Comments from 1/26 "State of the Restaurant Industry" Conference Call
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Mark Kalinowski 212-940-6997
mkalinowski@janney.com Restaurants
January 27, 2010
Comments from 1/26 "State of the Restaurant Industry"
Conference Call
INVESTMENT CONCLUSION:
Yesterday's "State of the Restaurant Industry" conference call provided thoughts regarding the outlook for burger chains
from the creator and operator of the BurgerBusiness.com blog.
KEY POINTS:
• Yesterday, we held the latest in our ongoing series of “State of the Restaurant Industry” conference calls, with the
featured speaker on yesterday’s call being Scott Hume. Mr. Hume is the creator and operator of the
BurgerBusiness.com blog.
• Mr. Hume called the burger business “a market-share game,” in line with our own viewpoint about the maturity of
the industry. Mr. Hume wants concepts to be aggressive in fighting for share, and cited McDonald’s (MCD $63.81;
Neutral) as one company that he believes “gets it” in this regard.
• Mr. Hume believes that in general, casual dining chains will have a tougher go of it than quick-service burger chains.
He cited as one reason for this that burger chains “have shown they are good at new product introductions.”
• Mr. Hume noted that he did not foresee Q1 2010 being any better in terms of sales than Q4 2009.
• Mr. Hume said that chains that work to have a quick pace of new-product introductions may be better positioned to
capture market share (“one to two [new] products a year may not be enough these days”). In that regard, he cited
CKE Restaurants' (CKR $8.52; Not Rated) Hardee’s chain favorably, saying that “nobody’s doing that faster than
CKE,” and noting some recent product news from Hardee’s. Mr. Hume also cited Wendy’s (part of the
Wendy’s/Arby’s Group [WEN $4.55; Not Rated]) as having some interesting new menu items on tap and/or in
test, including a Bacon & Blue Cheeseburger, natural-cut fries, and Fresh Wraps. Mr. Hume said that he has heard
that the Fresh Wraps product has done well in test, and also noted his surprise that those products haven’t been rolled
out nationwide yet. As for Jack in the Box (JACK $19.89; Not Rated), it apparently has a new product platform on
tap for rollout this quarter, which Mr. Hume suggested might be Quesadilla Grillers, an item that the chain tested last
year. In addition, Mr. Hume said to look for Whopper line extensions from Burger King (BKC $17.78; BUY),
citing as examples the Bourbon Whopper already rolled out in Canada, a California Whopper featuring avocado, and
a Salsa Whopper that is already available in some overseas markets).
• When asked specifically which quick-service burger chain would show sales gains during 2010, Mr. Hume cited
Wendy’s, which he said “has some ground to make up after a number of years of being pretty quiet in the
marketplace.” Mr. Hume suggested new products would help, as would a new management team willing to examine
the business and not being afraid to make changes.
• Folks who are interested in listening to a replay of the call can do so over the next 6-7 days by dialing (800)
642-1687, and entering conference ID number 49658954.
Equity Research Research Analyst Certifications and Important Disclosures
are on pages 4 - 5 of this report
Industry ReportOVERVIEW OF THE CALL
Yesterday, we held the latest in our ongoing series of “State of the Restaurant Industry” conference
calls, with the featured speaker on yesterday’s call being Scott Hume. Mr. Hume is the creator and
operator of the BurgerBusiness.com blog. He has also been a business and feature writer and editor for
more than 30 years, including ten years at Restaurants & Institutions magazine (for which he served
as editor-in-chief at the time of him leaving that respected trade publication in 2008).
http://www.burgerbusiness.com
Folks who are interested in listening to a replay of the call can do so over the next 6-7 days by dialing
(800) 642-1687, and entering conference ID number 49658954. We note the following bullet-point
comments regarding yesterday’s call:
* Mr. Hume started BurgerBusiness.com in February 2009. The site receives an average of 800-1,000
hits per day,. Mr. Hume does not own any restaurant stocks (and never has), and as such, we hope that
helps him provide an objective voice regarding trends in the burger sector.
