According to NPD research, fast-casual was the only restaurant segment to experience traffic growth in 2013. While the fast-casual segment has seen average year-over-year traffic growth of about 7% for the past three years, traffic growth for quick-service restaurants, or QSRs, has been flat over the same period. It seems that consumers are switching from QSRs to their fast-casual counterparts in view of their higher quality of food and customer service.
Notwithstanding the muted growth track record of the QSR industry, Popeyes Lousiana Kitchen (NASDAQ:PLKI) has been an outlier among its peers. It grew its revenues and earnings by three-year compound annual growth rates of 12.1% and 14.2%, respectively. What's the magic behind these numbers? Is it possible to draw insights from other restaurant operators Denny's (NASDAQ:DENN) and Einstein Noah Restaurant Group (NASDAQ:BAGL)?
Building the brand
Brands aren't built in a single day and they need constant investment to maintain their attractiveness to consumers. Started in 1972, Popeyes is a well-known American fried chicken fast-food chain which started to rebuild its iconic brand five years ago through a series of actions.
Firstly, Popeyes has made efforts to differentiate its menu. While it used to be known as a 'chicken & biscuits' company, its menu is much more diverse now with seafood like fried shrimp and other Louisiana sides. Within its core chicken menu, Popeyes also offers boneless variations and its flagship Bonafide Chicken -- marinated for at least 12 hours and hand-battered. In 2013, a limited-time offer of Chicken Waffle Tenders with Sweet Honey Maple Sauce met with a good customer response.
Secondly, Popeyes increased its brand awareness by advising its franchisees to step up their advertising efforts. Previously, Popeyes' advertising took place on a spot basis, where advertisements for its brand ran in selected geographic areas. Currently, the Popeyes brand is being advertised on television at a national level throughout the country. Based on the company's estimates, Popeyes' ad awareness increased from 14% in 2008 to 24% in 2013 as a result of these changes.
Thirdly, Popeyes worked at revamping its store image. It estimates that 80% and 90% of its North American restaurants will feature the company's new image by the end of this year and next year, respectively. Now, about 60% of its domestic restaurants have already been remodeled. Initial results have been positive, with remodeled stores recording sales 3%-4% higher than their non-remodeled counterparts.
The results speak for themselves. Among domestic chicken fast-food chains, Popeyes has significantly expanded its market share from 15.8% in 2009 to 20.8% in 2013. It has also delivered 15 consecutive quarters of positive global same-store sales growth since the second quarter of 2010.
Popeyes isn't the only restaurant operator that has seen results after making brand-building actions. Denny's, a casual-dining chain which prides itself as 'America's Diner,' recorded five consecutive quarters of negative same-store sales growth from 2010 until early 2011. Denny's reacted quickly by launching a value menu that offered food items at economical prices ranging from $2-$8 to regain market share with budget-conscious consumers. Items on the value menu included a $2 Cheese Quesadilla, $4 Chicken Wraps, a $6 French Toast Breakfast, and a $8 Fried Steak & Eggs Skillet.
Denny's also spent approximately $50-$60 million on an advertising campaign in 2011 to highlight its positioning and new value menu. The results were impressive, with Denny's experiencing a 25% increase in orders from the value menu. Since the second quarter of 2011, Denny's has managed to register positive same-store sales growth for seven quarters running.
There is hidden value in many consumer brands with the potential to be unlocked, as long as companies are willing to spend money to build and maintain their brand equities. This is evidenced by the results of the brand-building efforts that Popeyes and Denny's have undertaken.
Highly franchised business model
As of end-2013, Popeyes has 2,172 franchised restaurants and only 53 company-owned restaurants. With labor costs suffering negative effects from the Affordable Care Act and minimum wage increases, franchising represents the least capital-intensive method of store expansion. Popeyes' strong historical financial numbers validate this. For the past five years, Popeyes has remained profitable and free cash flow positive while maintaining high, consistent gross margins of between 65% and 69%.
Popeyes sets itself apart from other restaurant franchisors by focusing on being a strong partner to its franchisees. For example, it provides its franchisees with relevant software tools to enable them to track relevant operating data for labor costs, food costs, and wastage. This helps franchisees manage their profitability on a store level. Popeyes is also looking to spread its wings abroad as its franchisees started up in two new international markets, Vietnam and Chile, in 2013.
Einstein Noah, an operator and franchisor of bagel specialty restaurants, is another company which has walked down the path of asset-light growth. It has clearly stated its intention to 'accelerate unit growth primarily through franchise and license expansion', rather than adding more company-operated stores.
Between 2006 and 2013, Einstein Noah has increased its company-operated store count by a mere 6%. In contrast, its franchised and licensed store count grew by 163% from 71 stores to 187 stores. Looking ahead, it plans to add between 90 and 120 franchised and licensed stores and 15-25 company-operated stores annually.
Franchising has been an effective growth strategy for both Popeyes and Einstein Noah which has allowed them to grow in an asset-light manner, supported by recurring franchise income and strong free cash flows.
Foolish final thoughts
Athough the QSR market in general remains weak, Popeyes has proven that it is possible to outperform the industry if one has well-thought-out strategies for brand building and growth. Popeyes achieved its fifth consecutive year of same-store sales growth in 2013, and I expect this positive growth momentum to continue in the near-term.
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Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.