Annual Restaurant and Food service Review

1. MARCH 2012
Courting the Customer
The AlixPartners 2012 Annual Restaurant
and Foodservice Review INSIDE:
Taking the Temperature
Segment by Segment
Five Key Areas of Focus
Trends and Tactics
Accepting Reservations
Rising to the Occasion
© 2012 AlixPartners, LLP

2. 2
Courting the Customer
Hungry for convenience and value, consumers mean reaching customers in new ways, through
are on the lookout for high quality, on-the-go social media and mobile marketing, in addition to
options, easy ordering, value pricing, speed, and tried-and-true discounting and promotions. But
variety. As a result, in the year ahead, operators for nearly all, it will mean using new and innova-
will need to focus on brand differentiation and tive menus, tactics, and techniques to compete
consumer relevance to drive revenue growth. For and win ‘share of stomach.’
some, this will mean reinvention. For others, it will
TAKING THE TEMPERATURE
In 2011, sales continued to gain momentum, with Operators continued using limited-time offers
December 2011 sales up 8.4% year over year (LTOs), heavy discounting, and couponing as a
(YOY). Major segments experienced incremental primary means to drive customer traffic and stem
revenue and EBITDA gains by cutting waste and further declines, while some chains looked to
selectively re-engineering menus in terms of M&A, store re-imaging, and international sales
portions, price, etc. Many restaurants closed and expansion as drivers of growth. Bottom line: there
new construction decreased, creating a smaller were winners and losers across all segments, but,
playing field, better aligning supply with demand. all in all, 2011 was a good year, with total sales up
5.9% over 2010 (figure 1).
FIGURE 1: DINING AND FOODSERVICE SALES
9%
8.4%
8% 7.5%
Food services 7.6%
7%
YOY% Change
and drinking places 7.1%
5.8% 5.9%
6% 5.6%
YOY Trend 5.4%
5% 4.9% 5.3%
4% 1.1% 4.3%
2.9% 2.7% 2.9%
3% 1.7% 3.3%
2.2% 2.1% 2.4%
1.0% 2.6%
2% 2.1%
1.3% 1.6% 1.0% 1.1%
1% 0.6%
1.1% 0.2% 0.7% 0.9%
-0.1% 0.6%
0%
0.4%
08 09 9 09 09 9 09 10 0 10 10 0 10 11 1 11 11 1 11
c- b- r-0 n- g- t-0 c- b- r-1 n- g- t-1 c- b- r-1 n- g- t-1 c-
De Fe Ap Ju Au Oc De Fe Ap Ju Au Oc De Fe Ap Ju Au Oc De
Source: U.S. Bureau of Economic Analysis
© 2012 AlixPartners, LLP

3. 3
Courting the Customer
FIGURE 2: CONSUMER INCOME, JOBS, AND EXPENDITURES
Personal Disposable Income Personal Consumption Expenditures
1.0%
(MTM% Change) $11,000 2.0%
MTM% Change
Total PCE
0.5% $10,800 YOY Change 1.5%
$10,600 1.0%
YOY% Change
0.0%
$10,400 0.5%
PCE ($B)
-0.5%
09 v-09 -10 r-10 y-10 -10 10 10 1 11 11 11 11 $10,200 0.0%
p- n l p- ov- an-1 ar- ay- ep- ov-
Se No Ja Ma Ma Ju Se N J M M S N
$10,000 -0.5%
$9,800 -1.0%
Net Job Gain (000s)
700 Monthly Job Gain
$9,600 -1.5%
200
$9,400 -2.0%
-300 $9,200 -2.5%
-800 $9,000 -3.0%
09 0 0 0 10 0 10 1 1 1 11 1 11
c- b-1 pr-1 un-1 ug- ct-1 ec- eb 1 pr-1 un-1 ug- ct-1 ec- -07 -07 -08 -08 -09 -09 -10 -10 -11 -11
De Fe A J A O D F A J A O D Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
Source: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis
Consumer spending has reached its highest level side, these closures, coupled with fewer new-
since before the recession, with personal incomes store openings, have helped to create more equi-
up 1% and jobs growth improved somewhat by librium between supply and demand.
the close of 2011 (figure 2). In this environment,
overall restaurant sales continue to gain
FIGURE 3: DINING AND FOODSERVICE SALES
momentum. But headwinds persist. The high
price of commodities continues to have a negative % of Companies by Distress
Healthy
Watch
impact, and while the close of 2011 saw costs Category & Segment On Alert
beginning to subside, ongoing volatility keeps
67%
64%
this issue front-of-mind.
60%
56%
50%
For many operators, these concerns are urgent.
Forty percent of restaurant companies are in
36%
33%
30%
28%
“fiscal danger” (figure 3). While this is lower than in
20%
prior years, it’s higher than the historical 20-year
17%
16%
13%
10%
average of 25%, and we expect store closures
to continue going forward. But, on the positive Casual Fast Casual Fine QSR Foodservice
© 2012 AlixPartners, LLP

