2ND QUARTER 2018 CHAIN RESTAURANT UPDATE BELLWETHER FOOD GROUP, Inc. DATE: October 2018 TO: Friends & Colleagues FROM: Bellwether Food Group RE: Domestic Chain Restaurant Same Store Sales (SSS) 2nd Quarter 2018 2nd Quarter 2018 Same Store Sales Reports Overall, a relatively positive quarter, especially in limited/quick service. Hamburger, Mexican and Pizza categories posted mostly favorable results for Q2 2018. There were even some positive trends in casual dining. The value offerings continue to resonate with consumers. Most of the hamburger brands had positive quarters. The three big national Hamburger brands, McDonald’s (+2.6%), Burger King (+1.8%), Wendy’s (+1.9%) all had solid results, as did regional brands Jack in The Box (+0.5%) and Sonic (+2.6%). Wendy’s kept the momentum going with new products such as the Southwest Avocado sandwich & salad, limited time offers (Berry Burst Chicken Salad), and a value offering (50 Cent Frosty). McDonald’s is relying more on growth in average check driven by a combination of product mix shift and pricing. Sonic (+2.6%) attributed their success to new products combined with mobile order functionality across the entire system. The mobile order feature is now truly a must have, but the lift in sales is not always as significant as marketers hope for, especially this far into the consumer adoption curve. Of course the big news about Sonic is their acquisition by Inspire Brands. (More on that later) Regional QSR Fatburger (+9.5%) results continue to be driven by momentum in delivery, as well as by increased traction of the plant-based Impossible Burger. (We’ve actually tried the Impossible Burger – its tastes as close to a real burger as anything we’ve tried - it’s difficult to tell the difference). Del Taco’s (+3.3%) new advertising campaign “Celebrating the Hardest Working Hands in Fast Food “ was credited with driving sales. Taco Cabana (+3.1%) finally turned positive for the first time in over two years. Taco Bell (+2%) has announced plans to open three "Cantina" style restaurants in New York City by the end of the year. "Cantinas" have open kitchens, shareable tapas menus, local artwork, free Wi-Fi (which Mexican QSR customers don’t really care about) and power outlets for customers. We’ll keep an eye on that. Boston Dallas Sarasota 617.281.5175 773.255.6466 843.422.4285 2 Dunkin' Donut’s (+1.4%) success was attributed to initiatives on breakfast sandwiches and frozen beverages. To note, there was a slight traffic decline. Starbucks (+1%) now has 15 million loyalty club members. The emphasis continues on the store level “partners” who bring the Starbucks brand experience to life. Beyond their focus on unique partner benefits, product innovation continues. They’re not afraid to try something new, and then get out of it when it doesn’t work - like the wine program a few years ago. They also completed a comprehensive long-term agreement with Nestlé. Nestlé will obtain the rights to market, sell, and distribute Starbucks, Seattle’s Best Coffee, Starbucks Reserve, Teavana, Starbucks VIA and Torrefazione Italia packaged coffee and tea in all global at-home and away-from-home channels. Additionally, the Starbucks brand portfolio will be represented on Nestlé’s single-serve capsule systems. Great timing for Starbucks as green coffee prices are at historical lows. Encouraging trends are finally appearing in Casual Dining. Applebee’s (+5.7%) performance was their best quarterly report in 10 years. Among the reasons was the increase in the advertising budget for the first half of this year - $30 million from Applebee’s and some additional contributions from the franchisees. Chili’s (+0.5%) was able to generate an incremental +0.6% in traffic, BJ’s (+5.6%) turned traffic positive + 2.5%, while Olive Garden (+5.3% SSS) was driven by a traffic increase of +1.5%. None of these results are indicators the segment is at the beginning of a renaissance, as everyone is lapping 3-5 years of negative sales and traffic, but it does show the initiatives are having some positive impact. These results are at least encouraging, especially given the overall negative traffic trends over the past 5 years or so. Applebee’s is investing in delivery expansion with Door Dash. Every Monday throughout the football season (where Door Dash is available) delivery fees are waived on all orders over $30 for the remainder of the regular season. An interesting approach to address what is typically one of the slowest days of the week for casual dining brands. BJ’s used