Quiznos sees Asia move as key to its future

December 16, 2014

© 2014 American City Business Journals, Inc. All rights reserved.11aquiznostaiwan-304xx2905-1937-0-76

Quiznos is undertaking a major expansion in Asia as it emerges from bankruptcy, with plans to open 1,500 stores in China and several hundred more in other countries.

Kenneth Cutshaw, president of the company’s international division, says the overseas move is important to help restore the company’s financial health.

The Denver-based sub chain filed for bankruptcy protection in March, citing a need to reduce its debt load by more than $400 million and to aid franchisees who have fought with the company over their profitability.

It exited Chapter 11 protection in July after court approval of a prepackaged plan in which three senior lenders acquired 70 percent of the company’s shares in exchange for debt.

These new efforts in Asia represent the first substantial growth plans the company has announced since then. In addition to the Chinese partnership, Quiznos signed deals with master franchisees to open 100 stores each in Malaysia, Taiwan and Indonesia, including a 24/7, 10,000-square-foot location in Indonesia that will be the chain’s biggest in the world.

In betting big on growing Asian markets — it also has franchisees who have opened stores in South Korea, Singapore and the Philippines — Quiznos is following in the footsteps of larger chains such as McDonald’s and KFC that have found success in that region.

But Quiznos enters these new arenas after spending 10 years reducing its number of American stores from more than 5,000 to about 1,100, making Cutshaw keenly aware of how important this growth is.

“Yes, it is a key component to restoring our company’s financial health,” Cutshaw said. “We’re not alone. There are other brands that have had tremendous success outside the country and are still rebuilding their operations in the U.S.”

Quiznos entered the international market in 1999 in Latin America and now has more than 100 locations in that region. For its international expansions, it seeks out master franchisees who know the markets and who have experience operating chain restaurants. About 35 percent of its total stores are outside of the United States.

Asia would host the largest concentration of its overseas stores if the growth is completed as projected. Key to that is the 1,500 Chinese locations planned over the next 11 years in a partnership with AUM Hospitality and Parkson Holdings Berhad. Parkson operates about 60 top-tier stores of other brands throughout China now, Cutshaw said.

Quiznos will enter the market with what Cutshaw believes is a built-in advantage.

“American brands are given the strong benefit of the doubt when they enter an international market,” he said. “It’s perceived as a superior-quality product.”

Brands that have experienced Asian success have changed their culture and menu somewhat, adapting to the use of Asian meats and vegetables and an inclination toward spiciness, said Darren Tristano, executive vice president of Technomic Inc., a Chicago food-industry consultant. But there are big opportunities present.

“Looking abroad for growth … is definitely a way for brands to grow, especially for Quiznos as it comes out of bankruptcy,” Tristano said.


Immigrants to Get Wage Boost from Job Mobility Under Obama Plan

December 10, 2014

Copyright 2014 Daily HeraldiVfER3CaVAIA

President Barack Obama’s decision to lift the economic ceiling on almost half the nation’s 11.4 million undocumented immigrants will give those workers a chance at higher pay and better jobs.

That means it will also raise costs for businesses that rely on off-the-books labor.

Dishwashers will become waiters, and day laborers will move to full-time work on farms, forcing employers to pay higher wages for new workers. A 1986 immigration law covering 2 million people pushed up pay by 15 percent in the first six years for those workers.

Those are some of the effects of the president’s plan to protect about 5 million people from deportation.

“We’re going to see these people do better in the job market,” said Sherrie Kossoudji, an associate professor at the University of Michigan in Ann Arbor. “They’re going to be more mobile.”

On the higher end of the economic scale, workers with specialized technical expertise will have more freedom to change employers. And their spouses — often highly skilled themselves — will be allowed to work, too.

The consequences for the broader economy will be slight. The order has the potential to boost U.S. output by between 0.4 percent and 0.9 percent over the next 10 years, according to a report from the White House Council of Economic Advisers.

In contrast, the sweeping, bipartisan immigration legislation passed by the U.S. Senate last year would raise the gross domestic product by 3.3 percent by 2023, according to the Congressional Budget Office. That bill failed to advance in the Republican-controlled House.

