MILLERPULSE BUSINESS CONDITIONS REPORT JUNE 2016 THE WIDENING GAP BETWEEN RESTAURANT AND GROCERY PRICING MAY BE HURTING SSS

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1 MILLERPULSE THE WIDENING GAP BETWEEN RESTAURANT AND GROCERY PRICING MAY BE HURTING SSS SALES AND TRAFFIC GROWTH HIT MULTIYEAR LOWS IN MAY Sales and traffic softness continued into May. Restaurant industry same store sales were up +0.3% but grew at the slowest pace since Dec13. Sales growth didn t fare much better on a 2year basis, as it fell 20 bps to +3.5% and to the lowest level since Jul14. Traffic growth was equally disappointing in May, with traffic hitting a multiyear low at 1.9%. As has been the trend of late, sales and traffic in QSR held up better than in Casual Dining. Casual Dining same store sales were down 0.2% in May (stable 2year) on slightly less negative traffic of 2.3%. Sales in QSR clung on to gains in May at +0.5%. Weaker traffic was to blame, as it fell 150 bps to 1.6% in the month the lowest reading in the last two years. MIND THE GAP! IT S HURTING RESTAURANT SAME STORE SALES We believe restaurant industry sales are slowing due to the widening pricing gap between restaurants and grocery stores. The grocery channel has been very aggressive on price and promotion as commodity costs have fallen; so much so that grocery pricing has been negative since Dec15. The evidence that lower grocery pricing is eating into restaurant sales rests in the strengthening negative correlation between these two factors (see Figure 1). As the pricing gap between restaurant and grocery started to expand in Jan 15, the correlation increased to 90% from 50% over the last three years. In short, this means as grocery prices fall relative to restaurant prices, restaurant sales will fall 90% of the time. Restaurants need to be paying close attention not only to their menu price relative to other restaurants but also to grocery stores, especially during deflationary commodity cycles. FIGURE 1. THERE S BEEN A STRONG INVERSE RELATIONSHIP BETWEEN RESTAURANT SSS AND THE GAP BETWEEN RESTAURANTGROCERY PRICING (1.00) (2.00) Feb14 Mar14 Apr14 May14 Jun14 Jul14 Aug14 Sep14 Oct14 Nov14 Dec14 Jan15 Feb15 Mar15 Apr15 May15 Jun15 Jul15 Aug15 Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 Apr16 May16 Restaurant SSS Pricing Gap (Restaurants Less Grocery) JUNE 2016 LARRY MILLER ROBERT SANDERS LARRY@MILLERPULSE.COM ROBERT@MILLERPULSE.COM

2 SNAPSHOT SAME STORE SALES MAY 2016 MAY 2015 TRAFFIC 0.4 INDUSTRY CHECK 2.2 TRAFFIC 1.9 CHECK 3.6 SSS +0.3%; 2YR +3.5% SSS +3.2%; 2YR 0.3% TRAFFIC 0 QSR CHECK 2.1 TRAFFIC 1.6 CHECK 4.2 SSS +0.5%; 2YR + SSS +4.2%; 2YR +7.3% TRAFFIC 0.7 CASUAL DINING CHECK 2.1 TRAFFIC 2.3 CHECK 2.8 SSS 0.2%; 2YR + SSS +2.1%; 2YR +3.4% MILLERPULSE JUNE 2016 PAGE 2

3 SNAPSHOT DAYPARTS AND CHECK TRENDS (%) Figure 2 MORNING DAYPART Figure 3 LUNCH DAYPART Figure 4 SNACK DAYPART Mar16 Apr16 May16 Mar16 Apr16 May16 Mar16 Apr16 May16 Figure 5 DINNER DAYPART Figure 6 DELIVERY % OF SALES Figure 7 ALCOHOL SALES MIX 45! 44.8! 44! 1.2! 1.1! 1.3! Mar16 Apr16 May16 Mar16 Apr16 May16 Mar16 Apr16 May16 Figure 8 APPETIZER SALES MIX Figure 9 DESSERT SALES MIX Figure 10 SOFT BEVERAGE SALES MIX Mar16 Apr16 May16 Mar16 Apr16 May16 Mar16 Apr16 May16 MILLERPULSE JUNE 2016 PAGE 3

