3: sentiment analysis and some you know, rudimentary operational considerations, but
Speaker 3: but only some are well suited for jen Ai to
Speaker 3: you know, have a material impact like supply chain optimization
Speaker 3: from demand you know, more sophisticated demand forecasts. And then
Speaker 3: a third kind of myth that we're going to find
Speaker 3: out is a myth is and we know this is
Speaker 3: true because it's happened in just about every other category
Speaker 3: of tech that you know has been rolled out all
Speaker 3: of the big vendors. And if you think about you know, Microsoft, Google,
Speaker 3: and you know sales Force, they are all busily word
Speaker 3: get an investing on their out of the box solutions,
Speaker 3: and so there's going to be a partner to pick.
Speaker 3: You know, do you pick the right partner? Well, this
Speaker 3: it almost goes back to like when we were rolling
Speaker 3: out you know, point of sale systems. Did you pick
Speaker 3: the right partner or did you invent it yourself? You know,
Speaker 3: inventing it yourself didn't work out so well. But the
Speaker 3: vendors provide invaluable resources in backbone backbone and capabilities, but
Speaker 3: there's almost always a level of customization that's that's needed.
Speaker 3: And then the other bald fact is this is tech
Speaker 3: and there's a constant question, constant question about whether the
Speaker 3: solutions that are being proposed today or enabled today will
Speaker 3: still be advantaged. You know, in the future and the
Speaker 3: future like when in the future, Well, let's let's start
Speaker 3: with you know, six months, you know, not five years,
Speaker 3: you know, so because it's it's going to be moving
Speaker 3: very very quickly. And again, you know, the the real
Speaker 3: game changer is is the impact it's going to have
Speaker 3: on your human capital and how you integrate it and
Speaker 3: use it to impact profit productivity. And that the obviously,
Speaker 3: the the ability to make significant impacts there is all
Speaker 3: over the map, depending on a the sophistication of the
Speaker 3: company and b, you know, resources and don't know how
Speaker 3: too many operators that wake up with the warnings said, cheese,
Speaker 3: you know, you know what our problem is, we have
Speaker 3: too many resources that I don't hear that very.
Speaker 1: Yeah, yeah, it's interesting.
Speaker 2: I mean, you know, marketing obviously is one I think
Speaker 2: is interesting. Customer service obviously it could improve. One thing
Speaker 2: I saw on the list which I found interesting was
Speaker 2: store design. And I think one of the first companies
Speaker 2: that I recall hearing that had sensors and would track
Speaker 2: everywhere people will go in the store, Waskava. So I
Speaker 2: thought that was pretty interesting when I read that as
Speaker 2: a potential, you know, I put a potential, you know,
Speaker 2: use for generative AI.
Speaker 1: But another one's loyalty.
Speaker 2: It seems like every company I cover is in the
Speaker 2: process of upgrading their loyalty program right now.
Speaker 1: So what motivating this with loyalty?
Speaker 3: Yeah, yeah, Well we've been talking about loyalty for how
Speaker 3: many decades now, and you know, I mean quite frankly,
Speaker 3: if if you go back in time and at BCG,
Speaker 3: we've done an enormous amount of research on this because
Speaker 3: when it works, it could be magic. And we gave it.
Speaker 3: We gave a talk about this at r f DC.
Speaker 3: You know, boy, I'm want to say, almost ten years
Speaker 3: ago on loyalty, and the punchline at the time was
Speaker 3: most loyalty programs do not create value for the enterprise.
Speaker 3: And the reason was because they were very simple, and
Speaker 3: they were points based and they were earning burn learn
Speaker 3: and in some ways you know the way I described
Speaker 3: it as you know, they were very efficient aggregators of discounts,
Speaker 3: but in terms of really having you know, really driving
Speaker 3: the business, you know, in most cases they didn't. But
Speaker 3: today is different. You know, loyalty today is no longer optional.
Speaker 3: You know, you have to It's critical if you want
Speaker 3: to be really competitive, you have to you have to
Speaker 3: be in the loyalty game. And I mean loyalty creates
Speaker 3: a points currency with redemption, with redemption options that can
Speaker 3: help protect economics by actually avoiding inefficient discounting, you know,
Speaker 3: rather than you just give it to everybody just because
Speaker 3: you came in and you spent a butt.
