November 21, 2024 • 43 mins
Fast-food chains have lost their value and convenience advantages over competitors, Restaurant Insight Monitor Founder and Partner Tom Wagner tells Bloomberg Intelligence. In this episode of the Choppin’ It Up podcast, Wagner sits down with BI’s senior restaurant and foodservice analyst Michael Halen to discuss how lower cost of goods sold and the proliferation of mobile apps have hurt quick-service industry sales. He also comments on McDonald’s $5 Meal Deal and why it’s so important for restaurant chains to attract millennials and Gen Z.
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Speaker 1 (00:22):
Welcome to Chopping It Up.
Speaker 2 (00:23):
I'm your host, Mike Hamlon, the senior restaurant and food
Service analyst at Bloomberg Intelligence. Our Research and that a
bi's five hundred analysts around the globe can be found
exclusively on the Bloomberg terminal. Today, we're joined by Tom Wagner,
founder and partner at Restaurant Insight Monitor. The company is
a research restaurant research platform that tracks attitudinal and visitation
(00:46):
trends for over forty national brands across segments.
Speaker 1 (00:50):
Thanks for doing this, Tom, Well, thanks for having me. Mike.
You're famous man. I just read about you in Greg
Creed's book Red Marketing.
Speaker 3 (00:59):
Yeah. Greg and I I worked together for many, many years.
He was my direct boss when he was chief marketing
officer of Taco Bell and we had a blast together
and we made a lot of money. The company really
did well under Greg's leadership.
Speaker 1 (01:14):
Yeah, he's a cool guy. What roles did you fill.
Speaker 3 (01:17):
Over my Well, I was there twenty four years, So
it started in finance, financial planning, capital planning. I worked
in development for a while, then I got into marketing research,
then ultimately built the entire sales analysis function within the
company and that led into ultimately taking over consumer insights,
(01:38):
and that I took over that position, I want to say,
in two thousand and one, and I was VP of
Insights there for and brand planning for thirteen years. It
was quite a ride. Taco Bell is a super fun company.
You know, the culture there was very empowering and we
(01:59):
broke a lot of rules in the restaurant space and
had a blast doing it.
Speaker 1 (02:03):
Yeah, it sounds like fun.
Speaker 3 (02:05):
Man.
Speaker 1 (02:05):
What are you most proud of during your ten tenure?
Speaker 3 (02:08):
I think a lot of the strap planning work that
I did and really as we became very consumer focused
as an organization, And probably the thing I'm most proud
of there was really the team I built and really
being able to move the company towards a needs based
(02:29):
marketing approach. So we really stratified the whole industry into
specific need states, you know, things like price value or
abundant value or you know, a big taste something like
a Dorito's Locos tacos and things like that. And by
stratifying the consumer need states, it really enabled us to
do a lot of deep ideation within each need state,
(02:52):
which led to, you know, some pretty big innovations that
really delivered against specific consumer needs, and it really we
effectively drove actions ten years in a row, with the
exception of a e Coali event and a a class
action lawsuit which ended up being completely dismissed.
Speaker 2 (03:10):
Yeah, Taco Bells still rolling, Man, tell me a bit
about what you're doing at Restaurant Insight Monitor.
Speaker 3 (03:17):
So we started this. We started planning about a year
and a half ago, and we really we noticed that
even though there was a lot of marketing research firms
out there, based on our expertise, we didn't think there
was much integration between really what are the consumers needs
really around economic duress. You know, we were we were
(03:39):
coming out of COVID and we started seeing inflation, and
we thought, you know, there's a there's a big opportunity
here to take almost like the University of Michigan consumer sentiment,
you know, that level of understanding and then bridge that
with consumer attitude and visitation. Because I've been around a
long time and we've been through peereriods of inflation and recession,
(04:02):
and I've seen exactly what happens in the restaurant industry
and by brand, we've seen it. So we thought it
was a good opportunity to put this platform together. I
have two partners, Lynda Ashbrook and maher Minawala. We all
worked together at Taco Bell and then between the three
of us, we have over one hundred years of restaurant
analytic and research experience just amongst the three of us.
(04:24):
So we got together and built this platform and it's
going really well so far. We've really uncovered a lot
of interesting insight for a lot of brands.
Speaker 1 (04:33):
Great.
Speaker 2 (04:33):
So, the restaurant industry sure feels like it's in a
recession this year.
Speaker 3 (04:36):
Your thoughts, Uh, Yeah, Like we talk about recession as
a country, like the most anticipated recession that hasn't happened,
But in reality, we've had a rolling recession, right Like
you know, whether it's energy or transportation or package goods
or you know, a lot of things have moved around.
During COVID. Of course, we consumers were buying products like crazy.
(04:58):
You know, the manufacturing side of our economy was booming
and the service side was dead. And then once we
opened up, the service side took off and the manufacturing
side decline. But if you look at the restaurant industry
in general, we are in a recession. Transactions are down
about twenty percent over the last four years. So that
(05:19):
sure sounds like a recession to me, right, So you know,
try to disconnect it from the broader you know, recession
for the country. We are in a restaurant recession, there's
no doubt. And even within fast casual and QSR and
casual dining, you know, traffic is down, you know, two
to four percent every year and just getting smaller. So
(05:40):
that's that's a trend you cannot ignore, right, we are
trying to ignore it. And everybody's taken a lot of
price and we can talk about why they've been able
to do that and why it's going to be much
more difficult, but really we are shrinking as a industry
in terms of number of visits.
Speaker 1 (06:01):
So QSR traffics down a lot the last three years.
Speaker 2 (06:04):
And you know, based on the commentary from the companies
we cover, you know linked low income consumers are the
biggest issue, right And so is it just the cumulative
effective inflation that you mentioned on that cohort.
Speaker 1 (06:17):
Or are there some deeper issues in QSR?
Speaker 3 (06:21):
Well, think about you know where you're eating options are, right,
So there's kind of a hierarchy in terms of cost.
The cheapest way to eat is to eat at home,
So that's grocery, all right. The next level is quick
service restaurants or fast food, and then above that is
fast casual, and then you get into casual dining and
(06:42):
then really fine dining things like that. But fast food
accounts for about fifty percent of all restaurant revenues. Of
all restaurants, about half of all revenue is generated by
fast food, and almost three orders of all visits to
restaurants are to fast food restaurants. So fast food is
(07:05):
this huge segment, and they became that big for two
primary reasons, for value and convenience. Those are the primary
need states that fast food fulfills. You either don't have
the money or you don't have the time. So as
the industry grew and ballooned in all these different chains,
(07:26):
you know, starting way back when with an W and McDonald's,
and you know even Taco Bell back in starting in
nineteen sixty two, then burg King and all of these chains,
they were fulfilling either a value or a convenience need.
So if you look what's going on now is because
of all the inflation that has taken place over the
last several years, restaurants. Fast food restaurants, they have a
(07:49):
lot of labor and they had a lot of ingredient
inputs that were inflating at a very high rate. Right,
we come out of COVID and there wasn't enough labor,
so labor at restaurants and hotels, so hospitality labor got
very expensive. And the what did the companies do, Well,
they just raised price. Right, their input costs or their
(08:10):
food costs or way up as well, so they raised
raised price even more. So here you have this fast
food industry, raised tons of price and yes, transactions were
down some, but they were making more money. You know,
they were able to basically take those price increases with impunity.
Why because consumers were not price sensitive. We come out
(08:32):
of COVID, nobody cared. People had lots of money, right,
you know, five trillion dollars of stimulus money pays down
credit cards, people put it in the bank. They couldn't
spend it on you know, things to do, so they
bought everything on Amazon, or they bought houses. But they
had a lot of excess savings and resources, so they
(08:53):
didn't care when people came out of COVID. They just
wanted to do what they wanted to do, and if
restaurants were a lot more expensive. Sobit I have the
money either on my credit card, you know the capacity
of my credit card, or have the money in the bank.
Well that's no longer the case. If you look at
what's happened the COVID money has been depleted for the
most part, and credit card debt is at an all
(09:13):
time high. It's like almost one point two trillion dollars
of credit card debt in this country. And so they've
had to cut back and it really hit us January
of this year, all of a sudden, you started seeing,
you know, businesses were, you know, people are starting to
put up negative same store sales growth, which means their
(09:34):
transaction growth was significantly lower because everybody still were taking price.
So it was a in reality, people just ran out
of money and so they were forced to, you know,
make cutbacks. And by the way, restaurants are the number
one way consumers cut back. If they're cutting back, it's
(09:54):
restaurants spending the number one way.
Speaker 1 (09:57):
Yeah. Yeah, you shared that survey data that you did.
Speaker 2 (10:00):
With me, and so some of our clients will be
familiar with the with the fact that you know, seventy
four percent of financially concerned customers cut back at restaurants, right,
So that's why we've called it the canary and the
coal mine for for quite some some time. Man, Yes, yes,
And you know you're talking about value a bit here
(10:20):
with QSR. You know, would you say that that, you know,
Fast Casual now is kind of got a bigger lead
now in terms of value for the money on QSRs.