sales-building initiatives, such as the Daily Brewhouse Specials, Slow Roast menu items with a focus on off-premise sales. Longhorn (+3.1%) experienced a modest decline in traffic (-0.3%), but was able to transition menu mix (+1.8%) along with pricing (+1.6%). Price increases and improving mix are admittedly more short term - but a positive quarter is always good. In pizza – Domino’s (+6.9%) continues their unprecedented growth patterns. It’s technology first, now with the new delivery options and product. Everyone else in pizza playing catchup. The other national publicly held segment participants - Pizza Hut (-1%), Papa Murphy’s (-2.4%; steady negative SSS every quarter since 2016), and Papa John’s (-6.1%) all reported negatives. Boston Dallas Sarasota 617.281.5175 773.255.6466 843.422.4285 3 The one major issue for every national pizza brand is the local pizza players in every trade area. Those local brands are still the #1 competitor in most markets. Sadly, Papa John’s founder continues to insist on being the center of attention. In the end it’s the franchisees and their employees who ultimately suffer the most. For many, his behavior hits their personal income - right now. 4-5 years ago, JAB Holdings began making acquisitions in coffee-centric consumer brands - be it chain operators or delivery formats (Keurig). The latest collaboration in that portfolio is the addition of the Caribou Coffee brand to all the Einstein’s stores domestically. JAB’s track record so far suggests they’re not done. Not to be left out of the coffee acquisition party, Coke acquired the UK-based Costa Coffee chain, operating over 300 units today. Clearly, caffeine is much more in vogue than sugar from the investment community’s perspective. Consumers are on that path as well. Atlanta based Roark Capital now generates some $36 billion in annual system revenues (including Sonic) from 35,500 locations in 50 states and 81 countries. Domestically they own 21 chain restaurant brands ranging in size from Arby’s, Sonic, and Jimmy John’s with thousands of units across the industry, to Mexican Fast Casual Rusty Taco, with 28 units. One recent move is the Focus Brands division acquisition of Jamba Juice. Roark’s biggest recent move is the acquisition of Sonic. With Sonic’s $4 billion in sales, Roark’s restaurant domestic portfolio sales overall today are at $7 billion plus. Their portfolio actually generates more revenue than McDonald’s domestically. We removed Zoes Kitchen from the quarter’s report as they’ve been acquired by privately-held Cava Group and will no longer report quarterly SSS and financial data. (Although if they’d be willing to share it - we’ll publish it!). Same Store Sales Traffic Brand Pricing Comments Versus Change Prior Year Limited / Quick Service Baskin Robbins +0.4% Bojangle’s -0.2% Burger King +1.8% Chipotle +3.3% -1.8% +4.0% Del Taco +3.3% -1.2% +3.7% +1% menu mix Domino’s +6.9% Dunkin Donuts +1.4% El Pollo Loco -0.9% Traffic -2.5% @ 211 company stores Fatburger +9.5% +4.2% Boston Dallas Sarasota 617.281.5175 773.255.6466 843.422.4285 4 Same Store Sales Traffic Brand Pricing Comments Versus Change Prior Year Habit Burger +1.2% -3.3% +4.3% +0.2% positive mix Jack in the Box +0.5% -2.0%* +2.6%* *@146 company stores Jamba Juice +2.2% Agreed to be acquired by Focus Brands KFC Even McDonald's +2.6% Noodle’s +5.4% Papa John's -6.1% Founder issues hitting revenue Papa Murphy’s -2.4% Pizza Hut -1% Pollo Tropical* +3.4% Popeye’s +1.8% Pot Belly -0.2% Shake Shack +1.1% 100 Domestic units open Sonic +2.6% Starbucks +1% Taco Bell +2% Taco Cabana +3.1% First positive quarter since 2016 Wendy's +1.9% 40% of US system doing delivery Wingstop +4.3% Full Service Applebee's +5.7% Highest SSS increase in 10 years, BJ’s +5.6% +2.5% Just over 200 units Bonefish Grill +1.5% Capital Grill +3.9% Carraba’s -0.6% Cheddar’s -4.0% Cheesecake Factory +1.4% Chili's* +0.6% Traffic+0.8% @ company stores Chuy’s +1% Cracker Barrel -0.4% -3.5% +3.1% Dave ‘N Busters -2.4% Del Frisco’s Double -1.2% -6.3% +5.1% Eagle Del Frisco’s Grille +0.7% -7% +7.7% Denny's -0.7% Famous Dave’s -1.6% Fleming's +0.3% IHOP +0.7% Longhorn +3.1% -0.3% +1.6% +1.8% Menu Mix Boston Dallas Sarasota 617.281.5175 773.255.6466 843.422.4285 5 Same Store Sales Traffic Brand Pricing Comments Versus Change Prior Year Olive Garden +5.3% +1.5% +1.9% Outback +4.0% +0.6% Red Robin -2.6% -0.7% Ruth's Chris +1.3%* -0.1% +1.4% *77 company stores Seasons 52 -1.9% Steak ‘n Shake -3.4% -6.4% Sullivan’s Steak -6.0% -11.1% +5.1% House Texas Roadhouse* +5.7%* *450 Co.