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.”


Why new sports bars are blitzing Dallas for a piece of the action

September 28, 2016

1474308110-nb_11sportsbars5

By Karen Robinson-Jacobs
http://www.dallasnews.com/business/restaurants/2016/09/21/sports-bar-operators-look-gain-yardage-north-texas

When The Park, a small sports bar chain, began looking to expand beyond its Austin birthplace, it bypassed Houston and headed straight for Big D.

With its confluence of marquee sports teams across every major league and its never-say-die fans, North Texas has become a magnet for game-focused restaurant chains and independents.

All are hoping to score.

“I don’t think there’s a better sports town anywhere in the country than the Dallas-Fort Worth area,” said Eric Dunahoe, director of operations for The Park, which hopes to open a North Texas location — its first outside of Austin — by late 2017. “If we’re going to be the Texas-owned-and-operated sports bar, we need to be in the city within the state of Texas that’s the best sports town and that’s Dallas.”

The sports bar occupies a unique, if amorphous, niche within the casual dining segment.

There’s no strict definition of what makes sports bars. Generally, they include TV-festooned venues where more than 40 percent of sales come from alcohol and the draw is the love of the game. (Think Buffalo Wild Wings, Dave & Buster’s and Twin Peaks.)

The growth of sports bars — both in number and in sales might — comes as the broader casual dining segment has struggled.

Chicago-based Technomic tracks sales at the Top 500 U.S. restaurant chains. In the 2015 list, about 13 percent of casual dining sales were at “sports bar” concepts.

Sales at sports bars on the Top 500 list grew 7.7 percent in 2015 to $7.3 billion, compared with 2.9 percent sales growth for the broader “varied menu” category, Technomic said.

The top sports bar chains grew their location count by 4.6 percent in 2015 while major full-service chains overall grew at a rate of 0.9 percent.

“I would say this is a fast-growing niche in the full-service industry,” said Technomic president Darren Tristano. “Although independents place higher emphasis on food quality, the chains tend to have the largest consumer attraction due to the size of the locations, variety of adult beverages, affordability of shareable food, comfortable seating and availability of televisions to view a variety of sports.”

North Texas is one of about a dozen U.S. markets with all four major sports leagues — NFL, NBA, NHL and MLB — along with soccer and numerous alums from powerhouse college programs.

And it’s increasingly a draw for migrants from other major sports towns, who bring their viewing loyalties with them.

That makes North Texas fertile ground for expansion-minded sports bar operators.

It’s also home base for several of the major chains including Twin Peaks, Boston’s and Dave & Buster’s.

Dave & Buster’s was born in Dallas in 1982 as a hybrid restaurant/playground that enticed guests to “Eat. Drink. Play,” with a focus on food and electronic games. In 2011, the Dallas-based chain added “Watch,” as part of a full-court-press designed to include a branded “D&B Sports” area near the restaurant bar.

Today, all 86 U.S. Dave & Buster’s locations include amped-up “sports viewing packages.” About 80 percent are officially branded with D&B Sports sections that bring the restaurant TV screen count up to about 40 (compared with 20 pre-sports push).

That includes two or three 180-inch screens, according to Sean Gleason, chief marketing officer for Dave & Buster’s.

The sports theme has helped Dave & Buster’s appeal to millennials, who gravitate to the communal dining spaces and party-like atmosphere.

On a recent football Sunday, manager Don McDougall presided over the dimly lit but highly animated scene at the Dave & Buster’s on Central Expressway — a restaurant that promises the “ultimate sports watching experience.”

The bar shows every NFL game on Sunday.

As the Cowboys battled the New York Giants, the chatter among the sports fans was constant. A taunt here, a high-five-punctuated boast there. Cheers and groans were interrupted by the occasional “Over here” as patrons vied for attention from a worker lobbing Dave & Buster’s T-shirts into the crowd.

“We try to make it just like tailgating, with prizes, a T-shirt cannon,” said McDougall of the 4-year-old location. “We try to make it as close to being at an actual game as possible.”

Near the center of the bar area, Brad Cotton, 33, and his wife Donna, 42, of DeSoto said they can be found at a sports bar any given Sunday, unless family members are hosting a watch party.

“Going to the game is a little expensive,” said Brad, who was wearing a No. 82 Jason Witten jersey. “So that’s once a year if we do that. This is affordable, but you’re still around die-hard fans. You want to be in the atmosphere with other fans, that’s going to turn up like you turn up.”

Donna noted that the uniform of the day was predominantly blue and white.

“When we walk through the door, just because we have Cowboys gear on, everybody becomes friends,” she said. “That’s pretty cool.”

None of the sports fans interviewed were surprised that North Texas is home to a growing sports bar scene.

“Sports are big in North Texas, whether it’s NASCAR [or] football,” said Daryl Hope, 47, who is moving soon from Forest Hill to Rockwall.

