QUARTERLY CHAIN RESTAURANT UPDATE

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1 QUARTERLY CHAIN RESTAURANT UPDATE BELLWETHER FOOD GROUP, Inc. DATE: December, 2015 TO: FROM: Manufacturing Friends & Colleagues Bellwether Food Group RE: Chain Restaurant Same Store Sales (SSS) 3rd Quarter, Calendar Year 2015 The 3rd Quarter 2015 Same Store Sales Reports Overall, a very healthy quarter with positive performance across the industry. In looking at the numbers, many brands performed well. Dave N Busters had another strong quarter +8.8%, as did Denny s again +6.1%, while Longhorn +3.6% and IHOP +5.8% kept the momentum going. Texas Roadhouse posted a +6.9% at company stores, did even better at franchised locations +7.7%. All the burger brands had positive SSS. McDonald s finally got on a positive track with a +0.9% increase. They credit the introduction of the new Premium Buttermilk Crispy Chicken Deluxe sandwich and all day breakfast, including a return to the classic recipe ingredients for McDonald's iconic Egg McMuffin, as contributors to their improved performance. They mentioned a 1% decline in operating income for company stores, owing to investments in employee wages and benefits. There s more competition now for employees, more on that later. Jack in the Box continues to make strides and significant SSS gains +6.2% over a +3.1% in 3rd Quarter last year. Their approach is fairly straight forward new product news and store remodels. The new work includes all day breakfast, new breakfast items, milkshake LTOs, and some new burgers. Sonic +7.3% and Burger King +6.2% also continued their positive momentum. Domino s +10.5% continues to impress lapping a +7.7% from 3 rd Quarter 2014, and +5.4% from This success has to be one of the great accomplishments over the past few years. After admitting that their product had not met their own standards a few years ago, they ve continued to work at getting better. LTOs, expanded menu, technology, and reimaging the stores, are key drivers of their success. On the subject of reimaging the stores newer, remodeled stores have a positive effect on both the customers and the employees. Digital orders are now 50% of Domino s revenue, and the expectations are that this progress will continue to grow. Dominos believes there s still room for domestic unit growth. At the end of 2014, 59% of the dollars spent on pizza was with local independents according to NPD.

2 2 At IHOP it has been the simple things such as the new menu and positioning, which reinforces that everything is made to order, and a focus on individual customization. Customers have responded. The legacy or age of the brand is not an issue for many millennials, who may have never been to an IHOP, or at least not since childhood or college late night. They appear to base their decisions on their own personal experiences which has been good for both IHOP and Denny s. It continues to be a very mixed bag in casual dining. Darden posted a respectable +2.8% at Olive Garden and a +3.6% at Longhorn. Bloomin Brands had a tough quarter with a 6% at Bonefish Grill, ( 2%) at Carrabba s, and a modest +0.1% at Outback. Yet Buffalo Wild Wings continues to press forward quite well +3.9%, as does value player Texas Roadhouse. Some continue to be very troubled in Casual Dining Brio/Bravo and Famous Dave s specifically. Both are struggling, with year over year SSS trends very troubling for Famous Dave s 9.8% compared to a 5.7% in the 3 rd quarter in Tough sledding for those folks. Back on the subject of employees, the landscape and competition for the best talent is a real challenge today for many operators as employment trends continue to improve over time. Even McDonald s is talking about the need to enhance our employer brand. It s even more important for casual dining brands to keep the talented, customer facing staff. The best talent goes to where they can make the most money in tips, etc. If a casual dining brand is losing sales and traffic (Brio/Bravo, Bloomin Brands, Famous Dave s), the first staff to move to greener pastures are those that are the most dependent on tips that s wait staff and bartenders, those who interact the most with customers. It s that simple, lower traffic and sales means less in tips. It s a challenge. Middle class incomes haven t risen much at all over the last 7 8 years. There are some structural realities, but one big culprit is increasing healthcare costs that now consume more of the middle class incomes. Most Americans incomes haven t kept up with increased taxes (or fees ) and health care costs that hurts restaurants. The coffee business continues to grow and is now attracting a new group of professional investors. JAB Holdings (the investment arm of the Riemann family, Germany based) is playing in both retail, and to a lesser degree, the chain coffee business. They purchased Keurig for some $13.9 Billion. Admittedly this is primarily a retail organization, yet they ve made buys and investments in US based chains having purchased Peet s and Caribou Coffee and having made an investment in Chicago based Intelligentsia. We ve seen how the Fast Casual Emerging Brands are impacting consumer expectations overall, and as a result, putting pressure on the larger, legacy chain restaurant brands. If JAB decides to take a run (they certainly have the resources) in either continuing to innovate in consumer