4 GEOGRAPHY RESTAURANT PANEL PROFILE TOTAL SALES: $73 BILLION CASUAL DINING: 48% FAST FOOD: 32% FAST CASUAL% 20% NORTHEAST REGION: 25% SOUTH REGIONS: 25% WEST REGION: 25% MIDWEST REGION: 25% MAY 2016 HIGHLIGHTS BEST PERFORMING REGIONS MIDWEST: +1.3% WORST PERFORMING REGIONS TEXAS: 2.9% Figure 11 MAY 2016 SALES NATIONAL: 0.3% QSR: (0.2%) Casual Dining: 0.8% WEST: 0.4% QSR: (0.2%) Casual Dining: 1.0 MIDWEST: 1.3% QSR: 1.0% Casual Dining: 1.7% NORTHEAST: 0.3% QSR: 0.1% Casual Dining: 0.6% CA: 0.2 QSR: 0.1% Casual Dining: 0.3 SOUTH: (0.1%) QSR: Casual Dining: (0.2)% TX: (2.9%) QSR: (3.1%) Casual Dining: (2.6%) FL: (0.5)% QSR: (1.6%) Casual Dining: 1.1% MILLERPULSE JUNE 2016 PAGE 4

5 INDUSTRY THE DRUMBEAT OF WEAKER RESTAURANT SALES REMAINS STEADY The wearisome trend of weak same store sales and eroding traffic continued in May. Same store sales were +0.3% in May, or 40 bps below April. The 2year sales trend fell an equal amount compared with last month, or 40 bps to +3.5%. Weekly trends are still showing a slowing trend. The 4 week rolling average declined in three of the four weeks of the month, the exception being the boost from a later Memorial Day in the final week of the month. Industry traffic hit another low mark for the year, falling another 30 bps to 1.9. It s hard to see what could reverse this trend as the pressure from oversupply and aggressive grocery pricing are not shortterm issues. Traffic also eroded on a 2year basis to 2.1% in May versus 1.4% in April. Figure 12 INDUSTRY SAME STORE SALES CONTINUE THEIR SLIDE 7.0% 6.0% 5.0% 3.0% 3.3% 1.0% 0.2% 1.0% Feb14 Mar14 Apr14 May14 Jun14 Jul14 Aug14 Sep14 Oct14 Nov14 Dec14 Jan15 Feb15 Mar15 Apr15 May15 Jun15 Jul15 Aug15 Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 Apr16 May16 SSS 1YR SSS 2YR MILLERPULSE JUNE 2016 PAGE 5

6 QSR A ONE WAY STREET FOR QSR SAME STORE SALES: LOWER! Sales for the average QSR stayed barely positive at +0.5% May compared with +1.0% last month. The bright spot is QSR was lapping a hard comparison and thus the 2year sales trend stayed roughly flat at. The downward trend over the 18months has us worried about the future of this segment. This is especially true as pricing power is being eroded by heightened competition in the grocery channel. QSR traffic trends were down 1.6% in May. This was the lowest traffic reading in the last two years. Figure 13 YIKES! IS QSR SET TO BREAK THE NEUTRAL LINE? 7.0% 6.0% 5.0% 3.0% 0.5% 1.0% 1.0% 1.6% Feb14 Mar14 Apr14 May14 Jun14 Jul14 Aug14 Sep14 Oct14 Nov14 Dec14 Jan15 Feb15 Mar15 Apr15 May15 Jun15 Jul15 Aug15 Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 Apr16 May16 SSSQSR GTQSR MILLERPULSE JUNE 2016 PAGE 6