Speaker 2: Well that was the problem with Tim Morton's right when
Speaker 2: they launched it. They gave discounts to people that were
Speaker 2: going to come anyway.
Speaker 3: Right exactly. And so if to active evate, to activate
Speaker 3: a program today, you know, there's three areas. There's in restaurant,
Speaker 3: there's your digital channels, and then there's targeted messaging you know,
Speaker 3: slash personalization and and and and it and the other thing.
Speaker 3: It has to be simple and easy to understand so
Speaker 3: you can incentivize incremental customery behaviors. Otherwise it's it's really
Speaker 3: easy to get lost. And but where where I think
Speaker 3: And if you look at if you we do a
Speaker 3: massive restaurant survey every year, if you when you look
Speaker 3: at what consumers say about loyalty, the bottom line is
Speaker 3: earning points is still number one, but guests are increasingly
Speaker 3: value personalized and other benefits. So you know, what do
Speaker 3: they really like. They like points for purchase, they like
Speaker 3: bonus cash back, they like member sales and promotions you
Speaker 3: know that are targeted, targeted just for them. You know what,
Speaker 3: don't they care so much about exclusive events? You know?
Speaker 1: Interesting? Think what about uh like what about like a
Speaker 1: great table?
Speaker 2: You know, like stuff like that, Because I've heard of
Speaker 2: some some chains that will, uh you know, try to
Speaker 2: have kind of a loyalty program that rewards people with
Speaker 2: like the best table in the restaurant. They'll let them
Speaker 2: try things before there you know, that are coming to
Speaker 2: the menu before they're.
Speaker 1: Available for everybody else to.
Speaker 2: Your point, events, But but those don't seem to be
Speaker 2: uh drivers for for.
Speaker 1: You know, most customers.
Speaker 3: Perhaps is the best way I can answer that, because
Speaker 3: is that best table is at a concierge level service,
Speaker 3: very few concern consumers care about that? Is it a
Speaker 3: personalized reward if you put it in that bucket? Well, actually,
Speaker 3: you know about about a fifth of the consumers care
Speaker 3: about that a lot. Okay, so it sort of depends.
Speaker 1: But so I guess it all comes back down to personalization. Right.
Speaker 2: So that's what it sounds like to me from your
Speaker 2: answer that these chains are realized that their previous systems
Speaker 2: aren't doing a good enough job of personalizing their offers
Speaker 2: for their their loyalty customers.
Speaker 3: Yeah, but you still have to be in the game,
Speaker 3: you know, because it's loyalty is increasingly the hook into
Speaker 3: the rest of the enterprise digital the rest of your
Speaker 3: digital ecosystem. So, for example, nearly sixty percent this is
Speaker 3: a quorean for a survey of loyalty program members use
Speaker 3: the brand's mobile app, versus five percent for non loyalty
Speaker 3: Wow members. Wow that that that that's kind of a
Speaker 3: game changer.
Speaker 2: Well, that's why everybody's offering free free stuff to join
Speaker 2: the program, right.
Speaker 3: To sign up, yep, and and so okay, well that's cool.
Speaker 3: That's a cool little factoid. Somewhat Well, here's the sow.
Speaker 3: If if you order from the restaurant app versus just
Speaker 3: you know, ordering at the window or the drive through
Speaker 3: or or a third party, if it's forty eight percent
Speaker 3: of the orders are linked to the loyalty account, and
Speaker 3: what else do consumers say? Oh, well, it's faster to order,
Speaker 3: I knew, you know, they saved my address and my payment,
Speaker 3: The accuracy is better, My favorite orders are saved in
Speaker 3: the app. So it's just you know, vastly easier because again,
Speaker 3: I mean you've you've used a ton of these apps yourself,
Speaker 3: and you're one click away from disaster, right, So you know,
Speaker 3: it's it's you know, going forward, it's it's kind of
Speaker 3: a big deal. And they're evolving and and right across
Speaker 3: the industry all categories, you know, all of retail, and
Speaker 3: they're delivering more personalized experience and they're you know, they're
Speaker 3: you know, keeping their hooks into the consumers. And again,
Speaker 3: the the first generation of loyalty was earn and burn, right,
Speaker 3: I mean, I mean remember when you went to subway.
