Serving Up Big Opportunities

Yieldwink’s investment thesis focuses on identifying investments where we can find or create value. Quick-service restaurants (QSR) present, in our opinion, a compelling opportunity.

For one, the QSR industry is expected to grow substantially — from $862B in 2020 to $1.46T in 2028, representing a 5.1% compounded annual growth rate. According to a Transunion survey, 38% of households with children visit traditional QSR restaurants like Burger King and McDonalds at least once a week. Moreover, two in three Americans (65%) eat fast food weekly.

Despite a growing QSR market, there is a noticeable bifurcation between traditional QSR and premium QSR. Premium QSR, or fast-casual establishments like Chipotle, Cava, and Panera have recently outperformed  traditional QSR, like Burger King and McDonalds. Same store sales have dipped in traditional QSR franchises while fast-casual has seen an uptick.

There have been multiple QSR closures across nationally-recognized traditional and premium QSR brands like Wendy’s, Panera Bread, Red Lobster, and Burger King. Our team dug deeper to understand the reasons behind these unnecessary failures. We identified two primary causes: poor store-level franchisee operations and flawed franchisor guidelines and requirements that rendered certain businesses economically unsustainable.

Changes in the QSR Industry

A major headwind for operators has been soaring operating costs driven by inflation. Wages, cost of goods sold (COGS), and controllable expenses like utilities and supplies have risen year-over-year. Simultaneously, rising interest rates have further squeezed net profits of indebted multi-unit operators. Declining profits often lead to cost-cutting, resulting in operational inefficiencies, reduced labor force, deferred investment in machinery, and underinvestment in technology. This domino effect can decrease customer satisfaction and overall store traffic.

For over 12 months, our team has closely monitored developments across multiple franchises, including Burger King. The recruitment of Tom Curtis and Pat Doyle from Domino’s was, in our opinion, a strategic win for the brand. Earlier this year, Burger King signaled its turnaround intent by acquiring the Carrols Restaurant Group, a 1,023-store Burger King franchisee. Not only did this pique our interest, it drove us to become franchisees of Burger King.

During our training at Burger King’s corporate location in Miami, our priority was to learn their processes and procedures, and identify opportunities for improvement. We believe new operators can leverage technological advancements to gain a competitive edge. Unlike entrenched franchisees, new entrants with a strong operational focus and adequate reserve capital can adapt more quickly to drive efficiency. As the old saying goes, “You can’t teach an old dog new tricks.”

Labor Costs

In underwriting multiple opportunities, we’ve found that wage growth and labor shortages are clear contributors to reduced bottom-line returns. At Burger King, each location typically operates 5-8 staff members: two for the drive-thru, three at food stations, one cashier, and an additional staff member for cleaning or gap-filling.

The advent of cloud-based technologies can stream-line labor needs. For instance, remote virtual assistants can manage drive-thru orders via cloud-based POS systems, reducing labor costs by 4-7%.

Slow progress has been made with robotics in QSR. We recently witnessed White Castle St. Louis location try out Flippy, a robotic arm to flip burgers, while McDonalds cut off a partnership for AI-driven drive-thru’s with IBM. Progress has been slower, but it is expected to remain a pipeline priority for franchisors.

Inventory Management & Scheduling

Operational inefficiencies occur when staff is focused on non-essential business tasks. During training, we observed a store manager spending significant time on manual inventory counts and employee scheduling. Weekly inventory counts took over an hour, followed by an additional 30 minutes on data input into the software.

Technology can mitigate these inefficiencies. Camera systems integrated with optical character recognition (OCR) can visually track inventory levels and automatically update software via webhooks. While inventory tracking systems do exist, proprietary solutions can be more effective to solve for your specific needs.

Similarly, AI-powered software solutions can handle employee scheduling by aligning availability and demand. Even cooking oil management, a task requiring arduous labor, can be replaced with new outsourced automated cooking oil technologies, freeing up valuable labor hours. Scaling any efficient business requires a strong foundation of automation.

Closing Thoughts

Trends can provide valuable insights into investment opportunities. While consumers may gravitate towards healthier options or evolving dining preferences, strategic purchases at the right price are the strongest indicators of success. As Kimberly-Clark continues to thrive despite declining paper sales, we believe QSRs, bolstered by advances in food technology, present a prime opportunity for investment today.