4. 4
Courting the Customer
Overall, the restaurant industry experienced a bar- This, in part, is making some restaurants less risky
bell effect in 2011. On the higher end, Fine Dining investments and/or acquisition candidates going
saw stronger sales as business travel increased.On forward. In fact, in 2011, transactions doubled.
the lower end, Fast Casual, Quick-service (QSR), Although deals were generally smaller, multiples
and Convenience Stores benefitted as consumers appear to be becoming more attractive, returning
traded down from Casual in a flight to high value. closer to historic averages, as buyers and sellers
The result: the middle segment, mainly Casual reach better alignment on valuation expectations.
restaurants, struggled to maintain traffic and over- We are seeing significant successful debt refinanc-
all profitability. We expect the continuation and ing and share purchase activity, with cash and ST
possible acceleration of this trend to be a major investments improving across all segments. Cash
theme for operators in 2012, both across the levels and multiples indicate that 2012 could be a
industry and within individual segments. strong year (figure 4).
We also expect the trend of de-leveraging and con- Meanwhile, overseas, emerging markets are a
serving cash to continue 2012. Many companies significant source of growth, especially for the
are using free-cash flow (FCF) to support dividends QSR and Specialty segments. For example, two
and buybacks rather than for growth and develop- leading chains report that their emerging-market
ment. Others are paying off debt and, in general, locations now constitute 34% and 23% of their
hoarding cash to build stronger balance sheets. total units, respectively.
FIGURE 4: U.S. RESTAURANT M&A ACTIVITY
# of Transactions
Transaction Value ($)
60 $12,000
50 $9,641 $10,000
50
$8,280
40 $8,000
30 $6,000
?
$3,950
$3,581 25
20 $4,000
21
17 15
10 13 $1,612 $2,000
$1,810
0 $0
2006 2007 2008 2009 2010 2011 2012YTD
Source: The Deal Pipeline, AlixPartners analysis (only transactions w/reported value shown)
© 2012 AlixPartners, LLP

5. 5
Courting the Customer
SEGMENT BY SEGMENT
Quick-service Restaurant (QSR) financials as much as 30% for some companies. Breakfast
suggest 5% YOY revenue growth, largely driven continues to be a bright spot, with sales picking
by the success of just a few concepts. Internation- up in this and other segments last year.
al operations continued to be a major contributor
to revenue growth in this segment, with domestic Still, we see continued challenges ahead for
and international sales growth YOY differing by QSR companies. The number of visits has fallen
FIGURE 5: SALES HISTORY BY SEGMENT
60,000
QSR Sales History 35%
Fast Casual Sales History
QSR Dining Fast Casual Dining
$55,361
YOY% Change 30% YOY% Change
50,000 20,000 35%
$52,305
$51,943
Sales ($mm)
Sales ($mm)
$50,803
$50,159
25% 18,000 30%
$46,272
28.1%
$17,790
$43,753
40,000 16,000
$41,637
$16,141
20% 22.4% 23.7% 25%
$39,082
14,000
$14,908
$14,627
20%
$13,295
30,000 15% 12,000 21.0%
10,000 15%
$10,746
8.4% 10% 10.3%
20,000 6.5% 8,000
$8,777
5.8% 12.1% 10%
10.2%
$7,257
5.8% 5% 6,000
5.1% 5%
$5,666
10,000 4,000
3.6% 3.0% 0
2,000 0
-2.2% -1.9%
0 -5% 0 -5%
2003 2004 2005 2006 2007 2008 2009 2010 LTM 2003 2004 2005 2006 2007 2008 2009 2010 LTM
Casual Dining Sales History Fine Dining Sales History
35,000 35% 1,800 35%
Casual Dining Chains Fine Dining Chains
1,600 30%
$33,277
$32,782
YOY% Change YOY% Change
$1,676
$32,861
$32,230
30%
$1,656
$31,922
30,000
$31,294
$1,585
$1,550
$1,525
Sales ($mm)
1,400 25%
$28,698
25%
Sales ($mm)
$1,396
25,000
1,200 20%
$24,624
$1,243
20%
$1,142
$22,184
20,000 16.5% 1,000 15%
12.3%
$1.022
15% 9.9%
800 10%
15,000
9.0% 10% 11.7% 8.8% 9.3% 4.5%
11.0% 600 5%
6.3% 2.3%
10,000
2.7% 5% 400 0
5,000 -1.9 % 0 200 -5%
-1.2% -1.0% -7.5%
0 -5% 0 -10%
2003 2004 2005 2006 2007 2008 2009 2010 LTM 2003 2004 2005 2006 2007 2008 2009 2010 LTM
Sources: CapIQ, company reports, AlixPartners analysis
© 2012 AlixPartners, LLP

