McDonald’s Turnaround Fails to Get More Customers in Door

October 26, 2016

 

Leslie Patton
Bloomberg
http://www.bloomberg.com/news/articles/2016-10-26/mcdonald-s-turnaround-fails-to-get-more-customers-in-the-door

McDonald’s Corp. has figured out how to capitalize on the popularity of its breakfast menu, stop a slide in same-store sales and cut corporate overhead. What it hasn’t figured out is how to get more customers into its restaurants.

The world’s biggest fast-food chain is facing its fourth straight year of U.S. traffic declines, according to internal company documents obtained by Bloomberg. The drop follows at least four consecutive years of customer gains.

“Growing guest counts is our main challenge,” said an e-mail recap of a September meeting among McDonald’s franchise leaders and company executives. “Over the past 12 months, we have been pretty flat.”

The only way to build a sustainable business is to show progress on three key areas: sales, guest counts and cash flow, the e-mail said. “And today we are making uneven progress.”

McDonald’s declined to comment on the notes summarizing the meeting with franchise leaders.

McDonald’s last week reported third-quarter earnings and revenue that topped estimates as results in markets abroad, such as the U.K. and Germany, helped results. The company’s division known as international lead markets boosted same-store sales by 3.3 percent. It wasn’t quite as rosy in the U.S., where sales increased just 1.3 percent.

McDonald’s has made progress in the U.S. since Chief Executive Officer Steve Easterbrook took over in March 2015, but there’s still work to be done. He’s revamped drive-thru ordering and improved food quality by getting rid of certain antibiotics from chicken and switching to real butter in Egg McMuffins. While the introduction of all-day breakfast and speedier kitchens have provided a bump, they may not be the long-term catalyst the chain needs.

The stock began climbing about a year ago after the breakfast expansion, gaining 26 percent in 2015. But the shares haven’t fared as well lately. Shares fell 1 percent to $111.54 at 9:57 a.m. in New York on Wednesday. The stock had lost 4.6 percent this year, through Tuesday’s close.

“McDonald’s has become less relevant to the younger generations,” said Darren Tristano, president at industry researcher Technomic in Chicago.

Three Areas
To lure more U.S. customers, the company is focused on three segments, according to the the document: diners who frequent the chain for breakfast and coffee, those who go primarily for lunch, and families and children.

“We’ve talked about our main focus being growing guest counts, certainly in the U.S.,” Chief Financial Officer Kevin Ozan said during a conference call last week.

Through the third quarter, McDonald’s comparable customer counts are down 0.1 percent this year, compared with a 3.1 drop in the same period in 2015, according to a company filing. The U.S. restaurant industry also is facing a broader slowdown as consumers dine out less due to the turbulent election season and cheaper grocery-store prices.

To better compete, restaurants are aggressively discounting fare with offers such as 50-cent corn dogs at Sonic and $1.49 chicken nuggets at Burger King. But those deals haven’t helped so far. Burger King owner Restaurant Brands International Inc. and drive-in chain Sonic Corp. this week reported disappointing U.S. sales in the latest quarter.

Last year, McDonald’s U.S. traffic declined 3 percent, following a 4.1 percent drop in 2014. Customer counts also fell in 2013, filings show. To reverse the trend, McDonald’s needs to stick to its core identity of convenience and affordability, while also improving ingredients, Tristano said.

“It’s hard to imagine they’re going to be able to compete with better burger and fast casual,” he said, referring to chains like Shake Shack Inc. and Panera Bread Co. “They have to operate within their customers’ perception of their brand.”


Bartolotta cooks up kitchen for Kohl’s

October 25, 2016

636124725458241020-mjs-kohls20-kohls-2131-de-sisti

Rick Romell
Milwaukee Journal Sentinel
http://www.jsonline.com/story/money/2016/10/20/bartolotta-cooks-up-kitchen-kohls/92418108/

Menomonee Falls — For Bartolotta Restaurant Group, it’s an opportunity to branch further into a promising business area.

For Kohl’s Corp., it’s a shiny amenity to help in the quest to attract and retain good people.

And for Jason Wessels, the new dining area and kitchen his employer unveiled this week — a huge space that combines industrial-chic design with around-the-world food prep stations — is more than acceptable.

“This is amazing,” Wessels, who directs the big retailer’s shopper loyalty program, said as he got his first glimpse of the 32,000-square-foot area at corporate headquarters that Kohl’s has dubbed “The Kitch.”

“Like, amazing….It’s unbelievable.”

Following the lead of companies such as Silicon Valley tech firms that compete ferociously for talent, Kohl’s is wagering on the notion that one way to an employee’s heart is through his — or her — stomach.

“Corporations, particularly financial and high tech, where attracting and retaining high-skilled employees is very important, have seriously upgraded the quality of the meal services that they provide,” said Thomas MacDermott, owner of New Hampshire-based Clarion Group, a food service consultant.

Kohl’s isn’t Google. But for a department store retailer beset by stalled growth, changing consumer preferences and the ever-looming, Godzilla-like threat of Amazon, anything that helps bring in and hold smart employees may well be a smart bet.

“We knew we needed to elevate the quality,” chief administrative officer Richard Schepp said.

So, out with an in-house dining setup Schepp described with faint praise, saying it had been “OK” and “a decent cafeteria experience.”

In with a sleek, contemporary dining hall and such fare as Neapolitan pizzas, freshly prepared sushi, and specialty salads (beet and goat cheese; spelt and roasted squash with maple dressing) from a kitchen run by Bartolotta, which owns several highly regarded and popular restaurants in the area.