Hope prefers his perch at Dave & Buster’s to stadium seating because it allows him to watch multiple games at once.

That’s important, he said, since he’s big into fantasy football. Try 14 leagues big.

The introduction of fantasy football to younger consumers and mainstream consumers, including women, has given the sports bar segment a nice lift, Tristano said.

Despite the fan enthusiasm, North Texas remains a challenging market as operators compete for both consumers and investors.

In 2000, when the Canadian-based pizza and sports bar chain Boston Pizza began investing in a U.S. expansion, it headed straight for North Texas. The U.S. headquarters is in Dallas and a corporate restaurant that doubles as a training center is in Irving along busy Interstate 635.

Three more franchised locations were added locally through 2007. Then the company was hit with a blitz known as the great recession. From about 60 U.S. locations, the brand dropped to about 25. No additional locations have opened in North Texas in the past 9 years.

Nationally, the brand gained some yardage and is now back up to 29 locations. And while the company has found a franchisee to grow in West Texas — two locations will open in El Paso next year — the company has yet to find the right local combination of investor and real estate for North Texas.

“There’s lots of competition,” said Ken Phipps, director of franchise development for Boston’s Restaurant & Sports Bar, the U.S. arm, as the lunch bunch watched highlights from the weekend’s sports matchups.

North Texas “is and will remain one of our target markets to find the right franchise partners to help us grow.”

“It’s a very expensive market as far as real estate,” he added. “It retained its real estate value post-2008, and it’s gone nothing but skyward. Especially locations like Frisco, Plano, Arlington, with all of the new big developments like the Cowboys’ The Star.”

Three different franchisees own the three noncorporate D-FW locations. Now the company, like many major chains, is looking for large investors who can open more than one location.

“It’s a big investment,” he said, “We look for a net worth of $1.5 to $2 million and liquidity of $500,000.”

“We really want to grow our D-FW market,” said the North Texas native. “It’s our home. It’s our backyard for the U.S., and if we find the right partners we could easily add 15 restaurants in the next five years. This market can easily handle that.

“I’m grinning about the opportunities here in Texas,” he added, after showing off the restaurant’s 160-inch drop-down screen. “It’s very exciting.”


McDonald’s All-Day Breakfast Sparks a Fast Food Fight

May 9, 2016

by Leslie Patton

http://www.bloomberg.com/news/articles/2016-05-03/mcdonald-s-breakfast-push-sets-off-morning-scramble-in-fast-food

Fast-food joints aren’t hitting the snooze button anymore.

McDonald’s Corp.’s decision to start selling Egg McMuffins all day long last year — meant to help sales during lunch and dinner time — has boosted its morning business as well. That, in turn, has kicked off a scramble among its rivals to find new ways to combine eggs, potatoes and meat for a tasty breakfast.

The latest example is Burger King’s Egg-Normous breakfast burrito, which is being introduced in the U.S. on Tuesday. It’s stuffed with sausage, bacon, eggs, hash browns, cheddar and American cheese and served with picante sauce. The home of the Whopper, which still serves breakfast only during morning hours, also recently added a supreme breakfast hoagie and got rid of slower-selling English muffin sandwiches.

“We’ve invested more in breakfast,” Alex Macedo, head of Burger King North America, said in an interview. “The environment is very competitive.”

Along with adding and deleting items, Burger King tweaked its smaller egg burrito earlier this year, removing green and red peppers and replacing them with hash browns.

Skillet Bowls

Taco Bell revised its morning offerings in March to include $1 options such as skillet bowls and sausage flatbread quesadillas. Subway Restaurants just announced buy-one-get-one subs for the month of May. The catch: They have to be purchased before 9 a.m. And Dunkin’ Donuts revamped its menu boards to focus on all-day choices and started advertising $1.99 Coolatta drinks that are sold at all hours.

The changes come as more U.S. consumers grab eggs and coffee outside the home, according to a study by researcher GfK MRI published by EMarketer.com. Last year, more than 34 percent of Americans reported buying breakfast at fast-food restaurants, an increase from 32.8 percent in 2011. Meanwhile, fewer consumers said they’re dining out for lunch and snacks. Dinner increased less than 1 percent.

McDonald’s all-day breakfast in the U.S. has helped turn around its worst sales slump in more than a decade by drawing more customers throughout the day, including the morning. The plan is surpassing its goals.

Exceeding Expectations

“It’s still exceeding our expectations,” Chief Executive Officer Steve Easterbrook said on a conference call in April. “Whilst we clearly added incremental visits and incremental spend across rest of day, our breakfast business has also prospered.”

Items like Egg McMuffins and hash browns fueled a 5.4 percent U.S. same-store sales increase at McDonald’s in the first quarter. That’s stronger than the most recent quarterly gains posted by Burger King, Dunkin’ and Taco Bell.

“It’s helped drive success, which they haven’t seen for several years,” said Darren Tristano, president of industry researcher Technomic Inc.