Speaker 3 (10:31):
Well, it's interesting if both value and affordability. So the
way we ask the question, we start with affordability, right,
and we use a you know, we use a scale
like a traditional research scale. But affordability has been declining
across Fast Casual and QSR since January, so it's been
(10:51):
going down and it's even affordabilities lower in Q three
than it was in Q two across almost every brand,
I mean even big brands that are doing fairly well,
their affordability and value for the money scores are continuing
to deteriorate. But as it released to Fast Casual versus QSR,
you have to think about why people were going to QSR.
People are going to QSR again for value inconvenience, and
(11:15):
QSR is no longer of very good value. I mean,
you know, not to pick on McDonald's, but you know
a basic you know, big mac combo meal. It's like,
you know, between twelve and fourteen dollars. That's a lot.
And the real issue is the cost of sales. The
(11:36):
average cost of sales across fast food restaurants today is
somewhere in the neighborhood of you know, twenty three to
twenty seven percent, which means if I'm a consumer and
I go and spend a dollar at a fast food restaurant,
I'm only getting about twenty five cents worth of food. Right,
And I remember I was going to fast food. I
(11:57):
built it into my routine because I got a lot
of food for the money. Right. It may not as
been as good as fast casual or casual dining, but
it was a lot cheaper and it was a lot faster. Right. Well,
it's not very cheap anymore. So if you think about
fast casual, it might be a little bit more expensive
in terms of price point, and by the way, that's
not always the case, but it might be a little
(12:19):
higher in terms of price point. But consumers will say,
they do the math. It's what you get for what
you pay. So while it might cost just a little
bit more, their perception of quality is much higher in
fast casual, and the service experience is generally better fast casual.
So again, what you get for what you pay. And
now all of a sudden, fast food no longer has
(12:40):
an advantage over a fast casual, right, So there's that
value dynamic. Now let's think about something else. Let's talk
about the convenience side of things. The number one asset
that fast food restaurants typically have is a drive through.
Drive through is the ultimate in America culture, where everybody's
(13:02):
in their car driving around, going to work, you know,
driving on vacation, doing errands. Having a drive through was
a very important asset still is still is an important asset.
But now people have mobile apps and mobile apps. You know,
you can order from any restaurant and they will bring
the food to you. So if you think about like
(13:24):
this perfect storm of you know, post COVID, now a
lot of people are still working from their homes, they
are not driving as many miles, So all of a sudden,
you have, you know, the mobile device. That secular trend
of mobile is kind of in some ways neutralizing the
advantage that traditional fast food restaurants had over fast casual.
(13:48):
It makes sense, and you can access value through those
mobile apps as well.
Speaker 1 (13:54):
Yeah, so drive through traffic's been down pretty big, right.
Speaker 3 (13:58):
Yeah. If you look at a New Management Solutions RMS,
they publish a newsletter and they're their data is showing
that within QSR that drive through traffic is down double
digits this year and double digits last year. So the
even though traffic is down, you know, call it two
to three percent in fast food right now, they're drive
(14:20):
through traffics down ten. So if you're a if you're
a fast food concept and you're writing a strat plan
for a fast food company, and you show that you
are materially losing value and you're losing business in the
drive through, which I then interpret as we're losing our
convenience advantage, value and convenience. That's not a good trend
(14:44):
for that that segment.
Speaker 1 (14:45):
Yeah.
Speaker 2 (14:46):
And a couple of things that spoke out both in
the survey you sent to me and then also when
we spoke is that you know, gen Z is less
interested in cars, and car culture used to be such
a bigger part of American culture, but you know, not
really the case anymore.
Speaker 3 (15:02):
Yeah, that's right. I mean, I don't know about you,
but I got my driver's license the day I turned sixteen.
I mean the day I turned sixteen. It was like
that was the right of passage, right, that was your
you know, your venue to freedom and independence. It was
a driver's license. And you know, that's it. You're out
the door, and you know, all right, mom and dad,
I'll see you when I get home whenever. Right, And
(15:23):
so that was a really important you know, link to
our social interactions, right cars, and then of course eating
as well, it always is. Eating has always been part
of you know, how we socialize as humans. But but
if you're if you're a Gen Z and even millennials
to some extent, many were not in a big hurry
(15:46):
to get their driver's license. And look at with with
you know, the Internet, which didn't exist when I was
a kid, but you know social media platforms that that
you get a lot of interaction there, you get a
lot of self worth there, things that were not important.
One the extras and the Boomers were really young, but
the Millennials and the Gen zs, it really is about
(16:06):
social media and being an influencer and creating content. You
don't really need a car. Right, If you don't need
a car, then you're not using to drive through. So
generationally it is also not a good trend for the
fast food segment overall. It really helps, i said, neutralize
the advantage that fast food had over fast casual. And
(16:28):
if you look at some of the really popular brands
with gen Z right now and millennials, they're the Chipotles,
they are the wingstops, raising cane Zaxby's brands like that
which are doing very well, and even Starbucks to some extent,
and we could talk about that a little bit later,
but they also have a relatively younger consumer base, very
(16:50):
close to Taco Bells actually, but not as young as
Chipotle does. But they have a young consumer base. And
again think about the historically how wrong the Starbucks mobile
app is and their ability to bring in younger users,
especially over the last several years.
Speaker 1 (17:06):
Yeah, it's interesting. Interesting, man, It's like the pandemic, give
it and then.
Speaker 2 (17:10):
Take it away for QSR because right, because it's like
if you had to drive through, you were still you
were you killed it coming out of the pandemic, right,
But then at the same time, a lot of these
consumers were taught to use the apps and order online
and just have the food delivered to them. And so
you know, that advantage just gone away pretty quick, man.
(17:31):
You got this industry moves fast man, Right.
Speaker 3 (17:34):
You know there's a there's an old adage or insight.
Actually it was from the former chairman of PEPSI used
to say this a lot. He'd say, average is awful. Right.
Average is awful not only because it doesn't push you
to attain high levels, but in the world of consumer insights,
average is awful because it hides what's really going on. Right.
(17:57):
So if you look at the publicly traded restaurant concepts
out there over the last few years, they're killing it, right,
they're killing it. Yeah, traffic's been down, but their revenues
are hitting all time highs. Their unit level economics are unbelievable.
Their franchisees for most of the major chains, we're making
more money than they've ever made. Right. They got their
(18:19):
financing at historically low rates, so they could lever up
like crazy and expand, right, and the average performance out
there is hiding what's really going on. And what I
mean by that is we're seeing earnings per share those
things moving up, margins going up. But that's all being
masked because consumers were not price sensitive. They were artificially
(18:43):
demand was artificially high given the price level of what's
going out there. Now we're starting to see a reality
of it, especially starting in January of twenty twenty four,
traffic going down. Companies posting very very low digit single
same store saying or negative same store sales, which means
their traffic is meaningfully lower. The need to start pushing
(19:06):
on you know, value, you know, and we're seeing that obviously, right,
you know McDonald's doing their five dollars meal deals. We
can talk about you know, my outlook on that, because
I'm kind of bearish on it actually, But you know,
this is really the pivot point twenty twenty four. You know,
all the things that were masked in twenty twenty really
(19:28):
twenty one, twenty two, and twenty three are really now
coming to a pivot point in twenty twenty four. And
I believe in twenty twenty five will be a difficult
year in the restaurant space for many brands.
Speaker 2 (19:41):
Okay, so why don't you talk about McDonald's, right, like
the five dollars meal deals. It seems like they're trying
to re establish their position on value. They've always, you know,
been a great provider of value due to their scale.
You know, what's your view on the five dollars meal
deal and just your view on McDonald's.
Speaker 3 (20:01):
Sure, well, the five dollars meal deal is, you know,
I don't know exactly how they chose the specifics. I
know this much, Right, in order to reduce the break
even associated with offering a discounted product, right, they had
to include items that are not super high mix sales mix.
In other words, the big Max not in there. At a
quarter pine of with cheese isn't in there. Their most
(20:22):
popular chicken sandwiches are not in there. So it's kind
of a it's a it's more like a nod to
value as opposed to really resolving the value problem that
McDonald's has. McDonald's has a significant value for the money problem.
Significant Like, they took a lot of pricing and again
(20:45):
they made a ton of money. But now what's happening
is their visitation is going down. So doing a five
dollars meal deal is to me a you know, it's
what they want to do and what they need to
do are two different things. They want to for value
but not have any impact of margins. But that's not
what they need to do. What they need to do
(21:06):
is give more food for the money their cost of sales.
And again I don't know the specifics for that brand. Again,
McDonald's a great brand. I'm not in any way taking
away the profitability or the you know how big an
Americana it is, but their cost of sales is too low.
Consumers want more food for the money, right, So the
five dollars meal deal is a nod now our insight platform,
(21:30):
we saw that in Q two that McDonald's three month reach,
so the percent of consumers that have been in McDonald's
in the past three months, we saw that go up
in Q Q. Yeah, Q two versus Q two year
ago just a little bit, but now we're seeing it
(21:52):
lower than prior year, right, And we're looking at their
affordability and value for the money scores and they have
not materially changed that five dollars meal deal did not
materially change consumer's net perceptions of affordability or value for McDonald's, right.
