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Another Restaurant Black Swan Event!
by John A. Gordon, Principal and Founder, Pacific Management Consulting Group
Now we have a war in Ukraine that is affecting the restaurant space. As if we needed any more drama. It is another Black Swan. In 2007, a mathematician and former stock market trader named Nassim Talab used the term Black Swan<1> as the title of his book to describe rare and profoundly impactful events that happened in society. Now all of a sudden, we have a Black Swan event affecting the restaurant space in two ways: a grain cost spike and another oil spike.
Global Grain Price Spike:
Ukraine is known for being the breadbasket of Europe and is intense in wheat in corn crops. Last week, the USDA Analysis Shops said that: “since the net reduction in corn availability triggered by a sharp cut in Ukrainian corn exports, is bound to trigger substantial changes in global corn markets. Lower net supplies combined with the fairly low level of global corn stocks….a grain price spike has resulted.” For the US, the USDA’s term is for “relatively higher farm-gate prices and values for corn.” <2>
When restaurant types see corn costs, we have to think about future protein 2022-2023 costs. This comes at a time of hopes of a second-half 2022 moderation of food commodity costs, so we will see what happens. I’m not hopeful. We have already seen chicken wing portion size cutting at some restaurant brands.<3> This limits value maintenance.
Global Oil Spike
Oil and Gasoline retail prices were high enough before the Ukrainian War began. But since early February, midgrade conventional area US weighted area gasoline cost has risen from $3.87 on February 7 to $.4.54 on March 14<4>. This excludes California of course which is about $2.00/gal. higher. I’m no oil analyst but this drifted up well before President Biden put oil sanctions on Russia.
My friend Larry Miller of Miller Pulse published regression analysis sensitivities relating restaurant sales changes to gasoline price hikes in the past. My memory is the price sensitivity Larry reported was low in the early and mid-00s but the answer might be different now with these large increases.
No Easy Solutions—But to Think Creatively at All Times Is Essential
Starting with the Pandemic Year and then the ugly backbite from the Pandemic (still underway) and now this has stretched this industry like at no other time. No one has all the answers but a few we can surmise immediately:
The pricing discipline has always been vitally important but it is now critical. Pricing is not the only way to maintain margins. Mix management and visual design exist also. Faster and more honest guest input tools to stores and corporate are required. To date, we are lucky that grocery store prices have risen dramatically, too, but that might not hold for the balance of the year.
Effective matrix teamwork—among corporate staff departments and between company regions and between company and franchisee operations groups stands out as an always can be improved, easy low hanging fruit item.
Mining for the price, revenue, and menu potential: Brands, franchisors, and franchisees have to think and act creatively. In addition to Subway, which franchisees say still operates under an old-fashioned 1960s command and control mentality, several other franchise brands hold menus fixed in vast swaths of the country, and do not allow flexibility. This is for inspection purposes. This seems not what is needed in the post-2020s. Company groups have to work together to learn and test business lessons.
Taking Care of Staff. The business simply cannot run without employees, corporate staff members, and as the case may be, franchisees. This makes special team building, relationship building, and communications skills all the more important as we learned in the Pandemic Period; even franchisees can sell and be on their way to better investments and better cultures leaving you the job to backfill.
Build and Reinforce: Don’t lose sight of and plot continue to progress and resources dedicated toward:
The improvements in store level margin that you and the brand have been able to wrench out since the Pandemic.
Don’t re-lever up with debt, keep the CAPEX cost discipline in place. Keep the debt low as possible.
Continue working on ways to make your customer and product mix more efficient via digital, windows, drive-thru, and other on-the-go technology and menu bundling that makes payments easier and works toward a higher average ticket.
More than likely, these foundational elements will be built and reinforced as the near-term challenges recede.
About the author: John A. Gordon, MAFF is a long-time restaurant analyst and management consultant. With 6 in units (operations—Multi-Unit), 18 years in corporate restaurant HQs (financial planning &analysis), 2 years at a Strategy Management Consulting Firm, and the last 21 via founding my restaurant analysis consultancy, Pacific Management Consulting Group, Gordon focuses on complex earnings, analysis and investigative restaurant engagements for clients of all sorts, such as investors, attorneys, restaurant operators, and others. He is a Master Analyst of Financial Forensics and a graduate of Indiana University (Business). He can be reached anytime at 858 874-6626 or jgordon@pacificmanagementconsultinggroup.com.
<1> Black Swans are said to be in Australia only.
<2> USDA Feed Outlook, March 11 2022, USDA ERS
<3> Burger King, among others.