Speaker 3: You know, you got stamps, you put them in your
Speaker 3: little card and fill up your card to get a
Speaker 3: sub and that went on for decades. And then the
Speaker 3: second generation is building you know, engagement, and you know
Speaker 3: the leaders in that are you know, Chick fil A
Speaker 3: and in the restaurant industry and and Starbucks. And then
Speaker 3: the the trends with momentum are our personalized experiences and
Speaker 3: uh and you know there has been a barrimenting with
Speaker 3: subscription services, you know, just to you know, you know,
Speaker 3: to to pick one, but also you know, loyalty member
Speaker 3: exclusive features that you're going to get that others aren't
Speaker 3: going to get just because you're on the app and
Speaker 3: you're in the in the in the loyalty. Yeah.
Speaker 2: We saw that with Chipole Right, Like there's certain menu
Speaker 2: items like case ideas and stuff like that where you
Speaker 2: can only get them through the app. Right, try to
Speaker 2: create create a little buzz and some incentive to sign
Speaker 2: out brand.
Speaker 3: Yeah. And well, and it even goes beyond that because
Speaker 3: now they have branded apparel. No, I don't think that
Speaker 3: this is going to be I don't think that they're
Speaker 3: going to arm wrestle branded apparel for brutal bowls. But
Speaker 3: you know, it's just it's just something else that's out there.
Speaker 3: And you know, and then Panera did quite well with
Speaker 3: their My Panera you know coffee subscription. Oh yeah, and
Speaker 3: they got they went from zero like four hundred excuse me,
Speaker 3: for forty million members like Lickety's flow.
Speaker 2: So it's a perfect item, right, It's addictive, it's it's
Speaker 2: a ritual. It's a perfect item to sell on a subscription.
Speaker 2: It's fantastic.
Speaker 3: Yeah. And and then the you know, the top performing programs,
Speaker 3: you know, you you do ben fit from increased average
Speaker 3: check size as well, so you keep them, you get
Speaker 3: them coming more, and they spend more and and you know,
Speaker 3: that's that's a that's a pretty good.
Speaker 1: Plus.
Speaker 2: It's a high that coffee is a high margin item too,
Speaker 2: so you can afford the subscription on it.
Speaker 3: So there there's there is a lot of chatter about
Speaker 3: the subscription plans and we're we're we are seeing more
Speaker 3: and more efforts in that. But it's also probably worth
Speaker 3: pointing out that subscription programs are not new. You know,
Speaker 3: Taco Bill had one, yeh, Taco Lovers Pass. You know,
Speaker 3: it's a you know, it's a flat fee for a month.
Speaker 3: I don't remember how much it was, and you can
Speaker 3: get a taco per day free. Well, obviously you're not
Speaker 3: gonna do that if you're going to go and you're
Speaker 3: going to get you're not stepping in for one tackle. Yeah,
Speaker 3: and Subway had they had a for a short period
Speaker 3: of time. You know, they're foot long Pass again for
Speaker 3: a monthly fee and you could get fifty percent off
Speaker 3: one foot long sub per day. But those those are
Speaker 3: gone now, all.
Speaker 2: Right, cool, let's change gears. How much pricing do you
Speaker 2: think restaurant chains are going to be taking next year?
Speaker 3: Well, for many too much. How's that?
Speaker 2: I probably wanted to listen, you know me, I'm as
Speaker 2: barished as anybody right now. So you know, you know
Speaker 2: you're not going to get any push back here.
Speaker 3: Yeah, I think, Look, I again, we have unprecedented pressure
Speaker 3: on the P and L top to bottom, right, every
Speaker 3: every line item and so, and to just keep that
Speaker 3: in perspective, I'll give you a couple of rules of
Speaker 3: thumb or historical historical you know ideas. We've been in
Speaker 3: a low inflation environment for what the past thirty years more.
Speaker 2: Well, we had some we we had the last commodity
Speaker 2: bull was the early two thousands, all right, so that
Speaker 2: was the last time, but.
Speaker 1: It was short. Historically is very short.
Speaker 2: So commodity bulls typically the last seventeen years on average,
Speaker 2: just one lasted from the Russian blow up in the
Speaker 2: late nineties was like ninety eight or so, and then
Speaker 2: into into the Great Recession, so we had about a decade.