So that brings me to the next point, which is
how else do brands offer value out there? And that
(22:15):
is really through their mobile app. So you can if
you download the McDonald's mobile app, you can get some
pretty decent deals on it. Right, you buy a six
piece McNugget, you get one free. All right, Yeah, it's
you know, it's five and a quarter, but you get
twelve for five and a quarter, So that's that's not
a bad deal. Right. Here's the problem. McDonald's largest age
(22:35):
cohort is over forty five, and by the way and growing,
the percentage of past month McDonald users that are over
forty five is significantly higher than the percentage of their
past month users that are under forty five. So let
me translate, McDonald's is more about gen X and boomers
(22:56):
than they are about Gen Z and millennials. Right, and
guess who uses mobile apps? Gen Z and millennials at
a significantly higher rate than Gen X and boomers significantly higher.
So McDonald's largest cohort is gen X and boomers. Right.
(23:17):
They aren't really getting access to value to the mobile
app because they don't use it as much. So again,
I think what McDonald's is going to need to do
is they're going to have to make a material investment
in their cost of sales in order to legitimately bring
back transparent and accessible value to the masses because they
(23:42):
are not there now. I mean an average a medium
French fry in the McDonald's near my house there, they're
almost five dollars for a medium French fry. It's crazy, right,
I mean, people just aren't going to do it. I
mean they do it, but so really that's my that's
my takeaway at McDonald's I think, I think again, going
(24:04):
back to that insight, what what their operators need to
do and what they want to do are two different things.
They need to give more food for the money to
the masses in an accessible way, and they're trying to
get around it by reducing the breake. Even their five
dollars meal deal is their second tier sandwiches, right MC
chicken or a mcdoubell, which is not the ones that
(24:26):
people really want. I mean, they'll lead them right, and
then they get you know, their small fry and small
drink and if you look at their combos, that's not
what they sell. So there is a there is a
compromise to get to the five dollar price point.
Speaker 1 (24:40):
Yeah.
Speaker 2 (24:41):
No, it's interesting, man, and I don't think a lot
of people are talking enough about you know, the cost
of sales being too low. I think you know everybody
for the longest time was just trying to get that
number down. And to your point, you know, pricing has
got some of these chains have gotten ahead.
Speaker 3 (24:55):
Of themselves in pricing that, oh for sure.
Speaker 1 (24:58):
And so you know we're talking that all.
Speaker 2 (25:00):
So you know in your survey that you shared with me,
you also talked about how gen Z was the one
cohort that was least financially concerned, right, and so you
kind of want that.
Speaker 1 (25:12):
You want that group coming in your doors, right.
Speaker 3 (25:15):
Sure, it's the future.
Speaker 2 (25:16):
Right.
Speaker 3 (25:16):
If you're not, if you're a brand and you are
not in your strap plan, if you are not materially
figuring out how to increase your peal with gen Z,
I mean long term, you're going to be in trouble.
You know. Like I could talk from my own experience
at Taco Bell, right, I mean we got behind millennials
really early. I mean two thousand, two thousand and one.
(25:39):
We were really pushed. We had this initiative called the
Millennial Mindset, right, and the whole executive team right had
to get around it, really focus it. I'll tell you
a quick story. It's I was on the executive team
meet at the executive team meeting, and I asked a question.
I used to give the state of the business update
every Monday morning, and I remember I asked the executive
(26:02):
team a question. I said, guess what happened today? And
I said, well, today is a very important day because
this was back in I want to say two thousand
and one or two, or maybe two thousand and three.
I said, today is a day the text messaging surpassed
phone calls as the most common way of communicating. And
(26:24):
I said, how many of you in this room know
how to send a text message? And there are I
think we had seven people on the you know, the
executive team and like to raise their hand. So, without
calling out any names, I said, so, you guys are
running this company which is basically a millennial skewing brand.
(26:48):
Most of our employees are millennials, and you don't know
how to communicate and the number one way that millennials communicate,
I said, I am changing my objective this year to
one thing, and that's to help to drive a millennial
mindset through this entire corporate office, which we call the
Restaurant Sports Center, as well as you know, the broader organization,
(27:10):
and and we did lots of things to make that happen,
and the whole, the whole you know, corporate office got
behind it, and we really did well. I mean, Taco
Bell was very early in the social media, very early.
We you know, they saw the power of it, and
we had lots of young, hot shot marketing guys that
are you know, one or two years out of graduate
school MBAs, and those guys really got behind it. And
(27:32):
again a lot of those people are leading some big
organizations now as marketers.
Speaker 1 (27:36):
Yeah, and doing well.
Speaker 3 (27:37):
Man.
Speaker 1 (27:38):
We've had some of them on the podcast.
Speaker 2 (27:40):
You know, Yeah, there's there's Taco Bell, and young graduates
will call them doing good work all over the US man,
and not only in quick service either.
Speaker 3 (27:52):
So.
Speaker 2 (27:54):
You know, and and you mentioned, you know that the
bifurcation between maybe you know, the over forty five and
they're forty five year olds, right, the millennials and Gen
Z under and the Gen X and the boomers over.
And you see a real correlation, don't you, in terms
of what percentage of your sales are coming from the
younger generations and how you same store sales and traffic
(28:18):
are trending.
Speaker 3 (28:19):
Right, yeah, definitely. I mean if you look at take
a wingstop. Okay, Wingstop is the current you know, Darling
of same store sales growth. They I think they're two
years same store sales growth in Q two if you
look at two years where there was something like forty
six percent same store sales growth. Not to mention all
the new units they've opened, but they skew very young, right,
(28:41):
very young they are. I don't have the numbers in
front of me, but something like between seventy and eighty
percent of their past month users are gen zs or
millennials right way up there. Raising Cain is another one.
Chipotle has a very very high percentage of their customer
(29:02):
base that is under forty five. That's kind of the
proxy we use for gen Z and millennials, whereas the
more traditional QSRs. McDonald's definitely skews much older. Burger King
excus much older. Wendy's is much older, not as old
as Burger King and McDonald's, but they do now at
Taco Bell again, they're about fifty to fifty, right. Starbucks
(29:25):
and Taco Bell are about fifty to fifty, so half
of their users are under forty five, and half of
the users are over forty five, so it really can.
I'm not saying it's it's not the only factor, but
it is an important factor. And I didn't quite answer
your question before around what's going on with gen Z's
(29:45):
but they are significantly more hopeful about the future and
significantly less concerned about their financial situation. And when you
put that together, they don't cut back as much on
spend as especially like the boomers. The boomers cut back
the most millennials or the extras, and the boomers cut
(30:06):
back the most. Millennials are starting to need to because
they are still in you know, important earning years. Yeah,
but our platform shows very clearly by brand, which ones,
which brands are skewing lower generation, and what's going on
with their level of financial concern and it matters.
Speaker 2 (30:24):
Yeah, and listen, man, gen z they're young. They got
their parents' credit cards. Man, they're bringing them.
Speaker 3 (30:28):
Up, not all of them them up, not the twenty
six year olds twenty seven.
Speaker 1 (30:34):
Yeah.
Speaker 2 (30:35):
Well, that's what we find interesting too, is how everybody
categorizes the different generations.
Speaker 3 (30:40):
Not true.
Speaker 2 (30:42):
Neil Strauss's work and you know, he's like, you know,
he claims that one to eighteen are.
Speaker 1 (30:49):
Gen Z.
Speaker 2 (30:50):
But then also you know, some of the chains we
cover will go much higher to the later twenties.
Speaker 3 (30:55):
Sure on those generations so well, they do have less debt.
Gen Z is a lot less that they have more
student loans, but you know they can't afford houses right.
Speaker 1 (31:04):
Now, yeah, or some mortgage that's no.
Speaker 3 (31:07):
Mortgage, right They don't have as much credit card debt,
not yet.
Speaker 1 (31:10):
Anyway, how's their loyalty?
Speaker 2 (31:12):
You know, I know it was it was widely publicized
that millennials are very disloyal. They want to try a
lot of different types of cuisine, and so they might
not frequent their favorite restaurants as much as as previous generations.
Speaker 1 (31:23):
Where does gen Z pan out in terms of loyalty?
Speaker 3 (31:27):
I can't really comment very objectively on. I just almost
hearsay from what I heard. Maybe maybe you know, a
lot of adventure right there they get Again, social media
really runs through their lives, and there's there's people that
can get you to try new brands if you're an influencer.
But I don't know, maybe maybe a little bit more
(31:48):
they're showing, from what I've read, a little bit more traditional,
more loyal than the millennials. Potentially and we'll see as
they move through. You know, the restaurants is there's a
lot more choices now than they used to be, right,
and I'll tell you it's there's a lot of exciting
stuff out there. Chicken, right, Chicken is big right now,
(32:10):
look at again some of the most top performing brands
is you know, Wingstop not raising canes, axe Be's even
Chipotle when they when they ran chicken ol pastor that
was kind of their their Q two numbers. You know,
that broadly appealing, you know, with different sauces and Wingstop
you know a lot about the sauces and the dipping.