7 QSR QSR SANDWICH/BURGER WAS TOP DOG IN MAY Sales in Sandwich/Burger shone bright in May, gaining +20 bps to rest at +1.3%. While positive, and a far cry better than other segments this month, Sandwich/Burger is showing cracks as its well off its 2015 highs. Traffic followed a similar path, becoming less negative +30 bps to 0.5%, which is hard to get excited about. 6.0% 5.0% 3.0% 1.0% 1.0% 3.0% Feb14 Mar14 Apr14 May14 Jun14 Jul14 Aug14 Sep14 Oct14 Nov14 Dec14 Jan15 Feb15 Mar15 SSSQSR Apr15 May15 Jun15 Jul15 Aug15 GTQSR Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 1.3% 0.5% Apr16 May16 QSR CHICKEN FALLS FROM ITS PERCH Like most segments, Chicken saw a decline in May, falling 200 bps to +1.0%. We re not crowing about these results as the 2year fell as well 170 bps to +6.7%; but they remain positive so we ll take it. Traffic was negative fir the first time in the last three months, dipping 410 bps to 1.1% % 6.0% Feb14 Mar14 Apr14 May14 Jun14 Jul14 Aug14 Sep14 Oct14 Nov14 Dec14 Jan15 Feb15 Mar15 SSSQSR Apr15 May15 Jun15 Jul15 GTQSR Aug15 Sep15 Oct15 Nov15 Dec15 Jan16 1.0% 1.1% Feb16 Mar16 Apr16 May16 MILLERPULSE JUNE 2016 PAGE 7

8 QSR QSR PIZZA/MEXICAN HOVERS SOUTH OF THE BORDER Sales for Pizza/Mexican were down for the 6 th straight month with May 30 bps worse than April at 0.9%. The compares, like the rest of QSR were hard as evidenced by the +4.3% 2year sales trend but still lower by 240 bps. Traffic could not find its way in May, slipping another 20 bps to down 3.6%. Ay Caramba! 1 8.0% 6.0% 6.0% 8.0% Feb14 Mar14 Apr14 May14 Jun14 Jul14 Aug14 Sep14 Oct14 Nov14 Dec14 Jan15 Feb15 Mar15 SSSQSR Apr15 May15 Jun15 Jul15 Aug15 GTQSR Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 0.9% 3.6% Apr16 May16 QSR OTHER Sales fall for the QSR Other segment cooled but remained positive. Sales slid 100 bps to +0.4% in May vs April. Both the 2year sales trend and guest traffic hit their lowest levels in over 2 years at +2.4% and 2.4%, respectively. No one segment in other stood out, as all saw a similarly weak trend relative to the prior month. 5.0% 3.0% 1.0% 1.0% 3.0% Feb14 Mar14 Apr14 May14 Jun14 Jul14 Aug14 Sep14 Oct14 Nov14 Dec14 Jan15 Feb15 Mar15 SSSQSR Apr15 May15 Jun15 Jul15 Aug15 GTQSR Sep15 Oct15 Nov15 Dec15 Jan16 0.4% 2.4% Feb16 Mar16 Apr16 May16 Note: QSR Other includes Asian, Coffee, Juice, Dessert, and Other. MILLERPULSE JUNE 2016 PAGE 8

9 C ASUAL DINING CASUAL DINING DIPS ITS TOE INTO NEGATIVE WATERS Casual Dining sales continue their gradual decent, easing another 20 bps to land in negative territory for the first time since Feb14 (down 0.2% in May). The upshot is the 2year trend held steady at + with the prior month. The bad news is that if this 2year trend continues Casual Dining sales will sink further into the abyss. Traffic was a relative bright spot. Casual Dining traffic improved +40 bps to 2.3% in May compared to April. The 2year traffic trend followed suit, rising +30 bps to come to rest at 3.0%. While it s hard to be pleased with negative year on year traffic, we ll look at this as a small victory for the struggling Casual Dining segment. Figure 14 CASUAL DINING SALES TURN NEGATIVE IN MAY AFTER PEAKING 16 MONTHS AGO 5.0% 3.0% 1.0% 0.2% 1.0% 2.3% 3.0% Feb14 Mar14 Apr14 May14 Jun14 Jul14 Aug14 Sep14 Oct14 Nov14 Dec14 Jan15 Feb15 Mar15 Apr15 May15 Jun15 Jul15 Aug15 Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 Apr16 May16 SSSCD GTCD MILLERPULSE JUNE 2016 PAGE 9