6. 6
Courting the Customer
over the past few years, and high unemployment innovation (e.g., offering wine and beer on tap
continues to eat away at traffic, especially in the in select markets), convenience, and price with
important 18-24 year old demographic. Higher driving growth in this segment.
Convenience Store foodservice quality and the
perceived health consciousness of Fast Casual While Casual Dining’s five-year compound annual
offerings are also taking a toll. growth rate remains negative (at -0.4%), 2011 was a
turnaround year for many operators in this segment.
Speaking of which, the Fast Casual segment Sales began to rise as consumer confidence
remains relatively small (less than 6% of market strengthened, operators employed new market-
sales, compared to QSR at 40% and Full Service ing tactics and smarter menu pricing, and supply
at 54%). Year-over-year growth is robust, fueled and demand became better aligned. But, despite
by both same-store sales and new-unit growth. this slight gain, declining overall traffic continues to
This increase is likely tied to the perception of present a challenge. High fuel costs have taken
healthy food choices, which appeals to a broader a toll, forcing operators to raise prices to drive in-
customer base. We also credit a focus on creased comps. And the competition from Fast Casual
FIVE KEY AREAS OF FOCUS
1 Stay focused on the needs and expectations of core consumer groups to avoid alienating or
confusing them. Avoid introducing new lines that are out of touch with existing brand value and
equity. Further, keep to a minimum the number of new decisions you require of a core customer
in terms of customization.
2 Prioritize. Place fewer but bigger bets. A ‘shotgun’ approach to growth is not nearly as effective
as focusing the organization on the game-changers. Problems with the former can include
cannibalized product lines, organizational burnout, turnover, and inflated Capex costs.
3 Track performance along with each of the initiatives. Don’t underestimate the operational
complexity associated with certain changes. Failing to get this right can result in slower service
time and table turns, higher labor costs, new product equipment needs, and IT issues.
4 Establish a robust loyalty program to yield consumer insight and tracking. Use analytics to
drive menu developments, programs, and promotions that will enhance one-to-one marketing.
5 Create a balanced sourcing model (local, regional, and global), pursuing local opportunities
when they can be marketed or the customer perceives additional value. Local sourcing is not
always an optimal solution. You can encounter difficulty delivering mainstream products through
a new supply chain. Menu variances, sustainability, and food traceability challenges can arise.
© 2012 AlixPartners LLP

7. 7
Courting the Customer
concepts intensifies as the gap in check size narrows. Fine Dining experienced two consecutive
Looking ahead, we expect Casual Dining operators to years of positive growth, with 2.1% CAGR since
achieve growth by stealing market share as opposed 2007. In 2011, the increase in Fine Dining sales
to growing organically. Menu innovation and social was spurred in large part by YOY growth in
media marketing, along with traditional mainstream business travel expenditures. This trend will
advertising, are important levers to drive traffic in this likely continue, given that U.S. business travel
segment; LTOs, low-calorie meals, and heavy dis- is expected to grow by 6.4% over the next 12
counting appear to be the favored marketing tactics. months to reach 2007 levels. International
travel, expected to grow 4.5% in 2012, will also
provide a boost.
TRENDS AND TACTICS
•
EMERGING TREND EFFECTIVE ACTION
• onvenience, value, and quality are key. Custom-
C Reengineer menus to offer new products, beverages, and service offer-
ers demand high quality, on-the-go options, easy ings. Base decisions on systematic data-driven assessments of all menu
ordering, value pricing, speed, and variety. items required. Provide easy access to products and value-added services,
and take advantage of technology in ordering, payments, and communica-
tion with customers.
• n marketing, mass media is changing its focus
I Differentiate messaging (other than price) and implement local store and mobile
somewhat, while social networking’s influence is marketing. Offer comprehensive guest-loyalty programs and mine resulting data
accelerating. for insights about individual consumers. Diversify marketing and media strategies
and include a clear and cohesive social media plan.
• rand differentiation and consumer relevance are
B Explore non-traditional revenue streams, such as flexible formats, remodels,
driving revenue growth. Older brands will con- and conversions. Consider new day-part mixes and consider repositioning
tinue to reinvent themselves in a variety of ways. other categories, like beverages. Look for other ways to innovate, including
extended hours, new delivery options, and the application of technology.
• iscounting and promotions will be common-
D Set prices based on analytics rather than on perceived requirements or competi-
place, but not everyone will play. Innovative tive response. Apply selective pricing increases and sophisticated tiered pricing
techniques will win “share of stomach.” with an eye toward regional differences.
•Nutritional transparency and healthy-choice Continue to introduce progressive menu options, especially for kids, and
options will become more prevalent. provide more disclosure in terms of calories, allergens, etc. Combine a fresh
and healthy image with a value offering.
• ommodity-cost spikes and volatility are likely
C Develop enhanced procurement capabilities focused on risk mitigation, menu
to continue. innovation, and kitchen operations. Offer LTOs linked to seasonal products.
• upply chain execution is becoming more critical.
S Perform value-chain analysis to optimize global and localized components
Supply networks strive for safety and efficacy with and to balance consumer appeal and cost. Renew the focus on store-level
an increased focus on traceability and sustainability. operations.
© 2012 AlixPartners, LLP