Speaker 2: But yeah, very abbreviated historically.
Speaker 3: Yeah, So, I mean, but if you had to pick
Speaker 3: a number, or if I had to pick a number,
Speaker 3: you don't have to, I would pick you know, like
Speaker 3: two percent of you know, inflation is just sort of
Speaker 3: right around that for an extensive period of time up
Speaker 3: until just recently. And so given that backdrop, what was
Speaker 3: an acceptable rate of pricing, you know, price increases that
Speaker 3: you could take, you know, without impacting customer traffic. And
Speaker 3: if I had to, I would say, you know that
Speaker 3: would you know generally bounce somewhere in a pretty narrow
Speaker 3: range of three to five percent?
Speaker 2: Yeah, and Change did it, and Change did it strategically,
Speaker 2: not the way they're doing it strategically now down to
Speaker 2: the d m A. But they were doing it strategically
Speaker 2: by market. I remember Cracker Barrel in like twenty fifteen
Speaker 2: or so did a a pricing program where they were
Speaker 2: raising prices in the Mid Atlantic, but they kept them
Speaker 2: static in the South right, And so they were kind
Speaker 2: of doing it by region, right, So they might have
Speaker 2: raised it five in the mid mid Atlantic, but maybe
Speaker 2: one in the South right right.
Speaker 3: And that that actually, you know, you know, goes back
Speaker 3: to your point about you know, are there changes in
Speaker 3: behavior depending upon you know, household income and things like that,
Speaker 3: And the answer is yes, and so yeah, you know,
Speaker 3: you try and be as strategic as you can, but
Speaker 3: the bottom line is that you know, three to five
Speaker 3: percent was the annual and maybe maybe it took two
Speaker 3: steps to get there. You know, if you roll your
Speaker 3: menus every six months or so, yeah each time, Yeah,
Speaker 3: yeah you did it. But but the annuals, you know,
Speaker 3: sort of top acceptable number for most brands is I
Speaker 3: would say five percent, maybe maybe six percent. But uh
Speaker 3: but then you know, you know, COVID hits and inflation hits,
Speaker 3: and what are we going to do. We have to
Speaker 3: protect our march and especially you know the book be
Speaker 3: trading companies, but not not just them, I mean, you know,
Speaker 3: independent operators, private operators, you know, still want to make
Speaker 3: money too, So so pricing started to you know, ramp up,
Speaker 3: you know, very significantly and immediately, and so and I
Speaker 3: was I was giving a talk about this at an
Speaker 3: industry conference. It was in two yeah, it was in
Speaker 3: twenty twenty, so it was in the fall of twenty twenty.
Speaker 3: And one of the guys that was on my panel said, look,
Speaker 3: if you haven't already raised your pricing by at least
Speaker 3: ten percent, your a dope. And I'm paraphrasing, but that
Speaker 3: was they good message, and.
Speaker 1: This is a great message. It was dead on.
Speaker 3: Well, I well, I you know, I kind of violently
Speaker 3: disagree with that. And but you know, early on, you
Speaker 3: know that, you know, operators were in bolden because they
Speaker 3: actually took these outsized price increases that in some cases
Speaker 3: were several times higher than what was historically acceptable, and
Speaker 3: it seemed to stick. Yeah, and so and but then
Speaker 3: the cost pressures weren't alleviated, and they kept going up,
Speaker 3: so they tried to do it again and again. And
Speaker 3: I think that basically we have reached reached the point
Speaker 3: where we already know that many brands have taken they've
Speaker 3: hit the price button too hot, and they're seeing softness
Speaker 3: in traffic.
Speaker 1: And a lot yeah for a couple of years now, man.
Speaker 3: Yeah, right, And you know, and if you look at
Speaker 3: you know, the publicly traded companies and you read you know,
Speaker 3: the you know, you listen to the conference calls and
Speaker 3: read the transcripts, and I had listened to them all,
Speaker 3: and there's so much chatter about you know, margin recovery,
Speaker 3: and we need to, you know, we need to take
Speaker 3: a little more outsize pricing, you know, because we have
Speaker 3: to we're trying to get our margins back. Well maybe
Speaker 3: you don't actually well, I mean you do, but maybe
Speaker 3: that's not the smart thing to do because you might
Speaker 3: be in a and probably are at a situation where
Speaker 3: you're going to have you know, your your margins are
Speaker 3: simply going to be less than they were in optimal
Speaker 3: every day uh, you know, in an optimal everyday environment.