After losing customers to McDonald’s all-day Egg McMuffins, Jack in the Box Inc. has been advertising a triple-cheese and hash-brown breakfast burrito. Same-store sales at company-owned Jack in the Box locations may be down as much as 3 percent in the recently ended quarter, the company said in Februar-1x-1y. The chain also is adjusting and improving other breakfast items, CEO Lenny Comma said during a conference in March.

Dunkin’ Donuts said last month that its new menu boards are helping drive breakfast-sandwich sales. It’s also focused on introducing mobile ordering and will start a 1,650-store test in metro New York in May to get customers their morning meals even faster. CEO Nigel Travis says McDonald’s push has actually helped Dunkin’ in the breakfast battle by highlighting that the doughnut chain has the same menu all day. Still, the change has increased competition for diners’ dollars.

“Clearly, the value war is pretty intense,” Travis said in an interview.


Fazoli’s closes only Las Vegas restaurant

February 24, 2016
Jennifer Robison
Las Vegas Review-Journal
February 17, 2016
http://www.reviewjournal.com/business/fazolis-closes-only-las-vegas-restaurant

1004922526_fazolis_021716_3.jpgThere’ll be no more free breadsticks on North Town Center Drive.

Italian fast-food franchise Fazoli’s has quietly closed its lone Las Vegas eatery. The restaurant, behind the 7-Eleven at Town Center and Covington Cross in Summerlin, shut Feb. 8, 15 years to the day after its 2001 debut.

The closure defies broader market trends, as big, national chains including Chick-fil-A and Cracker Barrel prepare market launches for late 2016 and early 2017.

“Las Vegas is definitely a growth market,” said Darren Tristano, president of Chicago-based restaurant consultant Technomic.

So why did operators shutter Fazoli’s?

Company spokeswoman Janet Ritter deferred to the franchisee, Las Vegas-based Glencoe Management, and Glencoe Management didn’t return phone calls. The company’s website said it owns 21 local Burger Kings, including one at 1280 Town Center Drive, next to the former Fazoli’s.

But Ritter said Fazoli’s, a Kentucky chain with 217 U.S. locations mostly in the Midwest and South, “would like to have a presence in Las Vegas, and we are seeking franchisees to open units in the Las Vegas area.”

The Fazoli’s closure capped a market foray that never really picked up steam.

Ritter said she had no information on number or dates of operation of prior local stores, but at least two other Fazoli’s franchises — one on Ft. Apache Road near Rhodes Ranch and another on Eastern Avenue in Silverado Ranch — opened after 2001 and closed years ago.

The 28-year-old company had as many as 300 U.S. restaurants before it began pruning locations in the recession. Each restaurant typically employs 30 to 40 people, Ritter said.

Competition has hurt Fazoli’s, Tristano said.

The U.S. market is saturated with chains, including Panera Bread and Noodles & Co., that serve pasta and pizza. Plus, Fazoli’s straddles a blurry line between fast food and the more upscale fast-casual segment, which includes operators such as Chipotle and Au Bon Pain.

“That’s not a terrible place to be. The problem is, you’re lumped in to some extent with fast food because of the drive-thru and the price points, but the quality is not at the level of a fast-casual restaurant,” Tristano said. “That’s not to say it’s not good quality, but there are so many concepts with customized, prepared-to-order food.”

It didn’t help that Fazoli’s had just a handful of local stores. A franchise needs 20 to 25 locations in a big market to build loyalty and brand awareness, Tristano said.

Still, Fazoli’s seems to have righted its ship: The company said in December that same-store sales were up in 65 of the prior 68 months, including a 3.1 percent jump year over year in November. It opened 10 new franchises in 2014 and 2015.

And restaurant operators continue to salivate over the Southern Nevada market, Tristano said.

“Las Vegas has the demographics and growth that many chain brands are looking for,” he said. “Not all of the markets in the United States are growing, but you’re seeing housing development and population growth there, and that’s a big deal. Chains tend to be prioritizing growth markets.”


Bagger Dave’s slide: After multiple closings, missteps, burger chain goes into holding pattern

February 18, 2016
GARY ANGLEBRANDT
February 13, 2016 8:00 a.m.
Crain’s Detroit Business
http://www.crainsdetroit.com/article/20160213/NEWS/302149989/bagger-daves-aims-to-beef-up-outlook-after-closings-missteps

If the past year is any indication, the future of Bagger Dave’s Burger Tavern is anything but in the bag.

The Southfield-based restaurant chain suffered the indignity of two rounds of restaurant closings in 2015. The first came in August, when parent company Diversified Restaurant Holdings Inc. shuttered three locations, all in Indiana, gnawing $1.8 million in writedowns off the corporate books.

Then in December, eight more locations closed, at a loss of about $10.7 million for writedowns and other costs. One of them was its downtown Detroit location. The others were in Indiana.