Wage Pressures

Obama’s plan, which he outlined this week, will defer for three years the deportation of those who came to the country as children, as well as the parents of children who are citizens or legal permanent residents.

As a result of the order, the agricultural industry, which relies heavily on immigrant labor, could face rising wage pressures. Once workers are documented, they won’t stay in seasonal work for long, said Baldemar Velasquez, president and founder of the Farm Labor Organizing Committee of the AFL-CIO.

“How are you going to replace the people you’re losing?” Velasquez said. “Farmers will still be looking for workers to harvest their short-term crops.”

Restaurant Workers

An estimated 18 percent of undocumented workers — about 1.5 million — are employed in low-paying restaurant and hospitality jobs, according to the Migration Policy Institute, a Washington-based research group. Another 1.3 million work in construction and 723,000 in retail.

For restaurants, Obama’s action will make it easier for those employing undocumented workers to follow the law, said Darren Tristano, an analyst at Technomic Inc., a research firm in Chicago.

“It will help the operators who are not compliant, who are running the risk of being closed or fined,” Tristano said. “It should take some of the complexity and pressure out of a business that is hugely labor oriented.”

One of the smaller groups aided by Obama’s directive may see the biggest gains: Some 40,000 foreign students who earn graduate degrees to get jobs in technology industries will be allowed to work in the U.S. for up to 29 months.

These students, who have degrees in science, technology, engineering and math, would have a significant effect on productivity and innovation, said Giovanni Peri, an economist at the University of California at Davis.

“It involves few people, but very crucial people,” said Peri, whose research shows that undocumented labor complements, rather than competes with, U.S. workers. “Those workers will go beyond the effect of matching the right person to the right job and increasing efficiency. They’ll create innovation.”

Good Start

For employers, the steps are a good start toward addressing the shortage of skilled workers, said Emily Lam, vice president of federal issues for the Silicon Valley Leadership Group, a San Jose, California, trade association. Still, the effect is limited because it’s only a temporary fix, she said.

Another large impact might result from a provision that expands opportunities for skilled immigrants and their spouses. Workers with specialized technical expertise would have more freedom to change employers. Their spouses would also be allowed to work.

Settled Debate

While Obama’s order has sparked a clash with Republicans over its legality, the economic debate over easing immigration laws is largely settled: Decades of research shows the economy benefits from greater worker mobility.

The 1986 amnesty law signed by President Ronald Reagan raised wages and boosted the economy. Almost 2 million undocumented immigrants living in the U.S. were given legal status, as were about a million seasonal workers.

By 1992, real hourly wages for those workers had risen an average of 15.1 percent as they moved out of low-status, low- paying jobs, according to a Department of Labor survey. Wages continued to rise, according to a 2012 study by the Economic Policy Institute in Washington, even as the nation entered a recession that lasted from July 1990 to March 1991.

Obama’s plan is even less controversial from an economic viewpoint because it mostly applies to people already working in the U.S. For them, the move brings opportunity.

“It’s quite a small effect in the aggregate,” Peri said. “There’s no harm done to the American worker and a big gain for the immigrants who can take these opportunities. That’s the big picture.”

Cumbersome Process

Peri was one of those immigrants, moving to the U.S. from Italy to study in 1993. He earned a doctorate degree and landed an H-1B visa, which are set aside for highly skilled people. The system made it almost impossible for him to get his green card granting permission to live and work in the U.S.

“It was so long and cumbersome I had to marry an American,” he said with a laugh. Now he’s a citizen raising three children. “I’ve invested in the U.S.”

For undocumented workers, moving up the economic ladder can be difficult, if not impossible. The economy creates and destroys millions of jobs a month, and that churn is one key to raising wages. Companies hired more than 5 million employees in September, according to Labor Department data, and almost 2.8 million people voluntarily quit their jobs, the most since April 2008.

The threat of deportation typically discourages workers from switching jobs, even within an off-the-books economy. Many don’t consider more visible jobs with their current employers to reduce the risk of detection, cutting off the easiest route to better wages, Kossoudji said.

With the danger of deportation at least temporarily lifted, “it releases them from having to be in the back of the restaurant,” she said.


