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Current Environment ............................................................................................ 1 Industry Profile .................................................................................................... 12 Industry Trends ................................................................................................... 15 How the Industry Operates ............................................................................... 21 Key Industry Ratios and Statistics ................................................................... 26 How to Analyze a Restaurant Company ......................................................... 28 Glossary ................................................................................................................ 33 Industry References ........................................................................................... 34 Comparative Company Analysis ......................................................... Appendix This issue updates the one dated September 2, 2010. The next update of this Survey is scheduled for September 2011. Industry Surveys Restaurants Erik B. Kolb, Restaurants Analyst March 3, 2011 CONTACTS: INQUIRIES & CLIENT RELATIONS 800.852.1641 clientrelations@ standardandpoors.com SALES 877.219.1247 [email protected] MEDIA Michael Privitera 212.438.6679 michael_privitera@ standardandpoors.com Standard & Poor’s Equity Research Services 55 Water Street New York, NY 10041
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Page 1: industry survey - restaurant 2011

Current Environment ............................................................................................ 1

Industry Profile .................................................................................................... 12

Industry Trends ................................................................................................... 15

How the Industry Operates ............................................................................... 21

Key Industry Ratios and Statistics................................................................... 26

How to Analyze a Restaurant Company ......................................................... 28

Glossary................................................................................................................ 33

Industry References........................................................................................... 34

Comparative Company Analysis ......................................................... Appendix

This issue updates the one dated September 2, 2010. The next update of this Survey is scheduled for September 2011.

Industry Surveys Restaurants Erik B. Kolb, Restaurants Analyst

March 3, 2011

CONTACTS:

INQUIRIES & CLIENT RELATIONS 800.852.1641 clientrelations@ standardandpoors.com

SALES 877.219.1247 [email protected]

MEDIA Michael Privitera 212.438.6679 michael_privitera@ standardandpoors.com

Standard & Poor’s Equity Research Services 55 Water Street New York, NY 10041

Page 2: industry survey - restaurant 2011

Topics Covered by Industry Surveys

Aerospace & Defense

Airlines

Alcoholic Beverages & Tobacco

Apparel & Footwear: Retailers & Brands

Autos & Auto Parts

Banking

Biotechnology

Broadcasting, Cable & Satellite

Chemicals

Communications Equipment

Computers: Commercial Services

Computers: Consumer Services & the Internet

Computers: Hardware

Computers: Software

Computers: Storage & Peripherals

Electric Utilities

Environmental & Waste Management

Financial Services: Diversified

Foods & Nonalcoholic Beverages

Healthcare: Facilities

Healthcare: Managed Care

Healthcare: Products & Supplies

Heavy Equipment & Trucks

Homebuilding

Household Durables

Household Nondurables

Industrial Machinery

Insurance: Life & Health

Insurance: Property-Casualty

Investment Services

Lodging & Gaming

Metals: Industrial

Movies & Entertainment

Natural Gas Distribution

Oil & Gas: Equipment & Services

Oil & Gas: Production & Marketing

Paper & Forest Products

Pharmaceuticals

Publishing & Advertising

Real Estate Investment Trusts

Restaurants

Retailing: General

Retailing: Specialty

Savings & Loans

Semiconductor Equipment

Semiconductors

Supermarkets & Drugstores

Telecommunications: Wireless

Telecommunications: Wireline

Transportation: Commercial

Global Industry Surveys

Airlines

Autos & Auto Parts

Banking

Food Retail

Foods & Beverages

Media

Oil & Gas

Pharmaceuticals

Telecommunications

Tobacco

Standard & Poor’s Industry Surveys 55 Water Street, New York, NY 10041

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STANDARD & POOR’S INDUSTRY SURVEYS (ISSN 0196-4666) is published weekly. Annual subscription: $10,500. Please call for special pricing: 1-800-852-1641, option 2. Reproduction in whole or in part (including inputting into a computer) prohibited except by permission of Standard & Poor’s. Executive and Editorial Office: Standard & Poor’s, 55 Water Street, New York, NY 10041. Officers of The McGraw-Hill Companies, Inc.: Harold McGraw III, Chairman, President, and Chief Executive Officer; Kenneth M. Vittor, Executive Vice President and General Counsel; Jack F. Callahan, Jr., Executive Vice President and Chief Financial Officer; John Weisenseel, Senior Vice President, Treasury Operations. Periodicals postage paid at New York, NY 10004 and additional mailing offices. Postmaster: Send address changes to Standard & Poor’s, Industry Surveys, Attn: Mail Prep, 55 Water Street, New York, NY 10041. Information has been obtained by Standard & Poor’s INDUSTRY SURVEYS from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, INDUSTRY SURVEYS, or others, INDUSTRY SURVEYS does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.