The Detroit restaurant had been open for two years. One of the Indiana restaurants didn’t last 10 months; two more barely made it to the one-year mark. The oldest of the Indiana restaurants, the one in Indianapolis, was just 3 years old.

Anyone looking for more upbeat signs than these should avoid cracking open Diversified’s quarterly reports of the past year.

The reports start rosily enough. The first, released in March, predicted between 47 and 51 stores by the end of 2017. (There were 24 at the end of 2014.) These numbers steadily fell in subsequent reports. By the time November’s third-quarter report came around, the company had stopped making any predictions at all.

“We will not commit to any further development of Bagger Dave’s,” the company said in the report, released seven weeks before the December closings.

That doesn’t mean the company had given up on Bagger Dave’s. It opened five last year, including one in Centerville, Ohio, as recently as November, its first in that state. Another is set to open near Cincinnati in late March. But that and the 18 Bagger Dave’s (16 in Michigan, one in Ohio and one in Indiana) that survived the closings — and employ 670 people — will be the last for the foreseeable future.

This is a marked about-face for a company normally hell-bent on growth. It opened six Bagger Dave’s in 2014 and seven in 2013. And that pales to its Buffalo Wild Wings franchise operations, the largest in the country. Last year alone, Diversified added 20 more restaurants, 18 of which came from the $54 million purchase of Buffalo Wild Wings restaurants in the St. Louis area. That brought the number of Buffalo Wild Wings locations under its umbrella to 62.

From the end of 2011 to the end of last year, Diversified increased the total number of its restaurants across the two brands from 28 to 80. This year, though, it plans to add just three — the Bagger Dave’s near Cincinnati and two more Buffalo Wild Wings locations.

Familiar taste

Bagger Dave’s has struggled before. Sales took a hit after Diversified embarked on an aggressive growth plan in 2012, opening or buying 16 stores across its two brands. It listed on Nasdaq the following year.

The pace distracted management from everyday operations, and it was the Bagger Dave’s side of the business that took the hit in sales.

To mend things, Diversified beefed up Bagger Dave’s marketing, launched a corporate training program, brought in an employee-assessment firm and began hiring professionals from national chains such as Red Robin. It brought in consultants from the Disney Institute to go over employee retention and recruitment and rolled out new menus — the first one in early 2014 and another last year. The final rollout wrapped up last September.

It included adding more burgers and removing sandwiches that weren’t selling well, switching from a two-patty burger to an 8-ounce one and adding a grilled chicken breast sandwich. Fries are included in the price of a burger instead of added on. The menu’s marketing pitch changed to tell customers about certain points of company pride, such as how it uses prime rib and sirloin in its burgers and carefully sources its food.

“I’m much, much more connected to Bagger Dave’s now,” CEO Michael Ansley said last April in a Crain’s interview.

Things appeared to pay off. In a conference call for last year’s second-quarter results, Ansley said sales at Bagger Dave’s stores open at least two years had increased 2.5 percent compared with the same quarter a year earlier and 4 percent year to date.

Ansley talked about encouraging positive signs showing in things like Facebook “likes” and “net promoter scores,” which measure customer satisfaction. Investments in technology — tabletop ordering tablets, a mobile app, a gift card program, a “RockBot” jukebox app — promised to further brighten the picture.

Nevertheless, Ansley had to acknowledge struggles. “Despite the positives, we fully appreciate the missteps we have made in the past with respect to the brand,” he said.

One initiative has proved costly. Management was determined to maintain a base staffing level at Bagger Dave’s restaurants, even if sales were low. This policy was done to bolster service and coax repeat visits out of customers.

But this, along with minimum wage increases, pushed up the company’s year-on-year compensation costs by more than 25 percent in the second quarter of last year. This came on the heels of a $2 million spike in compensation costs that brought its tally for 2014 to $9.2 million.

Minimum staffing practices like this are rarely used in the restaurant industry, said Darren Tristano, president of Technomic Inc., a Chicago-based restaurant industry research company.

“There’s nothing financially efficient about it,” he said. “You end up with staff standing around.”

In a conference call on Nov. 5, Ansley and CFO David Burke expressed frustration with the slow pace of results. Burke described Bagger Dave’s as a “Dr. Jekyll/Mr. Hyde concept” because of the changes it had undergone.

There were signs of improvement coming out of investments in the menu and training, but “you don’t see an immediate impact in sales from that,” he said.

The financial picture

Diversified’s breakneck growth comes with a heavy capital burden.

Estimated capital expenditures last year were about $30 million. It spent $36 million the year before.

The buildout of a Bagger Dave’s costs $1.1 million to $1.4 million, according to company financial statements. A new Buffalo Wild Wings costs $1.7 million to $2.1 million. Updates to older restaurants cost between $50,000 and $1.3 million.