10 C ASUAL DINING CASUAL DINING GRILL & BAR NUDGES HIGHER Casual Dining Grill & Bar sales couldn t turn positive, better by +20 bps to 0.4%. The 2year trend also climbed higher +40 bps to + but was still near the weakest in almost two years. Traffic was flattish month over month at down 2.2%. Not so hot, since this level is near its worst levels. 6.0% 5.0% 3.0% 1.0% 1.0% 3.0% 0.4% 2.2% Feb14 Mar14 Apr14 May14 Jun14 Jul14 Aug14 Sep14 Oct14 Nov14 Dec14 Jan15 Feb15 Mar15 Apr15 May15 Jun15 Jul15 Aug15 Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 Apr16 May16 SSSCD GTCD CASUAL DINING FAMILY REMAINS A STANDOUT Sales for Family dining remain satisfying, up +30 bps to a +3.6% in May vs April. The 2 year trend slowed 140 bps but remained an impressive +8.8%. 8.0% 6.0% 3.6% 1.4% The only bad news is traffic in this segment remains negative, albeit less so at 1.4% in May vs 2.7% in April. That suggests Family is getting all of its growth from a higher average check, something that s not sustainable. Feb14 Mar14 Apr14 May14 Jun14 Jul14 Aug14 Sep14 Oct14 Nov14 Dec14 Jan15 Feb15 Mar15 SSSCD Apr15 May15 Jun15 Jul15 Aug15 GTCD Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 Apr16 May16 MILLERPULSE JUNE 2016 PAGE 10

11 CASUAL DINING CASUAL DINING OTHER SALES REMAIN LIMP Sales in the CD Other segment rose like the rest of the segment, but remained negative at 1.7% (+40 bps above April). Traffic told a similar story, rising month over month to 2.8% but still well below the neutral line. Maybe the best news is that the 2year rebounded from last months multiyear low of 3.3% to a less bad 1.1%. 3.0% 1.0% 1.0% 3.0% 5.0% 6.0% Feb14 Mar14 Apr14 May14 Jun14 Jul14 Aug14 Sep14 Oct14 Nov14 Dec14 Jan15 Feb15 Mar15 SSSCD Apr15 May15 Jun15 Jul15 Aug15 GTCD Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 1.7% 2.8% Apr16 May16 CD Other includes Italian, Mexican, Asian, Seafood and Other. MILLERPULSE JUNE 2016 PAGE 11

12 COMMODITIES Figure 15 MILLERPULSE INDEX Our overall commodity index fell 16% during May. Our index hit the lowest level since May 12, as beef and dairy prices continue to decline. The continued fall in beef prices has more than offset a rebound in oil prices. Still, we wouldn t be surprised if we are close to a bottom in commodity prices Feb14 Apr14 Jun14 Aug14 Oct14 Dec14 Feb15 MP Index Apr15 Jun15 Aug15 Oct15 Dec15 Feb16 Apr (5.0) (10.0) (15.0) () (25.0) Figure 16 STEERS INDEX Steers $126.6 per CWT in May, down 20.9% year over year (10.0) () (30.0) Feb14 Apr14 Jun14 Aug14 Oct14 Dec14 Feb15 Apr15 Jun15 Aug15 Oct15 Dec15 Feb16 Apr16 Steers Index MILLERPULSE JUNE 2016 PAGE 12

13 COMMODITIES Figure 17 GROUND BEEF INDEX Ground Beef at $1.99 per pound in May was down 18.8 % year over year (10.0) () (30.0) Feb14 Apr14 Jun14 Aug14 Oct14 Dec14 Feb15 Apr15 Jun15 Aug15 Oct15 Dec15 Feb16 Apr16 Ground Beef Figure 18 CHICKEN BREAST INDEX Chicken breast pricing finished at $1.63 per pound in May, down 20% year over year (5.0) (10.0) (15.0) () (25.0) (30.0) Jan14 Mar14 May14 Jul14 Sep14 Nov14 Jan15 Mar15 May15 Jul15 Sep15 Nov15 Jan16 Mar16 May16 Chicken Breast MILLERPULSE JUNE 2016 PAGE 13

14 COMMODITIES Figure 19 CHICKEN WING INDEX Chicken wings were $1.53 per pound in May, down 9.3% year over year (10.0) () (30.0) (40.0) Jan14 Mar14 May14 Jul14 Sep14 Nov14 Jan15 Mar15 May15 Jul15 Sep15 Nov15 Jan16 Mar16 May16 Chicken Wings Figure 20 BLOCK CHEESE INDEX 40 lb block cheese came in at $1.39 per pound in May, down 14.2% year over year Jan14 Mar14 May14 Jul14 Sep14 Nov14 Jan15 Mar15 May15 Jul15 Sep15 Nov15 Jan16 Mar16 May16 Cheese MILLERPULSE JUNE 2016 PAGE 14