You can take a you know, a protein like chicken
(32:33):
and bring a lot of flavor to it. Right. That's
you know, that's in addition to you know, the Popeyes
of the world, when the chicken sandwiches became these you know,
the whole chicken breast fried, I mean blowing outside the bun,
you know, so big and will even fit in the bun.
And and then you know, younger consumers, you know, you
hear that they are a little more down on steak
(32:54):
and cows because of you know the environment and you know,
carbon dioxide and things like that. Thing I guess, but
it makes sense, right if you look at the kind
of the secular trends that are going, and the secular
trends are you know, you know, the millennials are the
biggest generation ever through but there's always a new one
(33:15):
coming mobile application, right, That is a secular trend mobile adoption,
and then you just kind of overlay that with what's
the landscape in the restaurant space. These traditional qs rs
have these older, you know, customer bases that are less flexible.
They may be more loyal, but you know, they don't
(33:35):
want another app on their phone. Some do, but most don't,
and it's creating a tech barrier for growth. So you know,
I'm having worked on a lot of marketing calendars and
a lot of product developments. One of the things that
you want to do in the restaurant space is give
consumers more reasons to come to your brand more often.
(33:59):
And the way you can do that is you can
do it through value. That's one way, but also innovation, right,
taste innovation, flavor innovation, and those brands that bring a
lot of flavor innovation are doing better overall all else equal.
That's one of the that's one of the strengths that
Taco Bell has is they are they are very strong
(34:22):
product innovators, and you know, sometimes it's very similar to
the last project product that they launched. But overall, if
you can upset that purchase cycle and get someone to
come in three days sooner than they normally would and
their purchase cadence, it really makes a difference. And Taco
Bell did better than almost all major QSRs and Q two.
They put up a plus five same store sales, which was,
(34:46):
you know, better than all the other major brands. It
wasn't Chipotle numbers or Winstock numbers all right, but it
was still pretty good. They're a smart group over there there.
They know what they're doing, and they have good franchisees.
They work together, and that's a you know, that's a
challenge for McDonald's because their their franchise relationship from everything
I've read, can be a little contentious at times. And
(35:09):
you know, the decision for them to extend the five
dollars meal deals through I think they said through December
at the end of the year, to me is symptomatic
that they probably got a response, right, you know, their
earnings are coming out. I don't know when they release
the first week in November, I'm guessing. I'm sure they
got a response. But again, as a as a marketing
strategy guy, I'm looking at the consumer data. I don't
(35:31):
see any improvement in value for the money, and I
just know how consumers respond to value and they're going
to have to step up their game if they want
to have a material reversal in what's going on with traffic.
Long term.
Speaker 2 (35:44):
Yeah, it's going to be interesting to see what they
do with the value menu because it's been largely ignored
for quite some time.
Speaker 3 (35:51):
Rightfully, so you didn't need it, right, people were not
price sensitive, but now they are.
Speaker 1 (35:55):
Yeah, and they've gotten a lot of shade online. Right,
you can't buy anything for a buck or less.
Speaker 2 (35:59):
The best you could do is maybe a drink for
a buck at the buck fifty nine or something.
Speaker 1 (36:04):
But yeah, and the items haven't been renovated. It's been
the same items on the menu for quite scan.
Speaker 3 (36:09):
I think you can, if you know what I know
about the restaurant space, you can as a consumer, you
can look forward to better values out there as we
as we move through the end of the year and
into twenty twenty five. Desperation tribe innovation.
Speaker 4 (36:23):
Yeah for sure, you know, and just you know, going
back a little bit to the gen zs and apps
app usage, you know, have you done any work around
how many apps people will have on their phone, how
many restaurant apps people will have on their phone, and
how that differs maybe from gen Z up to boomers.
Speaker 3 (36:41):
I don't have the specifics, although I have read articles
and I'm sorry I don't have anything written down I do.
But one thing that we do track on our platform
is so we look at all past month users of
these brands, and we we find out who never uses
the app, who always uses the app, and who sometimes
uses the app? And just again, anecdotal evidence suggests that
(37:07):
younger consumers will download apps in order to access a
value offering, and as soon as it's over, you know,
they take it off. You know, I don't know about
your your mobile device, but I mean I probably have
fifteen or twenty more apps on there than I had,
you know, eighteen months ago. You know, it's like, you know,
(37:28):
how many pages you have to scroll through to find
that you know the app you're looking for, and then
heaven forbid, somebody changes the color of the app you're
used to and now you can't find it at all, right,
But yeah, Jeff, definitely, I don't know the number, but
younger consumers definitely going to have more apps. But you know,
they are probably more fickle as it comes to how
many apps they're going to have, So keeping you know,
(37:51):
people engaged with that app is important. And I you know,
when I talk to the executives at these brands, everybody
understands that app users give much higher brand association scores
for brands. So for example, again we'll just to give
McDonald's some some favorable light here. If you're a McDonald's
(38:11):
app user, right, you are going to give McDonald's much
better scores on value for the money, right, quality of food,
all those things, and you go more frequently. So people
that always use the app go by far the most
frequent to all these brands. Now, is it that people
who go to these brands often the most often download
(38:34):
the app, or is it that if you have the app,
you go more frequently? It's both, right, is the dog
wagon the tail or the tail wagon the dog It's both.
It's got to be both. But I'll tell you know,
innovation in your app is going to be you know
the gen z and millennial battleground. Right, it's there are
some really good apps out there. Domino's has a great app, right,
(38:57):
Chipotle has a great app, Starbucks has a great app. Like,
those are the gold standards, and they have by far
the highest level of app adoption. You casual dining is
is you know, coming coming from behind, you know, a
lot lower adoption, but you don't need it as much generally.
But again as a as a strategy, you know, increasing
(39:19):
mobile app adoption is something you can't ignore. You just
can't ignore it.
Speaker 1 (39:23):
Yeah, you're good at this.
Speaker 2 (39:25):
Man.
Speaker 3 (39:27):
I've been in this industry a long time, and I'll
tell you, like I look at the restaurant world and
it seems very obvious to me what needs to happen. Right.
I mean not to pick on QSR, but QSR your
food cost is too low. I mean again like we
talked earlier on this podcast, which is you're not giving
enough food for the money. I mean just look at
(39:49):
if you look at the you know, at the inflation
data CPI data, Right, they track food away from home
and food at home. Food at home is grocery. Food
away from home are restaurants? Right? Since twenty seventeen. Since
January first, twenty seventeen, I track all this stuff. Restaurant inflation.
(40:10):
Prices in restaurants is up forty percent since January of
twenty seventeen. Groceries are up thirty percent. Well, that's a
ten point difference. And by the way, that's been going
on now for two years. That restaurant inflation continues to
outpace really more than too well really really you know
(40:33):
seven But there are different periods of time. But if
you look at it, and right now every month that
goes by, restaurants are getting more expensive relative to grocery prices,
right and again, restaurants are you know, they you know,
they have to hire people to make it, so they
have to buy the food, and then of course they
have to pay for you know, the asset they have,
you know, utilities they have, all these other things, and
(40:55):
labor costs. Labor costs are actually have settled down a
lot in restaurants and hospit mentality. Wage inflation in restaurants
and hotels is the same as the overall population. So
that's good for restaurants and that they're not going to
have to take a higher level of pricing to offset
their labor compared to everybody else. But every month that
(41:18):
goes by, groceries are getting relatively cheaper than eating out.
That is not a good trend, right, So the you know,
to me, the obvious reality is if you have a
basically a consumer base that's in recession, your demand is down.
We know there's a value for the money problem. We
(41:39):
know there's affordability problem. And you think about all the
profits that were made over the last three or four years.
Restaurants have made a lot of money by being able
to take all this price which has very high flow
through right with very little consumer you know pushback, right,
In other words, traffic's down a little, but sales are
(42:00):
up a lot, Right, You're gonna have to make some
investments back and cost of sales, right, even if it
means and again for publicly traded companies, yeah, you can innovate, thanks,
find a way to automate take labor out of the restaurant,
and and all the smart brands are doing that. But
this is a reality. And again I was looking at
Q three data right before this podcast, our Q three data,
(42:24):
and again all the affordability and value for the money
scores for all the major fast casual and fast food
brands continue to slip. So that's that's a tough trend
to acknowledge.
Speaker 2 (42:40):
No doubt, man, I think that's that's I know how
I'm gonna market this episode. That's a perfect place to
end because I think that that's really theme of cost
of sales being too low has run through this discussion,
and I think it's it's really important. I think it's
a great insight. So we'll wrap it there. Thanks again
for doing this. Where can our listeners go to find
(43:01):
out more about Restaurant Insights Monitor?
Speaker 3 (43:03):
Oh and thanks for asking Mike. It's it's pretty simple.
It's www dot Restaurant insightmonitor dot com and we have
you know that they can get ahold of us and
we do. We have we have subscriptions that we we
sell and then we do a lot of sea level
consulting as well.
Speaker 2 (43:22):
Well, yeah, you've done some great work on that, on
those surveys that you've shared with me.
Speaker 1 (43:25):
So I appreciate you for that, and uh yeah.
Speaker 2 (43:28):
I look forward to continue and discussing restaurants with you,
and we'll definitely have to have you back here.
