Quick Service Restaurant Analysis. American Ismaili Chamber of Commerce

Transcription

1 Quick Service Restaurant Analysis American Ismaili Chamber of Commerce S

2 Table of Contents Letter from the Editor 03 Quick Service Restaurants Fed Funds Rate AICC Calendar 09-10

3 3 Letter from the Editor Welcome to the first edition American Ismaili Chamber of Commerce's (AICC) Newsletter. We want these Newsletters to be informative, and have at least a new nugget of information for everyone. The first section of these Newsletters will be called Briefing, where we will take one key economic indicator, and in the style of Rachel Maddow, break it down and pull it apart. We want to explain why that indicator is important, what impact it has on the economy, and why it could be important to you as an individual, a business owner, or a professional. For our inaugural Newsletter, we'll analyze the Fed Funds Rate. The second section of the Newsletter will take a deeper dive into a specific industry. We will explore the macro trends driving that industry, dissect the inner workings and nuances of the industry, and offer insights for individuals interested in that sector. We may also do a series of reports on a specific sector if warranted. For this first Newsletter, we are starting with Quick Service Restaurants. We would love to hear your thoughts and ideas for future Newsletters. Please do not hestitate to send your suggestions and comments via to support@ismailichamber.org. Lastly, we are also building out our team and searching for talent. If you enjoy business or economic research and/or writing, please consider joining the AICC Newsletter team. Send us a note with an indication of interest to the above. We hope you enjoy the first issue! Sabeen Firozali, Editor Samir Merchant, Designer

4 4 Briefing Fed Funds Rate The Federal Reserve announced that it has raised its benchmark interest rate by 0.25% to a range of 1.25% to 1.75% in April Moreover, the market expects the Fed to raise rates between 2-4 times in This Fed Funds Rate is the interest rate that banksanace on your credit charge each other for overnight, short-term loans that are essentially very low risk. This increase in benchmark rate elevates across the broard, meaning banks and other institutions will begin charging higher rates for all loans. If you have a variable interest rate loan, such as balance on your credit card debt, expect that the total interest expense on the loan will rise. On the other hand, if you have a savings or an interest-bearing account with a variable rate, you should expect to earn slightly higher fees on those accounts. If your mortgage has a variable component that's pegged to the Treasury, that'll increase too. For new home buyers, the fixed-rate mortgage rates will be slightly higher as well. The Fed Funds Rate is still well above its long term average of 4.8% since the 70's. Mortgage rates move mostly in line with Fed Funds Rates, as shown in Exhibit A. Exhibit A

5 Briefing Fed Funds Rate 5 As rates rise in general, we can expect housing prices to decline. Home prices are inversely correlated with interest rates, as shown in Exhibit B. Exhibit B Exhibit C

6 6 Quick Service Restaurants

7 Quick Service Restaurants 7 I n d u s t r y Overview Against the backdrop of higher labor costs, rise of meal delivery kits, popularity of fast casual restaurants on the higher end and good quality ready-to-eat food offered at convenience and grocery stores at the lower end, quick service restaurants ("QSR's" or "fast food restaurants") are facing many headwinds. Comparing the cost of Food At Home (how much it costs to buy and make food from the grocery store) vs. Food Away From Home (how much it costs to eat at a restaurant) can be a key indicator of the health of the fast food industry. If the gap between the two indices is wide and the cost of eating at home is significantly lower than eating out, restaurants, especially QSR's because of their low prices, will be challenged. And that is precisely what has occured. Consumer Price Index As shown in Exhibit D, the gap between the two indices has been widening since And since 2016, the average QSR year-on-year same store sales growth has been below 3% every quarter. According to Nation's Restaurant News, traffic to fast food restaurants has plummeted and stores have tried to keep sales by increasing prices. Affordability Factors 50% Purchasing Decisions Customers who can afford to eat out continue to dine at higher-end restraurants as seen in Exhibit E, according to Black Box Intelligence. While sales less of buyers' decisions, pointing to a trend of "health fatigue" in QSR customers. The three factors comprising 50% or half of the purchasing decisions when deciding what to eat include affordability, quality ingredients, and indulgent taste. Exhibit D Exhibit E

8 8 Quick Service Restaurants Categorical Composition So how should we think about investing in QSR's when the industry is rife with obstacles? QSR's are typically broken out by cuisine category, such as Mexican, hamburger, or pizza. In the past five years, asian and chicken oriented fast food restaurants have been outperforming in terms of sales, and categories such as pizza and hamburger based QSR's have been underperforming as seen in Exhibit F. Much of this is due to supply-demand dynamics: there might be a few hamburger chains for a hungry consumer to choose from, but just one Mexican fast food restaurant in a large traffic intersection. There are exceptions to this, of course. For example, In-n-Out Burger, Culver's and Wendy's maintain a strong industry position despite being in the saturated hamburger segment. Each one of these restaurants has done a good job of promoting its brand as one with fresh, high quality ingredients for an affordable price, which is resonating with diners at the moment. Pricing Characteristics So, when considering an investment in a QSR, it may be wise to look at less abundant categories, such as Asian, chicken, and Mexican cuisines. It would also be important to ensure that menu items can be competitively priced compared to other QSR's in its immediate geography. This means making sure that both the corporate policy allows for pricing and discounts that can be seen as affordable, and that the internal cost structure has adequate buffer so that prices can be taken down slightly without sacrificing for too much gross profit as seen in Exhibit G. Exhibit F Exhibit G

9 AICC Calendar 9

10 10 AICC Calendar August 9, 2017 May 31, 2017 June 7, An online webinar examining real estate investment funds. An online webinar covering real estate investment in government leased buildings. An online webinar discussing landscape, opportunities, and risks in mulitfamily real estate. April 3rd-6th *May 5th-6th May 19th-20th 2018 A conference based in Las Vegas, NV covering the multiunit franchise industry. A conference based in Ft. Laura, FL covering the franchise industry. A conference based in Houston, TX covering the franchise industry. *May 29th-June 2nd *Nov 1st-3rd *These events are pending final approval 2018 A conference based in New York, NY covering the international franchise industry. A conference based in Los Angeles, CA covering the franchise industry. If you would like to be informed about future AICC events and webinars focusing on member education and investment opportunities, please submit your name, phone number, and address to Support@IsmailiChamber.org and we will place you on our mailing list.