Second Cup Tries Upmarket Vibe

December 8, 2014

©2014 The Globe and Mail Inc. All Rights Reserved.secondcup03rb5

Underdog coffee shop chain is trying to remain relevant as competition heats up

When Alix Box joined Starbucks Canada almost 20 years ago, it was the underdog taking on titan Second Cup in the fledgling coffee wars.

Today, as the new boss of Second Cup Coffee Co., Ms. Box is again the underdog, this time battling giant Starbucks – and an array of other fast-growing rivals.

Just over nine months into the job as chief executive officer, Ms. Box is rolling out a three-year transformation effort starting with a sleek redesigned Second Cup in downtown Toronto. On Wednesday, Ms. Box held court at the new “store of the future,” which opens on Friday. Located in the city’s hipster King Street West entertainment district, the café is an airy, white-hued space with marble counters, a “slow bar” and a high-tech Steampunk coffee brewing machine.

But as a reminder of the increasingly brutal café landscape, the new store faces a Tim Hortons restaurant across the street and a Starbucks about a block away. There’s also an outlet of the nascent, but increasingly popular, Aroma coffee shop several steps away and other independent cafés nearby.

Given the intense competition, Ms. Box travelled the country to get feedback from Second Cup franchise owners at their almost 350 cafés – a far cry from Starbucks’ 1,445. She got an earful.

“They felt Second Cup had fallen behind and was outdated,” she said as she sipped a Finca La Cumbre light roast Costa Rican brew at the slow bar, priced at $4.75. “This is not tweaking,” Ms. Box added, referring to Project Crema, the internal name for Second Cup’s reimagination. “We’re not doing a little bit here and a little bit there. This is a revolution … It’s never too late.”

It may not be too late but time isn’t on Second Cup’s side. Having essentially created the affordable luxury café culture in Canada, Second Cup has lost steam as Starbucks, market leader Tim Hortons and global titan McDonald’s Corp. have raced to perk up their coffee business here.

Now, under new leadership, the chain is betting it can get the jolt it needs with a chic café design, fresh offerings and breaks for its franchisors.

“Is it too late? Probably,” said Joe Jackman, CEO of consultancy Jackman Reinvents, which specializes in turnarounds such as the ones at U.S. fashion retailer Old Navy and drugstore chain Duane Reade. “They’re yesterday’s brand … But I don’t count them or anybody out. It’s doable. It’s just a long-odds situation.”

Added Darren Tristano, executive vice-president at researcher Technomic in Chicago: “Given the size of Starbucks compared to Second Cup, it’s a more uphill challenge.”

The challenge is daunting. In its latest quarter, Second Cup posted a $26.2-million loss, including provisions for café closings and a hefty $25.7-million writedown of impaired assets – the value of its trademarks – while its adjusted profit tumbled 64 per cent. Meanwhile, its same-store sales dropped 2.9 per cent, its 10th quarterly decline in that important measure of sales at outlets open a year or more.

Starbucks doesn’t break out its Canadian results, but in the third quarter, same-store sales at its Americas division rose 5 per cent and “Canada is a contributor to that growth,” Rossann Williams, Starbucks Canada president, said in an e-mail. It has also been adding more food and digital payment alternatives.

At McDonald’s Canada’s 1,430 restaurants, including McCafe, coffee sales have nearly tripled since 2008, more than doubling its coffee market share here, said president John Betts. Tim Hortons for its part will soon be acquired by Burger King, counting on the heft of the fast-food chain to help it expand even further.

Even as its rivals stake out their territory, Second Cup has an opportunity to move more upscale to make gains, Mr. Jackman said.

Other retailers, such as Hudson’s Bay Co., have found that reinventing themselves by shifting more upmarket can be more rewarding rather staying in the sinking middle ground, he said.

Ms. Box’s store of the future reflects her focus on a premium experience and offerings. Coffee at the slow bar, which she compares to the feel of a wine bar, costs up to $4.95, which can be more than twice the price of its regular brew. At the bar, the coffees include an Ehiopia YirgZ, with a “peach-like sweetness and grapefruit acidity” and Finca La Soledad, a light roast from Guatemala.

She’s chosen a new, local bakery to source a more edited offerings of muffins, scones and croissants, with a breakfast menu that includes egg white and kale sandwiches and granola and oatmeal. Franchise owners had told her that the food needed to be better and fresher.