A listing on Nasdaq in 2013 raised $31.9 million. But much of the company’s expansion has been financed by debt. Total debt rose from $61.8 million at the close of 2014 to $123.9 million at the end of September, pushed up because of the acquisition of the St. Louis stores.

The company’s share price opened at $2.57 the day the closure of the eight stores was announced. The stock was trading just above $1.50 last week.

A pair of lawsuits last year further strained finances. The two cases, brought by the same attorney, alleged employees who work for tips were made to do the work of non-tipped employees who earn a higher hourly rate. The settlement and related expenses cost the company $1.9 million.

For the first three quarters of last year, Diversified booked a net loss of $6.6 million, compared with an $85,000 profit for the same period in 2014. The company lost $1.3 million overall in 2014. The company does not believe it made a full-year profit in 2015. (Annual results are expected to be released in March.)

Preliminary financial estimates for 2015 show revenue growing 34 percent to $172.5 million from $128.4 million in 2014, in line with the company’s guidance.

Same-store sales increased 2.8 percent at Buffalo Wild Wings and 1.3 percent at Bagger Dave’s from 2014 to 2015, but they decreased 7.8 percent year-over-year in the fourth quarter at Bagger Dave’s and increased just 0.8 percent at Buffalo Wild Wings.

The Buffalo squeeze

Bagger Dave’s menu refresh included adding more burgers and removing sandwiches that weren’t selling well.

The 18 Bagger Dave’s stores that remain don’t appear to be on much better ground.

The eight stores shuttered in December generated $5.5 million in revenue, or $687,500 per restaurant, through the first three quarters of last year and had a pre-tax (EBITDA) loss of $600,000. But the other 18 locations brought in $14.1 million, or $783,333 per restaurant, and had a pretax profit of $700,000. That comes to less than $52,000 per restaurant on an annualized basis, a growth rate of 5 percent.

The revenue per restaurant on an annualized basis comes to $1 million, well below the target revenue per store of $1.7 million, the goal stated in a presentation to investors in January.

A profit margin of 5 percent is low, especially for company-owned stores, Tristano said. Franchisee-owned stores typically hit at least 10 percent because of the fees to the franchisor they must pay.

“They’ve got to be doing better than 5 percent to pay down their debt,” Tristano said.

The obvious question that arises is, were the closures enough?

All Bagger Dave’s restaurants are company-owned. (Plans to franchise the brand several years ago were scrapped.) With a massive Buffalo Wild Wings operation cranking away, the Bagger Dave’s “baby brand,” as Ansley has called it, has had a hard time getting the attention it needs.

Diversified has a contractual obligation with Buffalo Wild Wings Inc. to open 42 restaurants by 2021 and has 15 more to go. The company says it’s ahead of schedule.

Ansley also points out that failing to make that obligation bears only a weak cost: Diversified only has to pay Buffalo Wild Wings $50,000 for each store it does not open — far less than the millions it costs to open one. “With our relationship with Buffalo Wild Wings, I doubt they’d charge us the $50,000,” Ansley said.

In any case, the moves Bagger Dave’s has made demonstrate the pressure on Diversified to stay focused on the much stronger Buffalo Wild Wings side of the business.

“In the year ahead, we plan to focus our resources primarily on growing our BWW portfolio, which represents the overwhelming majority of both our revenue and adjusted EBITDA,” the company said in its third-quarter report.

The move toward Buffalo Wild Wings is smart because it’s a more proven brand than Bagger Dave’s, which is “a good brand but not that broadly differentiated,” Tristano said.

“The reality in our industry is that there’s no shortage of optimism. We hear about these ambitious goals, but very rarely do we see brands meet those goals.”

The response

Last year’s closings, which included one Buffalo Wild Wings restaurant in Florida besides the Bagger Dave’s spots, were the first for the company. But they were a long time coming.

“Bagger Dave’s has given us some fits,” Ansley said in an interview. “We knew we had issues with it two years ago. We made a lot of changes — I can’t even count the changes.”

These changes came too quickly and were confusing for guests and employees. “We were too aggressive. That was the problem, and we learned it the hard way,” Ansley said.

Casual dining chains face intense competition throughout the country, not just from each other but also from fast-casual restaurants like Chipotle Mexican Grill and Five Guys Burgers and Fries. The parent of the Max & Erma’s chain closed eight metro Detroit locations in January.

To counter this trend, Diversified needs to do a better job of marketing Bagger Dave’s by doing things such as telling people of premium ingredients that are mostly sourced in Michigan, Ansley said.

He also is heartened to see interest in properties of the shuttered locations. This includes the one in downtown Detroit, which has garnered “a lot of offers,” he said.

The company is holding the line on the minimum staffing levels that have driven up compensation costs. “There will be a little deleveraging from” the minimum staffing levels that drove up compensation costs but “nothing substantial,” Ansley said.