Speaker 3: And the most important thing is to keep your customers,
Speaker 3: because if you don't keep your traffic, you're not gonna
Speaker 3: have to worry about your margins. Yeah, because your your
Speaker 3: parking lots are going to empty out. You're going to
Speaker 3: go broak.
Speaker 1: Well in this business, right, the top line.
Speaker 2: If you want to expand your margins, the best way
Speaker 2: to do is by expanding that top line, right.
Speaker 3: And you know it's really hard to expand margins when
Speaker 3: your top line is Yeah, And.
Speaker 2: I think that's what we're that's what we could be
Speaker 2: looking at for especially the first half of next year, right.
Speaker 2: I mean, traffic's been atrocious. We got some tough comparisons.
Speaker 2: But you know, I don't want I don't want to
Speaker 2: bring too much doom and gloom to this podcast.
Speaker 3: Well, no, I I don't have a lot of doom
Speaker 3: and gloom quite frankly, I think you know it's it's
Speaker 3: gonna be tough sledding and there's a lot to work through.
Speaker 3: But you know, we've been through this before and but
Speaker 3: you're not going to be you know, brands simply don't
Speaker 3: have the ability to price their way out of trouble.
Speaker 3: I mean, consumer can't accommodate it even if they wanted to.
Speaker 3: And it doesn't impact all brands, all brands the same
Speaker 3: way at the same time, because you know, consumer favorites
Speaker 3: are impacted a little bit less because even if it
Speaker 3: costs a little bit more and it's on the high
Speaker 3: side of happiness, consumers don't they don't eliminate their favorite
Speaker 3: things first, so you know where where the brand lies
Speaker 3: on that scale of favorites if you want to call
Speaker 3: it that, we'll have a has direct implications for pricing.
Speaker 3: But the bottom line is these you know, six to
Speaker 3: eight percent and then ten percent and then another six percent.
Speaker 3: That's over. Yeah, unless you want to see your you know, traffic,
Speaker 3: it destroyed for sure.
Speaker 1: For sure. I couldn't agree more. What are your thoughts
Speaker 1: on the IPO market? Man?
Speaker 2: Are some you know, are we seeing some companies going
Speaker 2: public too soon since the passage of the Jobs Act?
Speaker 2: You know, I guess a decade ago or so, well.
Speaker 3: I have worked on an extraordinary number of IPOs over
Speaker 3: a thirty year period, so I have more than a
Speaker 3: passing familiarity with this. So I don't have an answer
Speaker 3: to your question that is confined to, you know, the
Speaker 3: last six months or twelve months, because I don't think that,
Speaker 3: I mean, I don't believe that the behavior of companies
Speaker 3: that approached the public markets has really changed that much
Speaker 3: in any industry. And so could could one say, well,
Speaker 3: you know, some of these companies, look, they went out
Speaker 3: too early in it, they should have just waited. Well,
Speaker 3: that's always true, And there's a couple of dynamics there.
Speaker 3: Number one, why do you go public? Well, you know,
Speaker 3: a really good reason is to raise capital that you
Speaker 3: and redeploy into operating assets and grow your business. And
Speaker 3: it can be in the public market can be a
Speaker 3: very very efficient way to make that happen. In fact,
Speaker 3: it's the only way if you want to build a
Speaker 3: big company, because you can't borrow your way to greatness.
Speaker 3: So that's attractive and it's and that's not going to change. Now,
Speaker 3: are you ready to be public? That that's a that's
Speaker 3: a company specific question with the company specific answer, And
Speaker 3: and I would also say that in addition to just
Speaker 3: you know, having access to capital. I've I've seen and
Speaker 3: I've been involved in many, many cases where you know,
Speaker 3: in hindsight, the IPOs was sort of it was more
Speaker 3: of a goal line than a tactic, and I finally
Speaker 3: made it. I'm public, you know, and actually it's not
Speaker 3: the goal line. You're still on your own twenty Okay,
Speaker 3: you still have a lot of field to cover here.