* Mr. Hume called the burger business “a market-share game,” in line with our own viewpoint about
the maturity of the industry. Mr. Hume wants concepts to be aggressive in fighting for share, and cited
McDonald’s (MCD $63.81; Neutral) as one company that he believes “gets it” in this regard.
* Mr. Hume remarked that franchisors will find it difficult to improve their in-store experience (for
example, the look-and-feel of the store) without having good relations with their franchisees. He cited
Burger King’s (BKC $17.78; Buy) current tense relations with quite a few of its franchisees as that
concept’s “biggest vulnerability right now.”
* Mr. Hume praised Jack in the Box (JACK $19.89; Not Rated) CEO Linda Lang and her
“insightful strategy” of “differentiated value” -- value not only with appropriate price points, but also
through menu offerings that aren’t duplicated (or are hard to duplicate) by competitors. He also
commented that Sonic Drive-In (SONC $8.52; Not Rated) wants to move in this direction, but says
for them to employ that strategy successfully, it will have to involve more than just having carhops.
* Mr. Hume called menu revamps “daring” -- implying what we believe to be a combination of
potential reward and meaningful risk. He termed privately-held Bennigan’s recent menu revamp a
“horrid throwback to a bad age of casual dining” -- a clear example of what, in Mr. Hume’s opinion, is
poor execution of the menu revamp strategy.
* Mr. Hume foresees additional competition within the quick-service sector in coming years both for
beverages (“the next battleground”) and breakfast. On the beverage front, chains will have to figure
out how to sell bottled beverages, in part because sales of high-margin combo meals are on the
decline. As for breakfast, Mr. Hume cited “trust” between a brand and its customers as a key factor
helping to determine where folks will go to buy their morning coffee (and potentially other items).
* Mr. Hume expressed skepticism about prevalent use of social media by restaurant companies, saying
that it “doesn’t really create relationships” or engage customers, although he also added that social
media outlets could become a new and effective way to distribute coupons. He further remarked that
mobile marketing might be a smarter way to go about engaging tech-savvy customers, although he
said he was “leery of some of the sillier iPhone apps.”
* Mr. Hume noted that in his opinion, how CKE Restaurants (CKR $8.52; Not Rated) -- the owner
of the Carl’s Jr. and Hardee’s concepts -- will do during calendar 2010 will be foreshadowed by their
current-quarter results. Mr. Hume’s opinion is that CKE has a reputation for having high-buzz, high-
profile ad campaigns that don’t do much to drive same-store sales.
-2-* Mr. Hume said that chains that work to have a quick pace of new-product introductions may be
better positioned to capture market share (“one to two [new] products a year may not be enough these
days”). In that regard, he cited CKE’s Hardee’s chain favorably, saying that “nobody’s doing that
faster than CKE,” and noting some recent product news from Hardee’s. Mr. Hume also cited Wendy’s
(part of the Wendy’s/Arby’s Group [WEN $4.55; Not Rated]) as having some interesting new menu
items on tap and/or in test, including a Bacon & Blue Cheeseburger, natural-cut fries, and Fresh
Wraps. Mr. Hume said that he has heard that the Fresh Wraps product has done well in test, and also
noted his surprise that those products haven’t been rolled out nationwide yet. As for Jack in the Box, it
apparently has a new product platform on tap for rollout this quarter, which Mr. Hume suggested
might be Quesadilla Grillers, an item that the chain tested last year. In addition, Mr. Hume said to look
for Whopper line extensions from Burger King, citing as examples the Bourbon Whopper already
rolled out in Canada, a California Whopper featuring avocado, and a Salsa Whopper that is already
available in some overseas markets).
* Mr. Hume believes that in general, casual dining chains will have a tougher go of it than quick-
service burger chains. He cited as one reason for this that burger chains “have shown they are good at
new product introductions.”
* Mr. Hume noted that he did not foresee Q1 2010 being any better in terms of sales than Q4 2009.
* When asked specifically which quick-service burger chain would show sales gains during 2010, Mr.