3 offerings or building new stores, that could influence the landscape. It would be really intriguing if they partnered with a large Fast Casual or QSR brand. We re going to watch that. Regarding the Chipotle supply chain issues to Steve Ells credit he has gone public with an apology and the commitment to the tightest supply chain on the planet. Of course their experience has sent some shock waves and alarms through not only the chain operator community, but the manufacturers as well. If Chipotle has had issues, it could happen to anyone. Improved food safety and quality assurance and supply chain control is an ongoing effort, as it should be for all. While very unfortunate, there will be some solid learning and enhanced practices as a result. 3 3rd Quarter 2015 SSS Sales by Brand Brand Same Store Sales Versus Prior Year Traffic Change Pricing Comments Limited / Quick Service Arby s +9.6% Bojangle s +4.1% Burger King +6.2% Includes Canada Chipotle +2.6% Del Taco +5.6% Domino s +10.5% Dunkin Donuts +1.1% El Pollo Loco +0.6% Habit Burger +2.9% Jack in the Box +6.2% Jamba Juice +5.6% KFC Flat McDonald's +0.9% Noodle s 0.7% Panera +3.8% Papa John's +3.0% Pizza Hut Even Popeye s +5.6% Pollo Tropical +4.2% 1% Pot Belly +3.7% Qdoba +6.6% Shake Shack +9.6% 16 domestic locations Sonic +7.3% Starbucks +8% +4%

4 4 Brand Same Store Sales Versus Prior Year Traffic Change Pricing Comments Taco Bell +4% Taco Cabana +4.8% 0.4% Wendy's +3.1% Zoe s +4.5% Applebee's 0.5% BJ s +2.3% Bob Evans 3.2% Bonefish Grill 6.1% Bravo Restaurants 3.1% Brick House Tavern 0.7% Brio Restaurants 3.8% Buffalo Wild Wings* +3.9% Capital Grill +0.9% Carraba s 2% Cheesecake Factory +2.2% Full Service Chili's* 1.6% 1.9% +1.7% Chuy s +4.2% Cracker Barrel +2.5% Dave N Busters +8.8% Denny's +6.1% Famous Dave s 9.8% Lapping a 5.7% Fleming's 0.6% IHOP +5.8% Joes Crab Shack 6.6% Longhorn +3.6% % Pricing & Mix Olive Garden +2.8% +0.9% +1.9% Pricing & Mix Outback +0.1% Red Robin +3.5% Ruby Tuesday +0.6% Ruth's Chris +3.3% 0.5% +3.8% Steak n Shake +3.0% +1.3% Texas Roadhouse* +6.9% Yard House +2.4% *@ 568 Company stores, (563) Franchised *933 Co. stores, Domestic sales 1.1% (1260 total) *385 Co. Stores 81 Franchise Stores

5 5 Implications for Manufacturers If you haven t done it already, it is time to rethink your chain strategy. Some of the resources put against legacy volume chain customers might be better assigned to emerging fast casual and/or other regional chains. Casual dining is mature and traffic is soft, while improving a little as seen in above numbers, and no one expects that to change. Furthermore, they re all looking to reduce costs and maximize other efficiencies. For example, Darden has told investors they have a goal, and a plan, to reduce cost of goods $26 $30 million dollars in the next fiscal year. That public notice should send a very clear sign to vendors. The first issue to reevaluate is how your sales talent is deployed. The direct question is necessary is keeping your best talent on the legacy, mature accounts the best ROI for your organization? If the margins are acceptable, and you need the revenue, we understand that. Yet, if that s the case, then how do you grow the business? If the legacy customers are becoming more and more transactional, then consider re assigning the most talented sales people to the more qualified target rich environment. Recognize that emerging brands volumes are lower, but margins are significantly better and decisions happen much faster than the traditional casual dining or family chain. Managing the customer organization is much easier you re not likely to get a request for product costing or formula requests from a unit chain (nor do they have large committees etc.) like you will from legacy casual dining. If you want to learn more about emerging brands or fast casual, we have developed an approach over the past 18 months with clients which facilitates learning and understanding very quickly (one and a half days). For more detail on how to use this approach, give any of the three of us a call. We re happy to talk further and share best practices. Mac Brand, mbrand@bellwetherfoodgroup.com, Rob Hardy, rhardy@bellwetherfoodgroup.com, Jon Jameson, North Carolina jjameson@belllwetherfoodgroup.com,