Speaker 3: And then you know, third, there's always been this fantasy
Speaker 3: that Okay, we think we can I think we can
Speaker 3: get out there and get a decent print and it'll work,
Speaker 3: and we'll do the little IPO. Now, we'll just raise
Speaker 3: a little capital because we need a capital just to
Speaker 3: get a little bit bigger, and then in eighteen months
Speaker 3: we'll do the we'll do the big boy, big boy
Speaker 3: public Equality Offering and raise a lot more capital. And
Speaker 3: so they had that you know, two stage idea that
Speaker 3: doesn't always work so well. And because you know, quite
Speaker 3: frequently that initial i PO that they contemplate because they
Speaker 3: think they're going to do a little one, then the
Speaker 3: big one later, well it's too small, Yeah, it's not
Speaker 3: enough capital or they're not ready and they're not ready
Speaker 3: for the both the expense and pressure of being a
Speaker 3: public company, and so they fail and then when they fail,
Speaker 3: now you're really in Now you're really in a world
Speaker 3: of hurt because you know, your access to capital is
Speaker 3: you know, vanishes, and and we have so many I mean,
Speaker 3: I don't want to pick on anybody in particular, but
Speaker 3: let's just take a fake meat company as an example
Speaker 3: where there's just a massive amount of hype and hyperbole
Speaker 3: and it's supported by contract research. It says, you know,
Speaker 3: consumers are you know this this much. I'll just make
Speaker 3: up some thirty percent of consumers spending on you know,
Speaker 3: protein is going to be on on you know, I'll
Speaker 3: just call it fake products, you know, or plant based
Speaker 3: And so they access to public marcacy, raised a lot
Speaker 3: of capital, there's a lot of hype. You know, the
Speaker 3: stock goes up. But then after they get out into
Speaker 3: the field and they're competing in the wild and consumers
Speaker 3: get over trial because there is a lot of trial.
Speaker 3: But you know, the going from trial to sort of
Speaker 3: permanent adoption is not guaranteed. And so you know, you know,
Speaker 3: several of these plant based protein companies all of a sudden,
Speaker 3: you know they're out there and then about eighteen months
Speaker 3: later and their sales fall off a cliff, and there's
Speaker 3: you know, and so you know you have a stock
Speaker 3: that goes from you know, eighty to two. Well in
Speaker 3: one case that one of the two dollars stocks is
Speaker 3: you know for sure will declare b K. So you
Speaker 3: know that that's a long winded, you know, answer to
Speaker 3: your question. Are some of these companies going out too soon? Yes,
Speaker 3: I mean, but that's always been yeah, and it's not
Speaker 3: only the restaurant industry, and not because yeah, and not
Speaker 3: because it's fraudulent. I mean, I think you know, there's
Speaker 3: just there's a lot of hope. Yeah, they're just not
Speaker 3: ready now.
Speaker 2: You know what I find interesting is I wonder how
Speaker 2: many companies look at Shakeshack and Shakeshack's CEO, Randy Grudy,
Speaker 2: gave a lot of credit to their success in the
Speaker 2: first couple of years after the I PO to all
Speaker 2: of the press they got.
Speaker 1: From the I p O.
Speaker 2: And I feel like one of the companies that I
Speaker 2: peoed over the last couple of years, I don't know
Speaker 2: if it was Dutch Bros.
Speaker 1: Or somebody mentioned the.
Speaker 2: Fact that, you know, they thought the IPO could kind
Speaker 2: of supercharge their growth.
Speaker 1: So I just find that that interesting.
Speaker 2: I wonder if that's in the in the calculus for
Speaker 2: some of these high growth restaurant chains.
Speaker 3: Well, I think it's in the in the calculus of
Speaker 3: all the things that we actually really like and really
Speaker 3: worry about. I think that's you know, down the list. Yeah,
Speaker 3: that's an added bonus, you know, when you're shake shack,
Speaker 3: you know, early on and it's brand new and everybody
Speaker 3: wants to try it, and it's got a lot of buzz.