The store’s remodelling cost close to $1-million, although rolling it out will probably cost half that much as the company learns from the process, she said.

An $8-million share offering will help fund the renovations in the 10 corporate stores, while Ms. Box is giving breaks to franchisors that could encourage them to invest in re-doing their stores.

Second Cup’s recent $2.3-million of annual savings from cuts to head office – dubbed coffee capital – went toward shaving franchisors’ royalties to 7.5 per cent of sales from 9 per cent, and their marketing spending to 2 per cent from 3 per cent if they achieve high operational scores, she said. That amounts to about $15,000 worth of annual savings for a café owner, and almost all of them so far have qualified for the breaks, she said.

At the new store. she changed the logo to a more modern-looking font and added art work by local artists to the cups. Her team has put hooks underneath the eat-in counters to hang purses and coats. And she introduced a new staff dress code of a charcoal grey apron over a white shirt and dark denim pants to replace the all-black with red piping uniform.

Its “image was very fast-foodlike,” Ms. Box said. “It looked like everybody else. We think we can be a bit different.”


Asian Concepts Poised for High Unit rowth this Year

November 25, 2014

New data from Technomic forecasts a 2.3-percent unit growth rate over 2013 among the 500 largest US restaurant chains.

According to a news release, this will be slightly higher than the 2.1-percent growth rate from 2012-13 and much higher than the 0.5 percent rate in 2009.

The unit growth is rising in both the full and limited-service segments. Technomic EVP Darren Tristano said fast casual concepts will continue to show high levels of unit growth, as well limited and full-service Asian concepts. Among full-service restaurant menu segments, Asian will increase units by 5.1 percent, followed by seafood (3.9 percent) and steak (3.4 percent).

Asian/noodle also leads the limited-service menu segments, increasing unit counts by 8 percent, while bakery cafes and coffee cafes will grow units by 5.2 and 4.2 percent, respectively.

Many full-service brands have positioned themselves to expand this past year. The largest growth has been at Buffalo Wild Wings, which will have added 65 units, Mellow Mushroom (32 units) and LongHorn Steakhouse (24 units), according to Technomic.

In limited service, Subway will add 908 units by year-end, followed by Starbucks (443), Jimmy Johns (350) and Dunkin Donuts (291).

Fast casual to continue double-digit sales bump
Additionally, limited-service restaurants are expected to gain a sales bump of 3.5 percent. Fast casual chains should experience a 10.8-percent increase in sales, while quick-service chains increase 2.3 percent.

Full-service restaurants will experience a 2.5 percent sales increase in 2014, similar to the 2.4 percent increase in 2013.

Fine dining is expected to continue its post-Recession rebound, with a 5.8-percent sales increase. Casual and midscale restaurant growth will be nominal, at 2.8 and 0.5 percent, respectively.

Q3 traffic gains at Mexican concepts
Additionally, research from The NPD Group analyzed Q3 consumer traffic at US restaurants, and shows an increase in the fast casual segment, as well as at coffee/donut/bagel concepts and Mexican concepts.

Fast casual restaurants posted an 8 percent gain in traffic across all dayparts compared to same quarter year ago. Visits to Mexican quick service and coffee/donut/bagel concepts grew by 5 percent, according to NPD’s foodservice market research.

Conversely, hamburger quick-service traffic, which represents the largest share of quick service visits at 23 percent, declined by 3 percent compared to same quarter year ago. Visits to both sandwich concepts and Asian quick-serve restaurants were down 1 percent.

Although total industry traffic was flat in the quarter, consumer spending rose 3 percent in the July/August/September quarter due to average eater check gains. Check and dollar gains are in line with food away-from-home inflation. Dealing/discounts are still supporting traffic with visits on a deal up 4 percent compared to a decline in non-deal visits.

“Although total traffic is flat, the visit growth in the fast casual, coffee/donut/bagel, and Mexican QSR shows that consumers still have an interest in going out to restaurants,” NPD analyst Bonnie Riggs said in a news release. “Those restaurant concepts that are meeting the needs of today’s foodservice consumers will win their visits.”


Buffalo Wild Wings Soars Under Sally Smith

November 24, 2014

By Nancy Gondo, Investor’s Business DailyUntitled-1

When Sally Smith worked as a waitress during college, she had no idea that she would one day run a big, national restaurant chain.