No more Bagger Dave’s locations will be closed, Ansley said. If the prototype stores do well for the rest of the year, “then we will start expanding again,” he said.

The 18 remaining Bagger Dave’s restaurants are profitable, said Ansley, who is especially encouraged by the performance of “prototype” stores. These stores have the new menus and have been redesigned to be smaller and “hipper.” They are in Grand Blanc, Birch Run, Grand Rapids, Chesterfield Township and Centerville, Ohio.

The three analysts who cover Diversified’s stock are encouraged. They express concern at the company’s debt but agree that the Bagger Dave’s changes are on the right track.

“We think much of the ‘noise’ of the past few quarters is behind the company and management can focus on restaurant operations,” wrote Mark Smith, analyst at Minneapolis-based Felt & Co.


Zaxby’s Plans Four BR Restaurants

September 29, 2015

Timothy Boone
Copyright 2015, The Advocate / Capital City Press LLC, All Rights Reserved. Distributed by NewsBank, Inc.

Zaxby’s, the Georgia-based chain that specializes in chicken tenders, chicken wings and salads, plans to open four restaurants in metro Baton Rouge over the next few months.

A franchise restaurant at 1850 W. La. 30 in Gonzales, near the Interstate 10 exit, should open at the beginning of October, said J.J. DeRoy, director of market development for Zaxby’s corporate restaurants. At the end of October-early November, a company-owned restaurant at 34071 La. 16 near Watson is set to open, while a Zachary location on Main Street, across from Wal-Mart, should be open by mid-December.

The chain has also applied for a permit to build a third company-owned Zaxby’s, in the Long Farm traditional neighborhood development at Airline Highway and Antioch Road. The city-parish Planning Commission should vote on the final development plan for that restaurant at its Sept. 21 meeting. Once ground is broken on the restaurant, it should be complete in about four months, DeRoy said.

Each restaurant will have about 40 to 60 employees. The restaurants will be about 3,500 square feet and have seating for 90 people.

Zaxby’s is making aggressive moves in a market dominated by Baton Rouge-based Raising Cane’s. The chains have similar menus, with a signature meal consisting of chicken fingers, fries, coleslaw, Texas toast and a tangy sauce. But Zaxby’s offers a variety of other dishes, including chicken wings, Buffalo chicken tenders and salads topped with grilled, fried or Buffalo chicken.

DeRoy notes that Zaxby’s has done well in the crowded marketplace for fast, casual chicken. After all, the chain has grown despite being in the shadow of Atlanta-based Chick-fil-A, the largest national chicken restaurant.

“We certainly know the competition is out there,” he said. “That’s the nature of the beast we have to deal with.”

It’s the other menu items, such as the wings and salads, that cause Zaxby’s to stand out, DeRoy said. “The chicken tenders are great; they got us to where we are today,” he said. “But our fresh approach to the process can’t be compared. And our guests see our true value when they look at the variety of menu items.”

Zaxby’s was founded in 1990 in Statesboro, Georgia, near the campus of Georgia Southern University. The company has grown to nearly 700 locations in 16 states. According to QSR magazine, which tracks the quick-service and fast-food industry, in 2014 Zaxby’s posted nearly $1.26 billion in sales. That put Zaxby’s as the 25th-largest quick-service eatery in the U.S., sandwiched between Jimmy John’s and Five Guys Burgers and Fries.

Zaxby’s, which opened its first Louisiana restaurant in West Monroe in 2012, now has six locations in the state, including stores in Lafayette, Ruston, Monroe and two in Bossier City.

“They’re more of a regional brand, but they’re aggressively growing toward the north,” said Darren Tristano, executive vice president of Technomic, a food industry research and consulting firm based in Chicago.

Despite the local popularity of Raising Cane’s, Tristano said there are a lot of opportunities for Zaxby’s in Baton Rouge. KFC, which long dominated the chicken market, has “hit the wall” and seen sales slide for the past five years. McDonald’s, which sells plenty of chicken sandwiches, has seen its sales plunge by 11 percent in the past year.

“There are shares to be gained from McDonald’s and KFC,” he said. “That’s where Zaxby’s will see it’s shares come from, not from other fast-casual chicken chains.”


Jimmy John’s Growth Fast-Tracked

September 25, 2015

20150918-175928-pic-444050051Debra Pressey
(c)2015 The News-Gazette (Champaign, Ill.)
http://www.news-gazette.com/news/local/2015-09-20/jimmy-johns-growth-fast-tracked.html

CHAMPAIGN — It was the “Slim 5,” a sandwich of salami, Italian capicola and cheese, that Seth Hobbs found himself ordering most when he was a college student and eating Jimmy John’s Gourmet Sandwiches “all the time,” he recalled.

Since he’s made the switch from customer to hardworking owner of two Danville Jimmy John’s franchises, his new favorite is the Italian Night Club, he said. That’s one of the heftier items on the menu, a genoa salami, capicola, smoked ham and provolone cheese sandwich topped with lettuce, onion, tomato, mayo and homemade Italian vinaigrette.