Speaker 3: I mean, the IPO helped that. They were in the
Speaker 3: media all the time, you know. I remember when Krispy
Speaker 3: Kreme first, you know, hit the public markets. I had
Speaker 3: at our investor conference in New York, and and all
Speaker 3: they did was show a video of you know, from
Speaker 3: a helicopter and here's our opening here, and it's just
Speaker 3: you know, lines of cards, you know, clogging up the
Speaker 3: freeway and here's you know, And so they used it
Speaker 3: for that, and it you know, created a lot of
Speaker 3: buzz and a lot of awareness, and they capitalized on it,
Speaker 3: you know, early on. But there are just as many
Speaker 3: examples of where you know, the entering the public markets
Speaker 3: and all the press around it helped up front, but
Speaker 3: then at the end of the day when you have
Speaker 3: to rely on the merits of your own brand. Some again,
Speaker 3: like some of the plant based companies that have been
Speaker 3: out there just to pick on them. They can't they
Speaker 3: can't hold on to their they can't hold on to
Speaker 3: their consumers.
Speaker 2: Yeah, it's Krispy Kreme, one of my favorite company visits ever.
Speaker 2: Twenty twelve ish, I visited them. I don't know how
Speaker 2: many blueberry glazed donuts. I had, donut milkshakes. They were
Speaker 2: handing me coffees.
Speaker 1: It was. I was eating donuts right off of the
Speaker 1: off of the off of the line.
Speaker 3: It was.
Speaker 1: It was fantastic man.
Speaker 2: All right, last question for your thoughts on a potential
Speaker 2: sandwich monopoly.
Speaker 3: Wow, you're referring to Subway obviously, Yes, sir, I think
Speaker 3: that is just one of the more amusing things I've
Speaker 3: heard and read about recently. So let me understand this.
Speaker 3: The suggestion is that Subway has a new home with
Speaker 3: Rourke and somehow this is going to create a monopoly
Speaker 3: or a monopoly like situation.
Speaker 2: Yes, so rur could just charge everybody like thirty dollars
Speaker 2: for a turkey sandwich, now.
Speaker 3: Right, Yeah, that's where I was going. So well, Number one,
Speaker 3: I don't think that we have any shortage of sandwich
Speaker 3: offerings anywhere in America, any town, any place. Number one.
Speaker 3: So I don't know where the monopoly comes from. But
Speaker 3: if the idea is that subway finds a new home
Speaker 3: and they wake up the next day and say, wow,
Speaker 3: we have monopolistic powers. So here's a new deal. Every
Speaker 3: all Ham sandwiches from this point forward our twenty five
Speaker 3: dollars because we can charge whatever we want. We have
Speaker 3: a monopoly. Okay, what do you think is going to
Speaker 3: happen to the sale of Ham sandwiches a subway?
Speaker 1: They're done.
Speaker 3: I can tell you there aren't going to be any
Speaker 3: I think that the premise is silly.
Speaker 1: Our tax dollars at work.
Speaker 3: Man, Yeah, let's protect you know, find us. There's got
Speaker 3: to be something else you can protect us from. But
Speaker 3: a sandwich monopoly is not. It should not be high
Speaker 3: on the list. No, definitely not, because it's a fantasy.
Speaker 1: I guess they're bored. They don't have enough work to do.
Speaker 3: Yeah, but if we see twenty five dollars Ham sandwiches, man,
Speaker 3: you can call me proved me.
Speaker 2: Well, all right, good stuff man, Thanks again for doing this.
Speaker 2: You're great man. I really when I send out some
Speaker 2: research or like a reminder to listen to one of
Speaker 2: my podcasts and I get an email back from you,
Speaker 2: it usually usually makes my day.
Speaker 3: Man.
Speaker 1: So thanks for doing this. Thanks for being a friend.
Speaker 3: Man. I appreciate the invite and hope you found that helpful.
Speaker 3: And that too controversial I tried.
Speaker 2: To Yeah, you did a good job man. You know
Speaker 2: in our personal discussions you're a lot more controversial. But no,
Speaker 2: that was great, So thanks again. Thanks to the audience
Speaker 2: for listening in. If you like the podcast, thanks all. Yeah, yeah,
Speaker 2: for sure. If you like the podcast, please share it
Speaker 2: with your colleagues and be on the lookout for another
Speaker 2: episode in early January.
Speaker 3: One