“It was really hard work — balancing, having four or five tables, so time management, remembering things — that hospitality component,” she told IBD. “It was not for a long period of my life, but having that, I have a lot of empathy for what happens at every restaurant.”

That experience has been one of the factors helping her lead Buffalo Wild Wings from a 35-restaurant chain 20 years ago to a 1,050-location behemoth in America, Canada and Mexico, with annual revenue of nearly $1.5 billion.

The stock has rocketed alongside that growth — by a stratospheric 1,300% since its IPO in 2003.

“Sally has maintained a consistent performance and track record in an industry where executive leadership turnover has been very high,” said Darren Tristano, an executive vice president at food-industry tracker Technomic. “Retaining key leadership team members and with consistent strategic planning and execution, she has built a solid foundation for success and continued expansion and sales growth opportunities.”

How has she kept the Minneapolis-based chain on a growth track?

Smith, 56, looks way down the road. She figures out what the sports-bar company needs to do in order to keep expanding over the next three to five years vs., say, three to six months.

 

Hello Columbus

Buffalo Wild Wings opened 32 years ago in Columbus, Ohio, and has been public for 11 years.

The restaurants are part sports bar, part casual eatery, with TV screens showing sporting events from around the globe.

And it still considers itself a growth play.

“We’re not a dividend payer, we’re not doing stock buybacks right now, but rather, we’re investing in our growth,” Smith said. “When we were smaller, it certainly was a lot easier because it’s a lot easier to double when you have $10 million in sales vs. a billion in sales.”

Amid that challenge, Buffalo Wild Wings is a force in the restaurant industry. After Smith joined in 1994 as chief financial officer, she closed underperforming units, changed the chain’s name from BW3 and updated the logo.

She took over as CEO in 1996. Under her reign, Buffalo Wild Wings has expanded to all 50 states and across both borders, broadened its menu and added technology for ordering and entertainment.

She also brought structure to what had been a rather rudderless company.

“We were so small that it really had no infrastructure. In a way, it was like starting a business,” Smith said. “We didn’t have a marketing department, we didn’t have a talent management department.”

Smith also helped set up an advisory council for franchisees. Her prior experience at Dahlberg, maker and franchiser of Miracle-Ear hearing aids, helped her define what kinds of franchisees Buffalo Wild Wings wanted to attract.

Growing up in Grand Forks, N.D., she didn’t know what career path to take. But she always heard her father, who worked in banking, talking shop at home. So business became quite familiar to her.

In her first job as a 16-year-old, Smith filed checks for a bank and performed bookkeeping duties, rising to become a teller.

She enjoyed economics classes in high school and the University of North Dakota. Seeing her prowess with numbers, a professor suggested a career in accounting.

Smith went for it, joining the accounting-consulting firm KPMG.

That move turned into an 11-year post with Dahlberg, where she served as chief financial officer. After the firm was acquired, she stayed on for a year, then heard from Buffalo Wild Wings, which was still called BW3. She was all in.

It turned out to be the right decision — for Smith and the wings-and-beer chain.

After setting up infrastructure and steering the company onto a growth path, Smith took B-Dubs (a moniker it sports on its website) public in 2003, raising more than $50 million in the initial public offering. As shares continue to advance — up 10% this year — the company has scored compounded annual revenue growth of 27% and net income growth of more than 34% the past decade.

With a 98 Composite Rating, Buffalo Wild Wings is a leader in IBD’s Retail-Restaurants group. Its five-year earnings growth rate and sales growth rate are 23% and 25%, respectively.

 

Cheers

“Her leadership has shaped the brand by remaining true to who they are and where they came from,” Tristano said. “By expanding the menu to be more relevant (burgers), and by keeping pace with technology and entertainment platforms, BW3 has continued to shine in an industry that has been struggling with low growth and weak performance since the recession.”

Aside from her nine-month stint as a waitress 15 years prior to joining the company, Smith didn’t have direct restaurant industry experience. But she has excelled by drawing on her financial background, speaking with other industry executives and studying what has worked for them.

Smith has what she calls a collaborative management style. When she meets with team members, she tells them that there’s enough work for everybody. Teamwork, not territorial behavior, helps advance the company.