Hume cited Wendy’s, which he said “has some ground to make up after a number of years of being
pretty quiet in the marketplace.” Mr. Hume suggested new products would help, as would a new
management team willing to examine the business and not being afraid to make changes. Mr. Hume
praised McDonald’s as the “smartest marketer in the business” and also Jack in the Box as a chain that
“will be working very hard” to better its market-share position.
* Mr. Hume remarked that McDonald’s recent promotion of Don Thompson from President of their
U.S. business to Chief Operating Officer for the whole company “shows their bench strength.” Mr.
Hume also questioned why Burger King had not yet named a permanent replacement for their
recently-departed Chief Marketing Officer.
LIMITED-SERVICE HAMBURGER SEGMENT -- U.S. MARKET SHARE, 1995-2008
Burger Jack in
Year McDonald's King Wendy's Sonic the Box Others
2008 46.8% 14.2% 12.6% 6.0% 4.8% 15.6%
2007 46.7% 13.9% 12.7% 6.0% 4.9% 15.8%
2006 46.0% 14.3% 13.3% 5.8% 4.6% 16.0%
2005 45.5% 13.9% 13.6% 5.5% 4.6% 16.9%
2004 45.0% 14.2% 14.2% 5.1% 4.7% 16.8%
2003 43.6% 15.6% 14.5% 4.8% 4.7% 16.8%
2002 42.7% 17.5% 14.4% 4.7% 4.7% 16.0%
2001 43.1% 18.5% 13.2% 4.6% 4.3% 16.3%
2000 43.1% 18.8% 12.7% 4.4% 4.0% 17.0%
1999 43.1% 19.6% 12.2% 4.0% NA 21.1%
1998 43.3% 20.4% 11.6% 3.6% NA 21.1%
1997 42.4% 19.5% 11.4% 3.4% NA 23.3%
1996 41.9% 19.2% 11.0% 3.2% NA 24.7%
1995 42.3% 18.2% 10.7% 3.1% NA 25.7%
Source: Technomic and Janney Montgomery Scott
-3-IMPORTANT DISCLOSURES
Research Analyst Certification
I, Mark Kalinowski, the Primarily Responsible Analyst for this research report, hereby certify that all of the views expressed in
this research report accurately reflect my personal views about any and all of the subject securities or issuers. No part of my
compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views I expressed in this
research report.
Janney Montgomery Scott LLC ("JMS") Equity Research Disclosure Legend
Individual disclosures for the companies mentioned in this report can be obtained by calling or writing Janney Montgomery
Scott LLC as provided on the first page of this report.Disclosure Site
Definition of Ratings
BUY: Janney expects that the subject company will appreciate in value. Additionally, we expect that the subject company will
outperform comparable companies within its sector.
NEUTRAL: Janney believes that the subject company is fairly valued and will perform in line with comparable companies
within its sector. Investors may add to current positions on short-term weakness and sell on strength as the valuations or
fundamentals become more or less attractive.
SELL: Janney expects that the subject company will likely decline in value and will underperform comparable companies
within its sector.
Janney Montgomery Scott Ratings Distribution as of 12/31/09
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [B] 164 51.00 15 9.00
NEUTRAL [N] 152 47.00 7 5.00
SELL [S] 5 2.00 0 0.00
*Percentages of each rating category where Janney has performed Investment Banking services over the
past 12 months.
Other Disclosures
Investment opinions are based on each stock’s 6-12 month return potential. Our ratings are not based on formal price targets,
however our analysts will discuss fair value and/or target price ranges in research reports. Decisions to buy or sell a stock should
be based on the investor’s investment objectives and risk tolerance and should not rely solely on the rating. Investors should
read carefully the entire research report, which provides a more complete discussion of the analyst’s views.
This research report is provided for informational purposes only and shall in no event be construed as an offer to sell or a
solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be
reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be
given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have
positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or
otherwise and may sell to or buy from customers such securities on a principal basis.Supporting information related to the
recommendation, if any, made in the research report is available upon request.
-4-RESEARCH
DEPARTMENT
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Gary R. Schatz, Managing Director
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BUSINESS SERVICES FINANCIALS
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Dan Wantrobski, CMT - Director (215) 665-4446You can also read