Speaker 1 (43:33):
On the pod.
Speaker 2 (43:34):
I want to thank the audience for tuning in. If
you liked the episode, please subscribe and leave us a review.
Check back soon for an interview with Steve Kislow, the
CEO of Firebirds, would fire Grill
Welcome to Chopping It Up.
Speaker 2 (00:23):
I'm your host, Mike Hamlon, the senior restaurant and food
Service analyst at Bloomberg Intelligence. Our Research and that a
bi's five hundred analysts around the globe can be found
exclusively on the Bloomberg terminal. Today, we're joined by Tom Wagner,
founder and partner at Restaurant Insight Monitor. The company is
a research restaurant research platform that tracks attitudinal and visitation
(00:46):
trends for over forty national brands across segments.
Speaker 1 (00:50):
Thanks for doing this, Tom, Well, thanks for having me. Mike.
You're famous man. I just read about you in Greg
Creed's book Red Marketing.
Speaker 3 (00:59):
Yeah. Greg and I I worked together for many, many years.
He was my direct boss when he was chief marketing
officer of Taco Bell and we had a blast together
and we made a lot of money. The company really
did well under Greg's leadership.
Speaker 1 (01:14):
Yeah, he's a cool guy. What roles did you fill.
Speaker 3 (01:17):
Over my Well, I was there twenty four years, So
it started in finance, financial planning, capital planning. I worked
in development for a while, then I got into marketing research,
then ultimately built the entire sales analysis function within the
company and that led into ultimately taking over consumer insights,
(01:38):
and that I took over that position, I want to say,
in two thousand and one, and I was VP of
Insights there for and brand planning for thirteen years. It
was quite a ride. Taco Bell is a super fun company.
You know, the culture there was very empowering and we
(01:59):
broke a lot of rules in the restaurant space and
had a blast doing it.
Speaker 1 (02:03):
Yeah, it sounds like fun.
Speaker 3 (02:05):
Man.
Speaker 1 (02:05):
What are you most proud of during your ten tenure?
Speaker 3 (02:08):
I think a lot of the strap planning work that
I did and really as we became very consumer focused
as an organization, And probably the thing I'm most proud
of there was really the team I built and really
being able to move the company towards a needs based
(02:29):
marketing approach. So we really stratified the whole industry into
specific need states, you know, things like price value or
abundant value or you know, a big taste something like
a Dorito's Locos tacos and things like that. And by
stratifying the consumer need states, it really enabled us to
do a lot of deep ideation within each need state,
(02:52):
which led to, you know, some pretty big innovations that
really delivered against specific consumer needs, and it really we
effectively drove actions ten years in a row, with the
exception of a e Coali event and a a class
action lawsuit which ended up being completely dismissed.
Speaker 2 (03:10):
Yeah, Taco Bells still rolling, Man, tell me a bit
about what you're doing at Restaurant Insight Monitor.
Speaker 3 (03:17):
So we started this. We started planning about a year
and a half ago, and we really we noticed that
even though there was a lot of marketing research firms
out there, based on our expertise, we didn't think there
was much integration between really what are the consumers needs
really around economic duress. You know, we were we were
(03:39):
coming out of COVID and we started seeing inflation, and
we thought, you know, there's a there's a big opportunity
here to take almost like the University of Michigan consumer sentiment,
you know, that level of understanding and then bridge that
with consumer attitude and visitation. Because I've been around a
long time and we've been through peereriods of inflation and recession,
(04:02):
and I've seen exactly what happens in the restaurant industry
and by brand, we've seen it. So we thought it
was a good opportunity to put this platform together. I
have two partners, Lynda Ashbrook and maher Minawala. We all
worked together at Taco Bell and then between the three
of us, we have over one hundred years of restaurant
analytic and research experience just amongst the three of us.
(04:24):
So we got together and built this platform and it's
going really well so far. We've really uncovered a lot
of interesting insight for a lot of brands.
Speaker 1 (04:33):
Great.
Speaker 2 (04:33):
So, the restaurant industry sure feels like it's in a
recession this year.
Speaker 3 (04:36):
Your thoughts, Uh, Yeah, Like we talk about recession as
a country, like the most anticipated recession that hasn't happened,
But in reality, we've had a rolling recession, right Like
you know, whether it's energy or transportation or package goods
or you know, a lot of things have moved around.
During COVID. Of course, we consumers were buying products like crazy.
(04:58):
You know, the manufacturing side of our economy was booming
and the service side was dead. And then once we
opened up, the service side took off and the manufacturing
side decline. But if you look at the restaurant industry
in general, we are in a recession. Transactions are down
about twenty percent over the last four years. So that
(05:19):
sure sounds like a recession to me, right, So you know,
try to disconnect it from the broader you know, recession
for the country. We are in a restaurant recession, there's
no doubt. And even within fast casual and QSR and
casual dining, you know, traffic is down, you know, two
to four percent every year and just getting smaller. So
(05:40):
that's that's a trend you cannot ignore, right, we are
trying to ignore it. And everybody's taken a lot of
price and we can talk about why they've been able
to do that and why it's going to be much
more difficult, but really we are shrinking as a industry
in terms of number of visits.
Speaker 1 (06:01):
So QSR traffics down a lot the last three years.
Speaker 2 (06:04):
And you know, based on the commentary from the companies
we cover, you know linked low income consumers are the
biggest issue, right And so is it just the cumulative
effective inflation that you mentioned on that cohort.
Speaker 1 (06:17):
Or are there some deeper issues in QSR?
Speaker 3 (06:21):
Well, think about you know where you're eating options are, right,
So there's kind of a hierarchy in terms of cost.
The cheapest way to eat is to eat at home,
So that's grocery, all right. The next level is quick
service restaurants or fast food, and then above that is
fast casual, and then you get into casual dining and
(06:42):
then really fine dining things like that. But fast food
accounts for about fifty percent of all restaurant revenues. Of
all restaurants, about half of all revenue is generated by
fast food, and almost three orders of all visits to
restaurants are to fast food restaurants. So fast food is
(07:05):
this huge segment, and they became that big for two
primary reasons, for value and convenience. Those are the primary
need states that fast food fulfills. You either don't have
the money or you don't have the time. So as
the industry grew and ballooned in all these different chains,
(07:26):
you know, starting way back when with an W and McDonald's,
and you know even Taco Bell back in starting in
nineteen sixty two, then burg King and all of these chains,
they were fulfilling either a value or a convenience need.
So if you look what's going on now is because
of all the inflation that has taken place over the
last several years, restaurants. Fast food restaurants, they have a
(07:49):
lot of labor and they had a lot of ingredient
inputs that were inflating at a very high rate. Right,
we come out of COVID and there wasn't enough labor,
so labor at restaurants and hotels, so hospitality labor got
very expensive. And the what did the companies do, Well,
they just raised price. Right, their input costs or their
(08:10):
food costs or way up as well, so they raised
raised price even more. So here you have this fast
food industry, raised tons of price and yes, transactions were
down some, but they were making more money. You know,
they were able to basically take those price increases with impunity.
Why because consumers were not price sensitive. We come out
(08:32):
of COVID, nobody cared. People had lots of money, right,
you know, five trillion dollars of stimulus money pays down
credit cards, people put it in the bank. They couldn't
spend it on you know, things to do, so they
bought everything on Amazon, or they bought houses. But they
had a lot of excess savings and resources, so they
(08:53):
didn't care when people came out of COVID. They just
wanted to do what they wanted to do, and if
restaurants were a lot more expensive. Sobit I have the
money either on my credit card, you know the capacity
of my credit card, or have the money in the bank.
Well that's no longer the case. If you look at
what's happened the COVID money has been depleted for the
most part, and credit card debt is at an all
(09:13):
time high. It's like almost one point two trillion dollars
of credit card debt in this country. And so they've
had to cut back and it really hit us January
of this year, all of a sudden, you started seeing,
you know, businesses were, you know, people are starting to
put up negative same store sales growth, which means their
(09:34):
transaction growth was significantly lower because everybody still were taking price.
So it was a in reality, people just ran out
of money and so they were forced to, you know,
make cutbacks. And by the way, restaurants are the number
one way consumers cut back. If they're cutting back, it's
(09:54):
restaurants spending the number one way.
Speaker 1 (09:57):
Yeah. Yeah, you shared that survey data that you did.
Speaker 2 (10:00):
With me, and so some of our clients will be
familiar with the with the fact that you know, seventy
four percent of financially concerned customers cut back at restaurants, right,
So that's why we've called it the canary and the
coal mine for for quite some some time. Man, Yes, yes,
And you know you're talking about value a bit here
(10:20):
with QSR. You know, would you say that that, you know,
Fast Casual now is kind of got a bigger lead
now in terms of value for the money on QSRs.
Speaker 3 (10:31):
Well, it's interesting if both value and affordability. So the
way we ask the question, we start with affordability, right,
and we use a you know, we use a scale
like a traditional research scale. But affordability has been declining
across Fast Casual and QSR since January, so it's been
(10:51):
going down and it's even affordabilities lower in Q three
than it was in Q two across almost every brand,
I mean even big brands that are doing fairly well,
their affordability and value for the money scores are continuing
to deteriorate. But as it released to Fast Casual versus QSR,
you have to think about why people were going to QSR.