“I think the more people that can be exposed to other areas, not just their own, they each would have a much better understanding of what everybody is trying to achieve,” she said. “So I’m big on collaboration and working together to solve a problem, whether it’s in your specific area (or not).”

 

One For All

When Smith goes on the road, she visits restaurants and interacts with management and employees to find out everything from what’s working to details about hiring and distribution to what would make the job easier or more fulfilling.

“I’ve always been a curious person,” she said. “I do a lot of reading, and I have since I was very young. So being able to ask questions helps me learn, and I think sometimes you ask questions to help the other person learn.”

Clearly, exploring fresh possibilities matters to Smith. While advising college students interested in a career at the executive level, Smith encouraged them: “Don’t be afraid to take a lateral move to learn another aspect of the business, or a lateral job. It isn’t all about up, up, up. And don’t be afraid to take a job that’s undefined. Most of mine have been.”

Take her start at Dahlberg. Her position was new, and it was a small company. Then there’s Buffalo Wild Wings, which was a fledgling, local firm when she joined.

On the personal front, Smith dives into newspapers’ business and technology sections, belongs to a book club, bikes, golfs and enjoys cooking with her two kids.

What’s next for Buffalo Wild Wings? Smith still sees big opportunities in America in terms of unit growth and individual restaurant growth. She also sees international expansion, with plans to reach the Middle East and the Philippines.

Technomic’s Tristano would agree. “BWW likely has greater opportunity to expand outside the U.S., in North America and other major international food-service markets across the globe,” he said. “There continues to be strong opportunities for expansion in the U.S. in smaller suburban and rural markets where wings and sports are in high demand.”

Meanwhile, said Smith, “I love going into the restaurants and hearing that someone’s been with us for five years or seven years, or they’ve been on 10 new-store-opening teams, or that they love working at Buffalo Wild Wings.”


Domino’s is Hot; Pizza Hut Needs Reheating

October 22, 2014

By Sarah Halzack

(c) Copyright 2014, The News Journal. All Rights Reserved.

Domino’s Pizza and Pizza Hut are the titans of the $38 billion U.S. pizza market, and at this moment, one chain is piping hot and the other is in need of reheating.

Domino’s dazzled investors this week with third-quarter results that showed sales at stores open at least a year grew 7.7 percent in the United States and profits jumped 8 percent. The chain, which has 5,000 restaurants in the U.S., also said it attracted more customers and saw the average size of their tabs increase.

But things at Pizza Hut are looking decidedly less upbeat. Its parent company, Yum Brands, said last week that Pizza Hut’s same-store U.S. sales fell 2 percent in the most recent quarter and that its operating profit for the full year is likely to fall short of initial forecasts.

So why are these companies in such dramatically different postures?

The delivery food business has always been about convenience, and now the battle for the biggest slice of the pie is increasingly being waged online. So far, Domino’s has outmaneuvered its competitors with a popular app that is helping drive sales.

“I think it has really boiled down to convenience and the ability for Domino’s to really capitalize on the move toward online and mobile,” said Stephen Anderson, a restaurant industry analyst with Miller Tabak.

Domino’s says that 45 percent of its U.S. sales now come from customers ordering online and that they are running up a higher tab than people who call in their orders.

In a conference call with investors Tuesday, chief executive J. Patrick Doyle said that digital ordering capabilities are also leading to a higher volume of orders from repeat customers.

“It’s ultimately about the better retention of customers, better frequency of orders from customers, and as they have a better experience with Domino’s, we get more orders from them,” Doyle said.

Domino’s added a voice-ordering capability to its mobile app in June. Before the company started advertising the feature a few weeks ago, 200,000 orders had already been placed this way.

On social media, some consumers seem befuddled by the feature, wondering how it’s any improvement over ordering a pizza the old-fashioned way – by picking up the phone.

But Mark Kalinowski, lead restaurant analyst for Janney Capital Markets, said the voice app could be valuable to customers because it brings consistency to the process and it eliminates long hold times.

Meanwhile, Pizza Hut says that while its digital business is growing quickly, it has also acknowledged it is lagging its rivals.

“Our goal is to not only catch the competition on the digital front, but to surpass it in 2015,” said Yum chief executive David Novak in a conference call with investers earlier this year.