8. 8
Courting the Customer
ACCEPTING RESERVATIONS
Of course, everything depends on consumers’ ‘extremely’ or ‘somewhat’ important when choos-
willingness to open their wallets. And in the U.S., ing a restaurant, while 62% said that nutritional
consumers remain cautious, with 74% saying information on menus affects their ordering deci-
they feel the same or worse about their personal sions—up a whopping 50% over last year.
economic situation as they did a year ago . 1
Accordingly, they expect their dining-out frequency But quality is still king. Sixty-five percent of con-
to remain the same or decline slightly in all seg- sumers cite food quality and taste (65%) as the
ments. Interestingly, the reasons for cutting back most important area of potential innovation and
seem to be less about finances and more about improvement, followed by overall price (55%)
healthier eating (figure 6). Additionally, 44% and healthy options (16%).
of respondents rated healthy menu options as
FIGURE 6: CONSUMERS’ REASONS FOR DINING OUT LESS OFTEN IN THE NEXT 12 MONTHS
51%
54%
Current finances / need to cut back 63%
66%
50%
Want to eat healthier 42%
36%
44%
Restaurant meals are too expensive 40%
49%
42%
33%
Concern over future financial situation 28%
48%
55%
Plan to purchase ready-to-eat meals from 7%
grocery stores in lieu of restaurant meals 8%
9%
7%
Restaurant food is poor quality 6%
5%
3% Q1-2012
6% Q4-2010
Too far to drive 4%
8% Q1-2010
4% Q1-2009
5%
Restaurant food is too predictable 6%
7%
6%
3%
Poor or unfriendly service 2%
3%
3%
3%
Do not like the atmosphere 2%
6%
2%
Do not enjoy the experience 2%
3%
3%
2%
1
AlixPartners surveyed 1,000 adults in the U.S. on January 3-4, 2012 on several dining-related topics including frequency, destination, spend-
ing, selection criteria, trends, and the influence of social media.
© 2012 AlixPartners, LLP

9. 9
Courting the Customer
Meanwhile, the Internet is playing an increasingly year olds, who cite usage at 35%-60% respec-
important role in driving consumer behavior. The tively. This group turns to the Internet primarily
impact of digital media as an influencer is growing to find locations and get directions (64%) and find
exponentially, especially among 18-24 and 25-34 discounts or coupons (52%).
RISING TO THE OCCASION
In 2011, the industry began a modest and slow overall economic environment and the changes in
recovery. Consumer confidence remained uneven consumer behavior. Successful operators will be
and easily impacted by the events of the day. Brutal those who focus on the needs of their customers
price competition perpetuated an already difficult and position and promote themselves as best able
operating environment, marked by commodity- to fill those needs. Operationally, operators must
price volatility, across all segments. In 2012, we focus on five key areas: customer needs, prioritized
expect these challenges to continue. Consumers investments, operational clarity, data-based loyalty
remain focused on value and quality and are in- programs, and balanced sourcing. Those that do
creasingly interested in healthy-food options. will manage through the continued uncertainty
we expect to see in 2012 and enter 2013 strongly.
Operators will need to carefully adjust their strat- Those that don’t risk being left behind.
egies to meet the challenges posed both by the
© 2012 AlixPartners, LLP

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Courting the Customer
For more information, please contact:
Adam Werner Eric Dzwonczyk Kurt Schnaubelt
Managing Director Managing Director Director
awerner@alixpartners.com edzwonczyk@alixpartners.com kschnaubelt@alixpartners.com
+1 (312) 705-3911 +1 (212) 845-4017 +1 (212) 297-1585
AlixPartners conducts a broad range of surveys and research in industries around the globe. To learn more
about our publications, or to contact the AlixPartners professional nearest you, please visit www.alixpartners.com.
AlixPartners is a global firm of senior business and consulting professionals that specializes in improving
corporate financial and operational performance, executing corporate turnarounds, and providing litigation
consulting and forensic accounting services when it really matters—in urgent, high-impact situations.
© 2012 AlixPartners, LLP

11. 11
Courting the Customer
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