People are going to QSR again for value inconvenience, and
(11:15):
QSR is no longer of very good value. I mean,
you know, not to pick on McDonald's, but you know
a basic you know, big mac combo meal. It's like,
you know, between twelve and fourteen dollars. That's a lot.
And the real issue is the cost of sales. The
(11:36):
average cost of sales across fast food restaurants today is
somewhere in the neighborhood of you know, twenty three to
twenty seven percent, which means if I'm a consumer and
I go and spend a dollar at a fast food restaurant,
I'm only getting about twenty five cents worth of food. Right,
And I remember I was going to fast food. I
(11:57):
built it into my routine because I got a lot
of food for the money. Right. It may not as
been as good as fast casual or casual dining, but
it was a lot cheaper and it was a lot faster. Right. Well,
it's not very cheap anymore. So if you think about
fast casual, it might be a little bit more expensive
in terms of price point, and by the way, that's
not always the case, but it might be a little
(12:19):
higher in terms of price point. But consumers will say,
they do the math. It's what you get for what
you pay. So while it might cost just a little
bit more, their perception of quality is much higher in
fast casual, and the service experience is generally better fast casual.
So again, what you get for what you pay. And
now all of a sudden, fast food no longer has
(12:40):
an advantage over a fast casual, right, So there's that
value dynamic. Now let's think about something else. Let's talk
about the convenience side of things. The number one asset
that fast food restaurants typically have is a drive through.
Drive through is the ultimate in America culture, where everybody's
(13:02):
in their car driving around, going to work, you know,
driving on vacation, doing errands. Having a drive through was
a very important asset still is still is an important asset.
But now people have mobile apps and mobile apps. You know,
you can order from any restaurant and they will bring
the food to you. So if you think about like
(13:24):
this perfect storm of you know, post COVID, now a
lot of people are still working from their homes, they
are not driving as many miles, So all of a sudden,
you have, you know, the mobile device. That secular trend
of mobile is kind of in some ways neutralizing the
advantage that traditional fast food restaurants had over fast casual.
(13:48):
It makes sense, and you can access value through those
mobile apps as well.
Speaker 1 (13:54):
Yeah, so drive through traffic's been down pretty big, right.
Speaker 3 (13:58):
Yeah. If you look at a New Management Solutions RMS,
they publish a newsletter and they're their data is showing
that within QSR that drive through traffic is down double
digits this year and double digits last year. So the
even though traffic is down, you know, call it two
to three percent in fast food right now, they're drive
(14:20):
through traffics down ten. So if you're a if you're
a fast food concept and you're writing a strat plan
for a fast food company, and you show that you
are materially losing value and you're losing business in the
drive through, which I then interpret as we're losing our
convenience advantage, value and convenience. That's not a good trend
(14:44):
for that that segment.
Speaker 1 (14:45):
Yeah.
Speaker 2 (14:46):
And a couple of things that spoke out both in
the survey you sent to me and then also when
we spoke is that you know, gen Z is less
interested in cars, and car culture used to be such
a bigger part of American culture, but you know, not
really the case anymore.
Speaker 3 (15:02):
Yeah, that's right. I mean, I don't know about you,
but I got my driver's license the day I turned sixteen.
I mean the day I turned sixteen. It was like
that was the right of passage, right, that was your
you know, your venue to freedom and independence. It was
a driver's license. And you know, that's it. You're out
the door, and you know, all right, mom and dad,
I'll see you when I get home whenever. Right, And
(15:23):
so that was a really important you know, link to
our social interactions, right cars, and then of course eating
as well, it always is. Eating has always been part
of you know, how we socialize as humans. But but
if you're if you're a Gen Z and even millennials
to some extent, many were not in a big hurry
(15:46):
to get their driver's license. And look at with with
you know, the Internet, which didn't exist when I was
a kid, but you know social media platforms that that
you get a lot of interaction there, you get a
lot of self worth there, things that were not important.
One the extras and the Boomers were really young, but
the Millennials and the Gen zs, it really is about
(16:06):
social media and being an influencer and creating content. You
don't really need a car. Right, If you don't need
a car, then you're not using to drive through. So
generationally it is also not a good trend for the
fast food segment overall. It really helps, i said, neutralize
the advantage that fast food had over fast casual. And
(16:28):
if you look at some of the really popular brands
with gen Z right now and millennials, they're the Chipotles,
they are the wingstops, raising cane Zaxby's brands like that
which are doing very well, and even Starbucks to some extent,
and we could talk about that a little bit later,
but they also have a relatively younger consumer base, very
(16:50):
close to Taco Bells actually, but not as young as
Chipotle does. But they have a young consumer base. And
again think about the historically how wrong the Starbucks mobile
app is and their ability to bring in younger users,
especially over the last several years.
Speaker 1 (17:06):
Yeah, it's interesting. Interesting, man, It's like the pandemic, give
it and then.
Speaker 2 (17:10):
Take it away for QSR because right, because it's like
if you had to drive through, you were still you
were you killed it coming out of the pandemic, right,
But then at the same time, a lot of these
consumers were taught to use the apps and order online
and just have the food delivered to them. And so
you know, that advantage just gone away pretty quick, man.
(17:31):
You got this industry moves fast man, Right.
Speaker 3 (17:34):
You know there's a there's an old adage or insight.
Actually it was from the former chairman of PEPSI used
to say this a lot. He'd say, average is awful. Right.
Average is awful not only because it doesn't push you
to attain high levels, but in the world of consumer insights,
average is awful because it hides what's really going on. Right.
(17:57):
So if you look at the publicly traded restaurant concepts
out there over the last few years, they're killing it, right,
they're killing it. Yeah, traffic's been down, but their revenues
are hitting all time highs. Their unit level economics are unbelievable.
Their franchisees for most of the major chains, we're making
more money than they've ever made. Right. They got their
(18:19):
financing at historically low rates, so they could lever up
like crazy and expand, right, and the average performance out
there is hiding what's really going on. And what I
mean by that is we're seeing earnings per share those
things moving up, margins going up. But that's all being
masked because consumers were not price sensitive. They were artificially
(18:43):
demand was artificially high given the price level of what's
going out there. Now we're starting to see a reality
of it, especially starting in January of twenty twenty four,
traffic going down. Companies posting very very low digit single
same store saying or negative same store sales, which means
their traffic is meaningfully lower. The need to start pushing
(19:06):
on you know, value, you know, and we're seeing that obviously, right,
you know McDonald's doing their five dollars meal deals. We
can talk about you know, my outlook on that, because
I'm kind of bearish on it actually, But you know,
this is really the pivot point twenty twenty four. You know,
all the things that were masked in twenty twenty really
(19:28):
twenty one, twenty two, and twenty three are really now
coming to a pivot point in twenty twenty four. And
I believe in twenty twenty five will be a difficult
year in the restaurant space for many brands.
Speaker 2 (19:41):
Okay, so why don't you talk about McDonald's, right, like
the five dollars meal deals. It seems like they're trying
to re establish their position on value. They've always, you know,
been a great provider of value due to their scale.
You know, what's your view on the five dollars meal
deal and just your view on McDonald's.
Speaker 3 (20:01):
Sure, well, the five dollars meal deal is, you know,
I don't know exactly how they chose the specifics. I
know this much, Right, in order to reduce the break
even associated with offering a discounted product, right, they had
to include items that are not super high mix sales mix.
In other words, the big Max not in there. At a
quarter pine of with cheese isn't in there. Their most
(20:22):
popular chicken sandwiches are not in there. So it's kind
of a it's a it's more like a nod to
value as opposed to really resolving the value problem that
McDonald's has. McDonald's has a significant value for the money problem.
Significant Like, they took a lot of pricing and again
(20:45):
they made a ton of money. But now what's happening
is their visitation is going down. So doing a five
dollars meal deal is to me a you know, it's
what they want to do and what they need to
do are two different things. They want to for value
but not have any impact of margins. But that's not
what they need to do. What they need to do
(21:06):
is give more food for the money their cost of sales.
And again I don't know the specifics for that brand. Again,
McDonald's a great brand. I'm not in any way taking
away the profitability or the you know how big an
Americana it is, but their cost of sales is too low.
Consumers want more food for the money, right, So the
five dollars meal deal is a nod now our insight platform,
(21:30):
we saw that in Q two that McDonald's three month reach,
so the percent of consumers that have been in McDonald's
in the past three months, we saw that go up
in Q Q. Yeah, Q two versus Q two year
ago just a little bit, but now we're seeing it
(21:52):
lower than prior year, right, And we're looking at their
affordability and value for the money scores and they have
not materially changed that five dollars meal deal did not
materially change consumer's net perceptions of affordability or value for McDonald's, right.