Yum says it is working hard to turn around the poor performance at Pizza Hut, not only by strengthening its digital offerings but by overhauling its marketing efforts and debuting new menu items that will connect with millennial diners.

The company said it recently “had good success” with the debut of its Hershey cookie dessert offering and its bacon and cheese stuffed crust pizza.

While the shift to digital pizza ordering is putting pressure on the major national brands to innovate, it could be creating problems for mom-and-pop shops and regional chains. These smaller operations likely don’t have the dollars to invest in such technology, meaning they might face fresh challenges in attracting convenience-focused customers.

Domino’s digital strategy has been crucial to its recent success, but analysts say the company has also gotten a boost from an effective marketing strategy that focuses on the improved quality of its ingredients. The company has also introduced a concept called “Pizza Theater” to some of its stores which allows the customer to see their pizza made fresh before their eyes. The hope is that this model can help boost its dine-in business and emphasize freshness.

“They’re really starting to reinvest in their brand by trying to shift the model from quick service to fast-casual,” said Darren Tristano, executive vice president of Technomic, a food and restaurant industry research firm.

Pizza Hut, meanwhile, has been more focused on emphasizing low prices with deals such as a large two-topping pizza for $7.99. Promotion-oriented strategies have been common in the quick-service restaurant industry lately as retailers try to get price-conscious consumers off the sidelines.

Both companies say they expect to remain focused on building their digital platforms to win market share in the future.

“You’re only going to be as good as your next platform or your next innovation,” said Chris Brandon, a Domino’s spokesman. “So we’re already starting to look at what are customers are telling us they want more of.”


It’s Good to be King

September 3, 2014

burgerking-304xx3148-2112-482-0Emon Reiser

© 2014 American City Business Journals, Inc. All rights reserved.

Burger King responded to the public outrage it inspired this week by saying its deal to merge with Tim Hortons was about global growth, not tax evasion.

“We don’t expect there to be meaningful tax savings,” Daniel Schwartz, the 34-year-old CEO of Miami-based Burger King Worldwide, said during a conference call with media on Aug. 26.

The deal is more complicated than that. And the public isn’t buying Burger King’s characterizations. Sen. Sherrod Brown, D-Ohio, called for a Burger King boycott after the company announced the $11.4 billion deal to merge with the Canadian coffee and doughnut chain. So did MSNBC TV host Joe Scarborough.

Sen. Dick Durbin, D-Ill., emailed supporters, asking them to sign a petition to tell Burger King to stay put: “Burger King told us they were proud to be in America, but now we know that was a whopper.”

The deal will create a new holding company for Burger King and Tim Hortons that will be based in Oakville, Ontario. The move was immediately characterized as a tax-inversion acquisition that would allow Burger King to skirt millions of dollars in corporate income tax payments to the U.S. government.

Petitions cropped up on the Internet. Social media commenters flame-broiled Burger King on Twitter and the company’s own Facebook page.

Some of the less vulgar comments:

 

  • “Liars. Tax dodgers.”
  • “Kiss my business goodbye forever.”
  • “I’m not boycotting your product, I’m merely relocating my loyalties.”

 

 

 

Burger King issued a response on Facebook hours after the deal was confirmed, assuring angry customers that it will continue to pay its “federal, state and local U.S. taxes.” The deal, however, will most assuredly lower its tax burden, particularly on dollars it earns offshore.

“Our headquarters will remain in Miami, where we were founded more than 60 years ago, and business will continue as usual at our restaurants around the world,” the fast-food chain wrote. “It’s about global growth for both brands.”

Burger King and Tim Hortons executives reiterated that stance on their conference call. But Schwartz, Burger King Chairman Alex Behring and Tim Hortons CEO Mark Caira never denied that the deal was a tax inversion.

The company paid a 27.5 percent rate in the U.S. last year – about the same rate it will pay in Canada.

The real tax savings potential lies in the income Burger King has earned offshore. The company gets nearly half of its revenue from other countries, and currently has nearly $905 million in cash and cash equivalents on its balance sheet.

“Our consolidated cash and cash equivalents include balances held in foreign tax jurisdictions,” Burger King has disclosed in a regulatory filing.