15 COMMODITIES Figure 21 CORN INDEX Chicken wings at $3.76 per pound in May, up 7.6% year over year (10.0) () (30.0) (40.0) (50.0) Jan14 Mar14 May14 Jul14 Sep14 Nov14 Jan15 Mar15 May15 Jul15 Sep15 Nov15 Jan16 Mar16 May16 Corn Figure 22 PORK INDEX Pork cut out pricing rose 3.3% to $0.84 per pound in May () (40.0) (60.0) Jan14 Mar14 May14 Jul14 Sep14 Nov14 Jan15 Mar15 May15 Jul15 Sep15 Nov15 Jan16 Mar16 May16 Pork MILLERPULSE JUNE 2016 PAGE 15

16 COMMODITIES Figure 23 Milk Index Milk prices were $13.7 per CWT in May, down 13.5% year over year (10.0) 5.0 () (30.0) (40.0) Jan14 Mar14 May14 Jul14 Sep14 Nov14 Jan15 Mar15 May15 Jul15 Sep15 Nov15 Jan16 Mar16 May16 Milk Figure 24 NATURAL GAS INDEX Natural gas prices fell 32.4% to $1.92 per BTU in May () (40.0) (60.0) Jan14 Mar14 May14 Jul14 Sep14 Nov14 Jan15 Mar15 May15 Jul15 Sep15 Nov15 Jan16 Mar16 May16 Natural Gas MILLERPULSE JUNE 2016 PAGE 16

17 ECONOMICS US JOB MARKET HITS A ROUGH PATCH 8.0% % Jan16 Aug15 Oct14 Mar15 May14 Feb13 May13 Jul13 Sep12 Jan13 SSS Dec13 Apr12 Nov11 NFP Sep12 Jan11 Jun11 Aug10 Oct09 Mar10 Dec08 May09 Jul08 Feb08 Sep07 Apr07 1,000 Nov Jan06 The US added 43K jobs in May, marking the weakest print since The number was weak even adjusting for the Verizon strike (hurt ~35k). Does this reflect a weakening economy or one nearing full employment? We believe it s more likely the latter. Watch RDPI as it holds the answer. 600 Jun06 Non farm payrolls 79% correlated with restaurant same store sales CONSUMER CONFIDENCE SEES NICE POP MILLERPULSE JUNE 2016 PAGE 17 May16 Jan16 Sep15 May15 Jan15 Sep14 Jan14 May14 Sep13 May12 Jan12 Sep11 May11 Jan11 Sep10 May10 Jan10 Sep09 May09 Jan Sep May08 May confidence experienced a nice rebound from the choppiness and now sits 4% above last year at This is a welcome data point given the jobs data and recent fatigue seen in confidence Jan08 Consumer confidence 38% correlated with same store sales:

18 ECONOMICS GAS PRICES REMAIN FAVORABLE Gas prices are 15% correlated with restaurant same store sales: Gas prices continue to help the consumer, as prices at the pump sit 15% below last year s levels. That said, current prices at $2.27/gallon are well above the February low of $1.76/gallon and are now at the highest level seen since Aug Feb14 Mar14 Apr14 May14 Jun14 Jul14 Aug14 Sep14 Oct14 Nov14 Dec14 Jan15 Feb15 Mar15 Apr15 May15 Jun15 Jul15 Aug15 Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 Apr16 May16 FOODSERVICE SALES SHOW SIGNS OF FATIGUE National Association of Home Builder (NAHB) index is 45% correlated with food service sales: The NAHB index stood pat again at 58 in May (4th straight month). Despite the flat absolute numbers, the index is +7% above last year. Food service sales were solid at up +5.2% over last year, but remain at multiyear lows and are decelerating. Stabilization in this metric would be welcome Jan98 Sep98 May99 Jan00 Sep00 May01 Jan02 Sep02 May03 Jan04 Sep04 May05 Jan06 Sep06 May07 Jan08 Sep08 May09 Jan10 Sep10 May11 Jan12 Sep12 May13 Jan14 Sep14 May15 Jan16 NAHB Foodservice Sales % 6.0% MILLERPULSE JUNE 2016 PAGE 18