But it was more than just love of the food that drove Hobbs, a 27-year-old former ballplayer for the Joliet Slammers, to become a Jimmy John’s franchisee three years ago.

“It’s one of the fastest-growing chains out there,” he said. “And it’s one of the best profit margins for what you have to put into it.”

The chain Jimmy John Liautaud founded when he opened his first sandwich shop in Charleston in 1983 has been steadily adding locations and climbing national industry rankings.

Since 2007, the chain has quadrupled its number of shops, from 500 to more than 2,000, with most of them franchises.

Some recent industry accolades: Last year, Jimmy John’s was ranked No. 5 in Entrepreneur Magazine’s Franchise 500 list and No. 8 in its fastest-growing franchises list.

Nation’s Restaurant News 2015 Top 100 report ranked Jimmy John’s the nation’s seventh-fastest-growing restaurant chain, with 307 new locations added in 2014 to boost the total to 2,109. That was as of last year. A 2015 total wasn’t available from the company.

Keys to the chain’s growth have been simplicity, including speed of service, sports connections and consistent leadership, according to an NRN report.

Jimmy John’s remains far behind the global sandwich behemoth Subway, which has more than 27,000 U.S. locations, and more than 44,000 shops worldwide. But Subway’s sales declined about 3 percent last year, and it fell from second-largest to third-largest in both the NRN’s Top 100 and food industry research firm Technomic’s Top 500 Chain Restaurant Report Restaurants this year.

Meanwhile, three fast casual sandwich chains — topped by Jimmy John’s, Firehouse Subs and Jersey Mike’s — grew, according to Technomic.

Jimmy John’s, which leads that fast casual sandwich category, has “been moving at a very rapid pace,” Technomic Executive Vice President Darren Tristano said.

While Firehouse Subs and Jersey Mike’s don’t rival Jimmy John’s in unit numbers and sales, they’ve also been growing fast. Jersey Mike’s, the fastest-growing chain in the NRN Top 100, had a 29.3 percent growth in the latest year and third-fastest-growing Firehouse Subs saw its domestic sales grow 24.8 percent.

Tristano looks for Jimmy John’s to continue to do well because it offers comfortable dining environments, good food and a delivery service that sets it apart and boosts sales, he said.

Jimmy John’s caters to both college students and a more affluent customer in the Millennial generation, he said. Those college students who dined on Jimmy John’s while they were at school: “Most of them have grown up, and they’re continuing to eat at Jimmy John’s.”

Cost: $323,000 to $544,000

Hobbs graduated from Ball State University in construction management in 2011, started work on a master’s degree, then left to play professional baseball. Being an athlete prepared him well for the work and dedication the restaurant business requires, he said. As a franchisee, he puts in 75- to 90-hour work weeks.

With Danville being so close to Champaign, home to Jimmy John’s headquarters and multiple shop locations, he said, the name recognition for the brand was good in Danville, and his first Jimmy John’s shop at 3120 N. Vermilion St. did well “pretty much right off the bat.”

After opening his second shop at 306 W. Fairchild St., the first one took a bit of a hit in traffic, he said, “but we’re hoping it will bounce back.”

The North Vermilion location will be getting a new drive-through soon, he said, and he’s interested in adding more locations.

The initial investment in a Jimmy John’s franchise, not including the real estate, is $323,000 to $544,000 — including the $30,000-$50,000 franchise fee payable in a lump sum upon signing the agreement, according to the chain’s website.

That’s substantially more than the cost of opening a U.S. Subway franchise, which is $116,000 to $263,000, including the $15,000 franchise fee. But a Subway franchisee will pay the company more in royalties and kick in more for advertising a year, a total of 12.5 percent, compared to 10.5 percent for Jimmy John’s. And that 2.5 percent difference can be substantial for a franchise owner, Tristano said.

Firehouse Subs has an even potentially higher cost of initial investment for a new franchisee, from $131,150 to $928,405, with a single-unit franchise fee of $20,000, according to that chain’s website. And a franchisee can expect to fork over 9 percent of sales to the company a year, 6 percent in royalties and 3 percent for advertising.

Freaky working conditions

The speedy service hailed as one of the keys to Jimmy John’s success isn’t necessarily great for the company’s workers, according to one former Baltimore employee, Isacc Dalto, who was one of the founding members of the Industrial Workers of the World/Jimmy John’s Workers Union campaign in that city.

Both that campaign and an IWW campaign in Minneapolis went public in 2010, and both continue even after a union election that lost by a hair in Minneapolis that year.

Dalto, 25, worked for Jimmy John’s for one year before his hours were cut to one day a week, which, he contends, was in retaliation for union organizing, and then he quit. He continues to organize Jimmy John’s workers even though he is no longer an employee, he said.