So that brings me to the next point, which is
how else do brands offer value out there? And that
(22:15):
is really through their mobile app. So you can if
you download the McDonald's mobile app, you can get some
pretty decent deals on it. Right, you buy a six
piece McNugget, you get one free. All right, Yeah, it's
you know, it's five and a quarter, but you get
twelve for five and a quarter, So that's that's not
a bad deal. Right. Here's the problem. McDonald's largest age
(22:35):
cohort is over forty five, and by the way and growing,
the percentage of past month McDonald users that are over
forty five is significantly higher than the percentage of their
past month users that are under forty five. So let
me translate, McDonald's is more about gen X and boomers
(22:56):
than they are about Gen Z and millennials. Right, and
guess who uses mobile apps? Gen Z and millennials at
a significantly higher rate than Gen X and boomers significantly higher.
So McDonald's largest cohort is gen X and boomers. Right.
(23:17):
They aren't really getting access to value to the mobile
app because they don't use it as much. So again,
I think what McDonald's is going to need to do
is they're going to have to make a material investment
in their cost of sales in order to legitimately bring
back transparent and accessible value to the masses because they
(23:42):
are not there now. I mean an average a medium
French fry in the McDonald's near my house there, they're
almost five dollars for a medium French fry. It's crazy, right,
I mean, people just aren't going to do it. I
mean they do it, but so really that's my that's
my takeaway at McDonald's I think, I think again, going
(24:04):
back to that insight, what what their operators need to
do and what they want to do are two different things.
They need to give more food for the money to
the masses in an accessible way, and they're trying to
get around it by reducing the breake. Even their five
dollars meal deal is their second tier sandwiches, right MC
chicken or a mcdoubell, which is not the ones that
(24:26):
people really want. I mean, they'll lead them right, and
then they get you know, their small fry and small
drink and if you look at their combos, that's not
what they sell. So there is a there is a
compromise to get to the five dollar price point.
Speaker 1 (24:40):
Yeah.
Speaker 2 (24:41):
No, it's interesting, man, and I don't think a lot
of people are talking enough about you know, the cost
of sales being too low. I think you know everybody
for the longest time was just trying to get that
number down. And to your point, you know, pricing has
got some of these chains have gotten ahead.
Speaker 3 (24:55):
Of themselves in pricing that, oh for sure.
Speaker 1 (24:58):
And so you know we're talking that all.
Speaker 2 (25:00):
So you know in your survey that you shared with me,
you also talked about how gen Z was the one
cohort that was least financially concerned, right, and so you
kind of want that.
Speaker 1 (25:12):
You want that group coming in your doors, right.
Speaker 3 (25:15):
Sure, it's the future.
Speaker 2 (25:16):
Right.
Speaker 3 (25:16):
If you're not, if you're a brand and you are
not in your strap plan, if you are not materially
figuring out how to increase your peal with gen Z,
I mean long term, you're going to be in trouble.
You know. Like I could talk from my own experience
at Taco Bell, right, I mean we got behind millennials
really early. I mean two thousand, two thousand and one.
(25:39):
We were really pushed. We had this initiative called the
Millennial Mindset, right, and the whole executive team right had
to get around it, really focus it. I'll tell you
a quick story. It's I was on the executive team
meet at the executive team meeting, and I asked a question.
I used to give the state of the business update
every Monday morning, and I remember I asked the executive
(26:02):
team a question. I said, guess what happened today? And
I said, well, today is a very important day because
this was back in I want to say two thousand
and one or two, or maybe two thousand and three.
I said, today is a day the text messaging surpassed
phone calls as the most common way of communicating. And
(26:24):
I said, how many of you in this room know
how to send a text message? And there are I
think we had seven people on the you know, the
executive team and like to raise their hand. So, without
calling out any names, I said, so, you guys are
running this company which is basically a millennial skewing brand.
(26:48):
Most of our employees are millennials, and you don't know
how to communicate and the number one way that millennials communicate,
I said, I am changing my objective this year to
one thing, and that's to help to drive a millennial
mindset through this entire corporate office, which we call the
Restaurant Sports Center, as well as you know, the broader organization,
(27:10):
and and we did lots of things to make that happen,
and the whole, the whole you know, corporate office got
behind it, and we really did well. I mean, Taco
Bell was very early in the social media, very early.
We you know, they saw the power of it, and
we had lots of young, hot shot marketing guys that
are you know, one or two years out of graduate
school MBAs, and those guys really got behind it. And
(27:32):
again a lot of those people are leading some big
organizations now as marketers.
Speaker 1 (27:36):
Yeah, and doing well.
Speaker 3 (27:37):
Man.
Speaker 1 (27:38):
We've had some of them on the podcast.
Speaker 2 (27:40):
You know, Yeah, there's there's Taco Bell, and young graduates
will call them doing good work all over the US man,
and not only in quick service either.
Speaker 3 (27:52):
So.
Speaker 2 (27:54):
You know, and and you mentioned, you know that the
bifurcation between maybe you know, the over forty five and
they're forty five year olds, right, the millennials and Gen
Z under and the Gen X and the boomers over.
And you see a real correlation, don't you, in terms
of what percentage of your sales are coming from the
younger generations and how you same store sales and traffic
(28:18):
are trending.
Speaker 3 (28:19):
Right, yeah, definitely. I mean if you look at take
a wingstop. Okay, Wingstop is the current you know, Darling
of same store sales growth. They I think they're two
years same store sales growth in Q two if you
look at two years where there was something like forty
six percent same store sales growth. Not to mention all
the new units they've opened, but they skew very young, right,
(28:41):
very young they are. I don't have the numbers in
front of me, but something like between seventy and eighty
percent of their past month users are gen zs or
millennials right way up there. Raising Cain is another one.
Chipotle has a very very high percentage of their customer
(29:02):
base that is under forty five. That's kind of the
proxy we use for gen Z and millennials, whereas the
more traditional QSRs. McDonald's definitely skews much older. Burger King
excus much older. Wendy's is much older, not as old
as Burger King and McDonald's, but they do now at
Taco Bell again, they're about fifty to fifty, right. Starbucks
(29:25):
and Taco Bell are about fifty to fifty, so half
of their users are under forty five, and half of
the users are over forty five, so it really can.
I'm not saying it's it's not the only factor, but
it is an important factor. And I didn't quite answer
your question before around what's going on with gen Z's
(29:45):
but they are significantly more hopeful about the future and
significantly less concerned about their financial situation. And when you
put that together, they don't cut back as much on
spend as especially like the boomers. The boomers cut back
the most millennials or the extras, and the boomers cut
(30:06):
back the most. Millennials are starting to need to because
they are still in you know, important earning years. Yeah,
but our platform shows very clearly by brand, which ones,
which brands are skewing lower generation, and what's going on
with their level of financial concern and it matters.
Speaker 2 (30:24):
Yeah, and listen, man, gen z they're young. They got
their parents' credit cards. Man, they're bringing them.
Speaker 3 (30:28):
Up, not all of them them up, not the twenty
six year olds twenty seven.
Speaker 1 (30:34):
Yeah.
Speaker 2 (30:35):
Well, that's what we find interesting too, is how everybody
categorizes the different generations.
Speaker 3 (30:40):
Not true.
Speaker 2 (30:42):
Neil Strauss's work and you know, he's like, you know,
he claims that one to eighteen are.
Speaker 1 (30:49):
Gen Z.
Speaker 2 (30:50):
But then also you know, some of the chains we
cover will go much higher to the later twenties.
Speaker 3 (30:55):
Sure on those generations so well, they do have less debt.
Gen Z is a lot less that they have more
student loans, but you know they can't afford houses right.
Speaker 1 (31:04):
Now, yeah, or some mortgage that's no.
Speaker 3 (31:07):
Mortgage, right They don't have as much credit card debt,
not yet.
Speaker 1 (31:10):
Anyway, how's their loyalty?
Speaker 2 (31:12):
You know, I know it was it was widely publicized
that millennials are very disloyal. They want to try a
lot of different types of cuisine, and so they might
not frequent their favorite restaurants as much as as previous generations.
Speaker 1 (31:23):
Where does gen Z pan out in terms of loyalty?
Speaker 3 (31:27):
I can't really comment very objectively on. I just almost
hearsay from what I heard. Maybe maybe you know, a
lot of adventure right there they get Again, social media
really runs through their lives, and there's there's people that
can get you to try new brands if you're an influencer.
But I don't know, maybe maybe a little bit more
(31:48):
they're showing, from what I've read, a little bit more traditional,
more loyal than the millennials. Potentially and we'll see as
they move through. You know, the restaurants is there's a
lot more choices now than they used to be, right,
and I'll tell you it's there's a lot of exciting
stuff out there. Chicken, right, Chicken is big right now,
(32:10):
look at again some of the most top performing brands
is you know, Wingstop not raising canes, axe Be's even
Chipotle when they when they ran chicken ol pastor that
was kind of their their Q two numbers. You know,
that broadly appealing, you know, with different sauces and Wingstop
you know a lot about the sauces and the dipping.
You can take a you know, a protein like chicken
(32:33):
and bring a lot of flavor to it. Right. That's
you know, that's in addition to you know, the Popeyes
of the world, when the chicken sandwiches became these you know,
the whole chicken breast fried, I mean blowing outside the bun,
you know, so big and will even fit in the bun.