Were the company to bring this cash to its headquarters to pay shareholder dividends or reinvest, it would have to pay perhaps one-third of it to the U.S. government in taxes.

In Canada, it would keep far more of this money – which could amount to hundreds of millions of dollars to help fund its “global growth.”

In addition to any tax savings, the merger of these two fast-food giants will lower the costs of goods for both companies, said Alex Macedo, Burger King’s president for North America.

“These two brands will have more purchasing power, which will reduce the costs for our franchisees,” he said. “The overall support has been very good.”

It also helps to have Warren Buffett on your team. America’s most popular billionaire is financing 25 percent of the deal. Buffett has crusaded for higher taxes on corporations and the wealthy, and has championed some of President Barack Obama’s ideas about tax policy. His involvement in this deal could be read as hypocritical, or as a sign that he doesn’t see it as driven by tax savings, either.

Local business leaders are pleased Burger King’s Miami headquarters would remain intact, along with its staff.

If anyone will feel the pain of this deal, it’s Burger King’s independent franchisees. Only 52 of its 13,667 restaurants are corporate-owned. In 2013, franchise restaurant revenues were four times that of company restaurant revenues, at $923.6 million and $222.7 million, respectively. So if customers stop eating Whoppers because they’re not American, it will hit the store sales of franchisees first. So far, they don’t seem concerned.

Guillermo Perales, who owns 191 Burger Kings in Florida and Texas, said that, if anything, sales are rising because of the backlash: “Besides the comeback of chicken fries, this is one of the best promotions we’ve had this year.”

Financiers, not franchisees, call the shots at Burger King. A global investment fund, 3G Capital, owns 70 percent of Burger King. It’s a Brazilian firm that has offices in New York and is used to crossing borders with its investments.

It’s betting Burger King customers will have short memories, or that the gains it achieves with its controversial move will overcome any losses in sales.

Some observers say it’s a safe bet.

“I don’t think Americans are concerned with where a brand is based,” said Darren Tristano, executive VP of Chicago-based food industry research firm Technomic.

Being labeled a corporate turncoat on social media hasn’t stopped companies from inversions. And ultimately, it’s problems with U.S. tax codes that are forcing some of America’s household names to leave, many tax experts have said.

Armando Hernandez, head of Hernandez and Co. CPAs in Coral Gables, said the advantages of tax inversion transactions can’t be ignored. After all, a company that doesn’t do an inversion faces steep taxes in the U.S. on earnings achieved abroad.

“If the tax adviser would recommend that their headquarters stay in the U.S., they would be committing malpractice,” he said.

Senior reporter Brian Bandell contributed to this report.

THE EVER-INCREASING MOVE TO TAX INVERSIONS

What is a tax inversion? A tax inversion describes when a U.S. company buys a foreign business and then shifts its headquarters outside the country – as Miami-based Burger King Worldwide (NYSE: BKW) plans to do with Canada’s Tim Hortons. Such a move carries many tax benefits for the companies, even though it largely stiffs U.S. tax collectors.

Why are tax inversions becoming more common? Companies are facing increasing costs, including modest ticks in inflation, higher health care tabs and even the potential for a higher minimum wage. At the same time, Canada and many European countries have cut their corporate tax rates.

What is the U.S. government doing about it? Almost nothing. While President Barack Obama has spoken out against the practice, tax reform is stalled in Congress.

What does the American public think? A wide swath of business-minded people believe anything a company can legally do to reduce its tax bill is a wise course. Others believe corporations should pay their share of income taxes. It’s an easily politicized issue. Walgreen Co. backed away from an inversion after too much of a backlash from its customers. Other companies have accomplished inversions without any backlash at all.

What are the benefits for a corporation? While they must still pay some taxes on their U.S. operations, companies achieve lower corporate income tax bills. Additionally, they can bring the cash they’ve earned overseas into their headquarters without paying taxes. This allows them to pay more dividends or invest in their operations. U.S. companies have accumulated about $2 trillion in cash overseas.

Does a company actually have to move its operational headquarters? No. Under current tax laws, companies don’t have to shift offices or executives overseas to be considered foreign. In the case of Burger King, the company will actually remain in Miami, but it’s corporate parent will be located in Canada.


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