Just a little over five years ago, Kohl’s was cooking its own food at its 5,000-employee headquarters and, according to Schepp, not very well.

Now it has signed up with one of Milwaukee’s premier restaurant operators, outfitted a completely new kitchen and built a dining area that offers a wide range of collaborative gathering spaces and private nooks.

It’s a spot away from cubicles and offices that’s meant to be used all day, full of power outlets and USB ports but free of Kohl’s branding and even any references to the company’s “Greatness Agenda.”

“You feel like you left the building,” Schepp said.

Kohl’s won’t say what it spent, but turning a warren of cubicles into a dining area that can seat 750, a kitchen the size of a mini-mansion and a barista bar to boot isn’t cheap.

“This is all brand new,” Bartolotta group co-owner Joe Bartolotta said as he showed off the space. “…We gutted everything. We tore out the ceilings. We tore out everything. It was a very sizable investment.”

Whatever Kohl’s spent, it appears the company can recoup a small part of the expense through an agreement with the state that gives the firm tax credits in exchange for capital investments.

The deal was struck in July 2012, when the company planned to build a new, $250 million corporate campus a few miles from its present location. Kohl’s abandoned the plans 17 months later in favor of a less-expensive expansion at its current site. The $137 million in capital investment the company made there through last year, however, have helped it earn $18.3 million in state tax credits under the agreement.

The corporate impulse to amp up in-house dining isn’t broad, but rather is concentrated in sectors such as tech, said Mike Buzalka, executive features editor of trade journal Food Management.

But he said upgrades make sense for companies that, like Kohl’s, are situated where there are few nearby dining options.

It’s unusual for a firm to hire a restaurant operator, rather than a food-service contractor, to run its kitchen, Buzalka said.

Joe Bartolotta, however, sees the venture as a way to diversify. His 1,000-employee company has 11 restaurants, including highly regarded spots such as Lake Park Bistro and Bacchus.

But opening stand-alone restaurants is costly, and Bartolotta has been looking increasingly at opportunities to run places without the big capital investment. The firm operates four restaurants at Wauwatosa’s Mayfair Collection, for example, that are owned by the shopping center’s developer.

Two years ago, Bartolotta took over the food court at the U.S. Bank Center and opened what it calls the Downtown Kitchen. That operation impressed Kohl’s executives and paved the way for creation of The Kitch.

Profit margins on such businesses are lower than at a typical Bartolotta restaurant, but with a minimal upfront investment and an all-but-captive market of 5,000 potential diners, it’s an attractive proposition, Joe Bartolotta said.

That thinking makes sense, suggested Darren Tristano, president of Chicago-based food industry research firm Technomic Inc.

“When we look at the full-service space where Bartolotta operates, the high end is doing OK, but there aren’t a lot of growth opportunities for new restaurants,” Tristano said.

John Wise, operations director and managing partner at Bartolotta, said Downtown Kitchen serves about 500 people for breakfast and 1,500 to 2,000 at lunch. He expects the numbers at Kohl’s to be bigger.

Wessels, meanwhile, expects the new space to be about more than food. He believes it will bring colleagues together and spur beneficial collaboration.

Many people, Wessels said, regard the kitchen as the heart of their home.

“This is really going to become the heart of our office,” he said.


Striking While the Tortilla Warmer is Hot

October 5, 2016

dostoroslogo-bd9115b9

By David Farkas
http://restfinance.com/Restaurant-Finance-Across-America/October-2016/Striking-While-the-Tortilla-Warmer-is-Hot/

Mendocino Farms co-founders Mario Del Pero and wife Ellen Chen have put their money where many mouths are. Last month, the couple invested an undisclosed sum in Dos Toros, a 11-unit New York City-based taqueria chain that plans to expand to Chicago next year. “There is an unbelievable runway for them [to grow],” Del Pero declared in a recent interview.

The timing of the investment is no accident. Investors have been scouting for a viable investment vehicle in the category given the troubles at beleaguered Chipotle Mexican Grill. “I think that with the decline in traffic to Chipotle, the opportunity for other restaurants to capture share and support their desire for flavorful Mexican fare is very high,” Technomic Inc. President Darren Tristano told the Monitor. The market research firm expects Mexican fast-casual to grow 8% overall in 2016.

Del Pero and Chen invested alongside Managing Director Nick Marsh of GrowthPoint Partners, which last month made a $10 million minority investment in Dos Toros. Marsh, an early investor in the Studio City, Calif.-based premium sandwich chain, is also CEO of Chopt Creative Salad Company. “He’s a close restaurant friend that we trust,” Del Pero said.

Although Del Pero declined to reveal how much capital the couple put up, he acknowledged it was their own money. Still, he added, he sought permission for the investment from private equity firm Catterton, which has a substantial stake in 13-unit Mendocino Farms. “We made it very clear that we’re just investors, though we are a sounding board for Leo and Oliver,” Del Pero explained.

Brothers Leo and Oliver Kremer founded Dos Toros (“two bulls” in Spanish) in 2009, slowly opening units in Manhattan and Brooklyn until they added a second line in store in a busy Manhattan food-court two years ago. The addition has allowed new units to serve 450 people an hour.

Del Pero wouldn’t comment on Dos Toros AUVs or unit economics but claimed Dos Toros unit sales rivaled Chipotle’s. Before the chain’s food-poisoning problems, CMG reported volumes of $2.5 million. Dos Toros reportedly rang up $20 million in 2015.

He also said the couple would likely offer Dos Toros advice on catering and procurement as the brand scales outside New York City. “We think there is opportunity in catering. So that’s one of the things we can help with,” Del Pero offered.