And and then you know, younger consumers, you know, you
hear that they are a little more down on steak
(32:54):
and cows because of you know the environment and you know,
carbon dioxide and things like that. Thing I guess, but
it makes sense, right if you look at the kind
of the secular trends that are going, and the secular
trends are you know, you know, the millennials are the
biggest generation ever through but there's always a new one
(33:15):
coming mobile application, right, That is a secular trend mobile adoption,
and then you just kind of overlay that with what's
the landscape in the restaurant space. These traditional qs rs
have these older, you know, customer bases that are less flexible.
They may be more loyal, but you know, they don't
(33:35):
want another app on their phone. Some do, but most don't,
and it's creating a tech barrier for growth. So you know,
I'm having worked on a lot of marketing calendars and
a lot of product developments. One of the things that
you want to do in the restaurant space is give
consumers more reasons to come to your brand more often.
(33:59):
And the way you can do that is you can
do it through value. That's one way, but also innovation, right,
taste innovation, flavor innovation, and those brands that bring a
lot of flavor innovation are doing better overall all else equal.
That's one of the that's one of the strengths that
Taco Bell has is they are they are very strong
(34:22):
product innovators, and you know, sometimes it's very similar to
the last project product that they launched. But overall, if
you can upset that purchase cycle and get someone to
come in three days sooner than they normally would and
their purchase cadence, it really makes a difference. And Taco
Bell did better than almost all major QSRs and Q two.
They put up a plus five same store sales, which was,
(34:46):
you know, better than all the other major brands. It
wasn't Chipotle numbers or Winstock numbers all right, but it
was still pretty good. They're a smart group over there there.
They know what they're doing, and they have good franchisees.
They work together, and that's a you know, that's a
challenge for McDonald's because their their franchise relationship from everything
I've read, can be a little contentious at times. And
(35:09):
you know, the decision for them to extend the five
dollars meal deals through I think they said through December
at the end of the year, to me is symptomatic
that they probably got a response, right, you know, their
earnings are coming out. I don't know when they release
the first week in November, I'm guessing. I'm sure they
got a response. But again, as a as a marketing
strategy guy, I'm looking at the consumer data. I don't
(35:31):
see any improvement in value for the money, and I
just know how consumers respond to value and they're going
to have to step up their game if they want
to have a material reversal in what's going on with traffic.
Long term.
Speaker 2 (35:44):
Yeah, it's going to be interesting to see what they
do with the value menu because it's been largely ignored
for quite some time.
Speaker 3 (35:51):
Rightfully, so you didn't need it, right, people were not
price sensitive, but now they are.
Speaker 1 (35:55):
Yeah, and they've gotten a lot of shade online. Right,
you can't buy anything for a buck or less.
Speaker 2 (35:59):
The best you could do is maybe a drink for
a buck at the buck fifty nine or something.
Speaker 1 (36:04):
But yeah, and the items haven't been renovated. It's been
the same items on the menu for quite scan.
Speaker 3 (36:09):
I think you can, if you know what I know
about the restaurant space, you can as a consumer, you
can look forward to better values out there as we
as we move through the end of the year and
into twenty twenty five. Desperation tribe innovation.
Speaker 4 (36:23):
Yeah for sure, you know, and just you know, going
back a little bit to the gen zs and apps
app usage, you know, have you done any work around
how many apps people will have on their phone, how
many restaurant apps people will have on their phone, and
how that differs maybe from gen Z up to boomers.
Speaker 3 (36:41):
I don't have the specifics, although I have read articles
and I'm sorry I don't have anything written down I do.
But one thing that we do track on our platform
is so we look at all past month users of
these brands, and we we find out who never uses
the app, who always uses the app, and who sometimes
uses the app? And just again, anecdotal evidence suggests that
(37:07):
younger consumers will download apps in order to access a
value offering, and as soon as it's over, you know,
they take it off. You know, I don't know about
your your mobile device, but I mean I probably have
fifteen or twenty more apps on there than I had,
you know, eighteen months ago. You know, it's like, you know,
(37:28):
how many pages you have to scroll through to find
that you know the app you're looking for, and then
heaven forbid, somebody changes the color of the app you're
used to and now you can't find it at all, right,
But yeah, Jeff, definitely, I don't know the number, but
younger consumers definitely going to have more apps. But you know,
they are probably more fickle as it comes to how
many apps they're going to have, So keeping you know,
(37:51):
people engaged with that app is important. And I you know,
when I talk to the executives at these brands, everybody
understands that app users give much higher brand association scores
for brands. So for example, again we'll just to give
McDonald's some some favorable light here. If you're a McDonald's
(38:11):
app user, right, you are going to give McDonald's much
better scores on value for the money, right, quality of food,
all those things, and you go more frequently. So people
that always use the app go by far the most
frequent to all these brands. Now, is it that people
who go to these brands often the most often download
(38:34):
the app, or is it that if you have the app,
you go more frequently? It's both, right, is the dog
wagon the tail or the tail wagon the dog It's both.
It's got to be both. But I'll tell you know,
innovation in your app is going to be you know
the gen z and millennial battleground. Right, it's there are
some really good apps out there. Domino's has a great app, right,
(38:57):
Chipotle has a great app, Starbucks has a great app. Like,
those are the gold standards, and they have by far
the highest level of app adoption. You casual dining is
is you know, coming coming from behind, you know, a
lot lower adoption, but you don't need it as much generally.
But again as a as a strategy, you know, increasing
(39:19):
mobile app adoption is something you can't ignore. You just
can't ignore it.
Speaker 1 (39:23):
Yeah, you're good at this.
Speaker 2 (39:25):
Man.
Speaker 3 (39:27):
I've been in this industry a long time, and I'll
tell you, like I look at the restaurant world and
it seems very obvious to me what needs to happen. Right.
I mean not to pick on QSR, but QSR your
food cost is too low. I mean again like we
talked earlier on this podcast, which is you're not giving
enough food for the money. I mean just look at
(39:49):
if you look at the you know, at the inflation
data CPI data, Right, they track food away from home
and food at home. Food at home is grocery. Food
away from home are restaurants? Right? Since twenty seventeen. Since
January first, twenty seventeen, I track all this stuff. Restaurant inflation.
(40:10):
Prices in restaurants is up forty percent since January of
twenty seventeen. Groceries are up thirty percent. Well, that's a
ten point difference. And by the way, that's been going
on now for two years. That restaurant inflation continues to
outpace really more than too well really really you know
(40:33):
seven But there are different periods of time. But if
you look at it, and right now every month that
goes by, restaurants are getting more expensive relative to grocery prices,
right and again, restaurants are you know, they you know,
they have to hire people to make it, so they
have to buy the food, and then of course they
have to pay for you know, the asset they have,
you know, utilities they have, all these other things, and
(40:55):
labor costs. Labor costs are actually have settled down a
lot in restaurants and hospit mentality. Wage inflation in restaurants
and hotels is the same as the overall population. So
that's good for restaurants and that they're not going to
have to take a higher level of pricing to offset
their labor compared to everybody else. But every month that
(41:18):
goes by, groceries are getting relatively cheaper than eating out.
That is not a good trend, right, So the you know,
to me, the obvious reality is if you have a
basically a consumer base that's in recession, your demand is down.
We know there's a value for the money problem. We
(41:39):
know there's affordability problem. And you think about all the
profits that were made over the last three or four years.
Restaurants have made a lot of money by being able
to take all this price which has very high flow
through right with very little consumer you know pushback, right,
In other words, traffic's down a little, but sales are
(42:00):
up a lot, Right, You're gonna have to make some
investments back and cost of sales, right, even if it
means and again for publicly traded companies, yeah, you can innovate, thanks,
find a way to automate take labor out of the restaurant,
and and all the smart brands are doing that. But
this is a reality. And again I was looking at
Q three data right before this podcast, our Q three data,
(42:24):
and again all the affordability and value for the money
scores for all the major fast casual and fast food
brands continue to slip. So that's that's a tough trend
to acknowledge.
Speaker 2 (42:40):
No doubt, man, I think that's that's I know how
I'm gonna market this episode. That's a perfect place to
end because I think that that's really theme of cost
of sales being too low has run through this discussion,
and I think it's it's really important. I think it's
a great insight. So we'll wrap it there. Thanks again
for doing this. Where can our listeners go to find
(43:01):
out more about Restaurant Insights Monitor?
Speaker 3 (43:03):
Oh and thanks for asking Mike. It's it's pretty simple.
It's www dot Restaurant insightmonitor dot com and we have
you know that they can get ahold of us and
we do. We have we have subscriptions that we we
sell and then we do a lot of sea level
consulting as well.
Speaker 2 (43:22):
Well, yeah, you've done some great work on that, on
those surveys that you've shared with me.
Speaker 1 (43:25):
So I appreciate you for that, and uh yeah.
Speaker 2 (43:28):
I look forward to continue and discussing restaurants with you,
and we'll definitely have to have you back here.
Speaker 1 (43:33):
On the pod.
Speaker 2 (43:34):
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Check back soon for an interview with Steve Kislow, the
CEO of Firebirds, would fire Grill
Host
Michael Halen
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