INSIGHT. 04/09/19

The Changing Landscape for Financial Communications within the Restaurant Industry

By Raphael Gross & Alexis Tessier

The restaurant industry is evolving at a rapid rate. Keeping pace with investor priorities is critical for financial communications to be effective in helping business leaders build and protect the value of their brands.

For the past two decades we have been following the publicly traded restaurant industry, first as sell and buy side analysts, and more recently as financial communications professionals. Through most of that time, understanding a restaurant company’s investment thesis was rather straightforward. Both the messaging conveyed by the c-suite and investor relations representatives, along with the more informal “follow up” inquiries from analysts and investors, were centered on a fairly narrow and consistent framework of topics.

Communications typically revolved around the competitive landscape and the brand’s differentiation; menu innovation; service standards; four-wall unit economics; comparable restaurant sales trends and strategies, including pricing, mix, and transaction components; cost headwinds or tailwinds; margin improvement opportunities within the restaurants and at the corporate level; traditional marketing; real estate; and existing penetration, along with potential for regional, national and international expansion.

Other items that would come up or get proactively addressed centered on launching a franchising or remodeling program, testing a new prototype design, the company’s capital structure and future needs for financing, and management’s depth to support ongoing operations and long-term development.

However, in the past several years, our conversations with analysts and investors have markedly shifted focus – a phenomenon that has reshaped the messaging that we help CEOs, CFOs, and even CMOs prepare for their company’s quarterly earnings calls, investor conference presentations and fireside chat Q&A sessions. It has also made complementing an effective investor relations program with equally robust public relations and digital branding programs more important than ever.

Of course, the topics referenced above are critical to understanding a restaurant company’s attractiveness as a potential investment, and therefore still routinely addressed, but interestingly they are now less typically the starting point of any communication.

Instead, the most commonly asked questions at the onset of a discussion involve how a brand is engaging with its customers digitally, and what operational modifications to address online and mobile ordering and delivery it is making. This is followed by inquiries around the results it is experiencing so far through these efforts, and whether incremental sales growth and improved profitability are being generated. Even a casual reading of recent quarterly earnings call transcripts from leading public restaurant companies will attest to this seismic shift.

Initially, this new line of questioning focused on the brand’s social media strategy – how many followers do you have on Facebook, Twitter, Instagram, etc.? Do you have partnerships with “influencers” and how does that work? Do you have or create content that resonates with the intended audience, and specifically with millennials, or for the most forward-looking among them, Gen Z?

Early adopters were winners, and saw a clear competitive advantage both from consumer loyalty and investor standpoints. Management teams were eager to tout how their brands were not simply “product-driven” but were, more broadly, “lifestyle-driven”, eager to engage with customers inside and outside of their restaurants who shared their corporate values and believed in their mission. And it was this “stickiness” that would serve as a catalyst for driving guest counts.

Then just as quickly as it began, simply having a social media presence no longer sufficed. Investors stopped trying to draw straight-line correlations between “followers” and top-line and earnings growth potential. Brands needed to have a robust digital strategy anchored by a social media presence that also incorporated immersive websites, user friendly mobile apps for ordering, loyalty programs. Last but certainly not least, delivery capabilities, were no longer an added bonus, but a necessity.

These platforms for “new” customer engagement became more relevant and therefore of greater interest to investors. Not surprisingly, we advised companies to devote more of their prepared remarks to addressing their digital strategies as we worked with them to determine which metrics they could and should share on a quarterly or annual basis – balancing the need for investor transparency and disclosure with management’s desire to limit information sharing for competitive purposes.

Restaurant industry observers will certainly agree that segmentation (fast-food, fast casual, casual, upscale dining) largely and directly impacts the sales mix originating from digital channels. A brand’s demographics, technological capabilities, menu offerings (how well its food travels and what cooking processes and packaging could be modified to ensure quality standards are maintained), ambiance, and the eating occasion itself are also important contributors to its current digital penetration and potential for sustainable growth. Not surprisingly, this is why, for example, pizza chains are far ahead of bar & grill chains in digital sales, and the reason fine dining concepts have barely or not even entered the digital realm.

Other factors may include how the restaurant prototype is set-up or can be retrofitted to process and expedite digital orders for easy pick-up or delivery, minimizing the “friction” in the ordering process to positively affect ease of use. Management initiatives that address capitalizing on all of these opportunities quickly become key takeaways in all financial communications.

Still, as time went on and more data was shared regarding digital engagement, analysts and investors began monitoring progress in how a brand was increasing its penetration of digital mix (the current range can be as low as 0%-5% to as high as 60% or more), and to what degree the average check and ordering frequency were being enhanced through digital channels. Any loss of momentum became cause for investor concern and warranted being addressed head-on.

And now, the meteoric rise of third party delivery companies such as GrubHub, DoorDash, Postmates, and Uber Eats, etc., has changed the game yet again, creating a multi-billion dollar market with even greater potential for disruption. Some restaurant brands readily embraced one or more of these delivery service providers (DSPs) immediately, eager to convey the importance of these new partnerships to the investor community. Others were more reluctant, arguing against being “early adopters” and hesitant to give up 20%-30% in margins, accede control of the “customer experience” and perhaps more importantly, their proprietary customer data. While individual brands may have had compelling reasons to jump in immediately, more slowly, or not at all, investor sentiment in most cases was clearly biased towards forging these partnerships, and rewarded companies, large and small, who did so.

Initial reactions have been positive, with operators generally adamant that sales are incremental and check averages are higher for online and delivery orders. Investors now eagerly await hearing about a brand’s rollout schedule for new DSP partnerships or new geographies that will offer delivery – and have all but stopped asking about the DSP’s fees or expressing concerns around product degradation during the delivery process.

However, while delivery sales may be incremental for now, at some point we are bound to see cannibalization of in-store sales; restaurant companies will need to acknowledge that to their investors if they are to maintain credibility. To be sure, there is increasing chatter about some restaurant companies rethinking their DSP partnerships and considering other options such as in-house delivery. It remains to be seen how this will all shake out, but certainly, effective messaging and transparent communications to analysts and investors will be critical in managing any transition from this point forward.

For publicly traded restaurant companies, and for those brands looking to raise capital or enter the public markets, it is critical that their financial communications not only convey their enthusiasm for these new business practices but can also be backed up with hard data demonstrating how they are positively impacting their top and bottom lines. In the “new” dynamic restaurant world, brands often express as much pride in their technology prowess as they do in the crave-ability of their food. And that combination, perhaps, is the best recipe for success.

Raphael Gross, Managing Director, and Alexis Tessier, Senior Vice President, work at the strategic communications firm ICR in its “Better Living” practice, advising consumer and restaurant companies on their investor relations programs.


 

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