Dalto said he has issues with Jimmy John’s “poverty wages,” sick day policy and a lot more.

“I was called in to work for a three-hour shift sometimes. You’re not allowed to call in sick. You are responsible for finding your own replacement. If you cannot find a replacement for yourself if you are sick, you are written up,” he said. “I was personally asked to work when I had pinkeye, which is not good for the public or customers, and beyond that, there’s a lot of issues with the flow of work and the pace of work. A sub is supposed to be made in 30 seconds on the assembly line.”

The company’s reference to subs “so fast you’ll freak” doesn’t make for such great working conditions for employees, Dalto contends.

“Comparable businesses, like Subway or Potbelly, don’t push workers at this breakneck pace. Aside from being miserable, it’s also very unsafe. People cut themselves when they’re doing this,” he said.

The Minneapolis IWW campaign included workers employed by one Jimmy John’s franchisee staging a work stoppage and picket, thousands of posters about the sick leave policy being posted and six employees being fired. The National Labor Relations Board ordered the employees reinstated in 2014, but they have never returned to work, according to the IBB.

Mum’s the word

Jimmy John’s seems to love social media, but the media maybe not so much?

Some 3.1 million people like a Jimmy John’s Facebook page, and many people post on it, some lovingly about the food, and the chain replies. Jimmy John’s also has more than 389,000 followers on Twitter and more than 34,000 followers on Instagram.

But news stories — which have been numerous as the chain has increased its footprint across the U.S. — often indicate the chain declined to comment, and that’s included no comments on everything from reports about an IPO in the offing to a controversial noncompete agreement required for lower-wage Jimmy John’s workers.

Reuters reported this past May that Jimmy John’s Franchise LLC was preparing for an initial public offering that could value the chain at more than $2 billion, including debt.

This past April, a federal judge in Illinois declined to grant an injunction sought by two former and current Jimmy John’s employees seeking to have noncompete agreements nullified, saying the employees lacked standing to pursue their claim because they had never been injured by the noncompete agreement.

In June, two U.S. senators, Chris Murphy, D-Conn., and Al Franken, D-Minn., introduced the Mobility and Opportunity for Vulnerable Employees, or MOVE Act, that would ban noncompete clauses for employees earning less than $15 an hour or $31,200 a year or the minimum wage where they live.

Liautaud wasn’t available for an interview for this story, and didn’t respond to questions that were emailed to him. A company spokeswoman solicited and received a list of questions from The News-Gazette on Sept. 9 after a local Jimmy John’s franchisee who was contacted for an interview contacted her, but in subsequent inquiries didn’t respond to any of the questions or requests for interviews, saying she hadn’t been able to reach the right people.

Several franchisees who were called and asked for interviews didn’t call back. One out-of-state franchisee who did answer his phone cut off the conversation after inquiring about whether there would be any negative references in the story about the Jimmy John’s chain. Another said franchisees aren’t encouraged to speak to the media.

Jimmy John’s: From 1 shop to 2,000-plus

1983 — Jimmy John Liautaud opens his first sandwich shop in Charleston, with the help of a $25,000 loan from his dad. He later opens stores 2 (Macomb) and 3 (Champaign).

1994 — Liautaud begins franchising.

2002 — Jimmy John’s is a 160-store chain.

2007 — 500th location opens.

2010 — The year store No. 1,000 opens, union organizing campaigns go public in Minneapolis and Baltimore. A vote in Minneapolis is 87-85 against union representation.

2011 — Liautaud and his wife, Leslie, pledge $1 million toward the construction of the new Stephens Family YMCA and Larkin’s Place play space. He also donates $50,000 to Promise Healthcare to help add a dental clinic.

2011 — Liautaud applies for Florida residency and says he may move his chain out of state because of tax increases.

2014 — With 2,000th locations, Jimmy John’s is ranked the sixth-fastest-growing chain by Nation’s Restaurant News, with sales of $1.5 billion.

2014 — U.S. Reps. Joe Crowley and Linda Sanchez ask the Federal Trade Commission and Department of Labor to investigate the hiring practices of Jimmy John’s. This comes after reports that the company requires low-wage workers to sign non-compete agreements “that severely impact workers’ rights,” Crowley says.

2014 — Reuters: Jimmy Johns Franchise LLC is preparing for an initial public offering in a deal that could value the chain at $2 billion-plus. The company declines comment.

2014 — The National Labor Relations Board orders a Minnesota franchisee to reinstate six Jimmy John’s employees fired for exposing company policies the IWW said could expose customers to sandwiches made by sick workers.

2015 — Some launch a Jimmy John’s boycott on social media with pictures of Liautaud posing with dead animal bodies. A new hashtag is born: #BoycottJimmyJohns.

2015 — NRN Top 100 ranks Jimmy John’s the seventh-fastest-growing U.S. chain, with sales of $1.8 billion.