Copyright © 2011 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. STANDARD & POOR’S, S&P and S&P 500 are registered trademarks of Standard & Poor’s Financial Services LLC. S&P MIDCAP 400 and S&P SMALLCAP 600 are trademarks of Standard & Poor’s Financial Services LLC.

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INDUSTRY SURVEYS RESTAURANTS / MARCH 3, 2011 1

CURRENT ENVIRONMENT

Outlook 2011: will the positive momentum continue?

In our outlook at the start of 2010, we questioned if 2010 would bring “blue skies” to the restaurant industry, or if it would just be the “eye of the storm,” as we were somewhat suspicious of a meaningful recovery for the industry in 2010. Even though 2010 first-half sales were up only modestly (despite easy comparisons with the first half of 2009), it now appears that the industry has generally stabilized, and some restaurant companies are even growing.

In the second and third quarters of 2010, there was serious concern over a double-dip recession, and a pronounced stock market correction. Since September 2010, however, both the economic outlook and the stock market have improved. Home prices also seem to have stabilized, though the bottom nationwide may not be fully reached until spring 2011. We single out home prices and the stock market, as they are the primary stores of household wealth. The recent improvements in both have resulted in a notable uptick in consumer confidence. Indeed, the University of Michigan’s Index of Consumer Sentiment increased to 74.5 in December 2010, up 4.1% from November’s 71.6 and 10.0% from October’s 67.7. The January 2011 figure was about flat with December, at 74.2.

Although most economists feel that the US has definitively emerged from recession, Standard & Poor’s Equity Research thinks that some uncertainty still exists about the strength of the economy in 2011, particularly as it pertains to consumer spending in general and to spending in restaurants in particular. The withdrawal of monetary and fiscal stimulus at the federal level and austerity measures being taken by state and municipal governments are all black clouds on the economic horizon.

We believe that home prices, while not a direct causative factor in restaurant sales, are still an important influence for several reasons. First, homes had become a source of capital against which many people borrowed in order to maintain their lifestyles. Obviously, since the collapse in home values, this is no longer true; furthermore, those conditions are unlikely to come back anytime soon. Second, rising home values contribute to positive consumer sentiment, but with the outlook still uncertain, consumers aren’t likely to alter their spending habits significantly.

Economists have largely cheered the decline in the US unemployment rate, which stood at 9.0% in January 2011, down from 9.4% the previous month and the lowest level since April 2009. Standard & Poor’s believes that this drop reflects not only real improvements in the labor market, but also the withdrawal of workers from the labor force.

More importantly for restaurant sales expectations, further improvement in unemployment is expected to be slow. As of February 2011, Standard & Poor’s Economics Department was forecasting unemployment to average 8.9% for 2011. In our opinion, the major downside risk to this forecast is that many of the millions of people that the US Bureau of Labor Statistics (BLS) has determined are no longer in the workforce (i.e., “discouraged workers” who have given up on finding a job and, therefore, are not counted as unemployed) may start looking for work again. Including this group in the unemployment and civilian workforce calculations would mean a January 2011 unemployment rate of 11.2% (the BLS’s U-4 number). We also note that many of the newly employed this past December were part-time workers for the holiday season. Finally, many states are facing large deficits and may be forced to lay off more employees in order to close budget holes. While the federal stimulus package contained funds to aid state and local governments, many of these benefits are set to expire in 2011. Thus, the possibility that the unemployment rate will resume rising cannot be discounted, in our view.

Amid this backdrop, most economists expect the economy to grow in 2011. Standard & Poor’s expects GDP growth, job creation, and consumer spending to remain somewhat muted during the post-recession economic recovery. The recent recession clearly was the most difficult period in the history of the modern

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2 RESTAURANTS / MARCH 3, 2011 INDUSTRY SURVEYS

restaurant industry, in our view. Not only did it reshape the industry, but it also is likely to remain an influence on the industry’s fundamental vigor for years to come.

SALES IMPROVE AS AMERICANS DINE OUT ONCE AGAIN

As background information for our industry forecast for 2011, we note that 2010 sales, according to the National Restaurant Association’s 2010 Restaurant Industry Forecast, were estimated to reach $580 billion, a 2.5% increase (in current dollars) from the 2009 figure. After adjusting for inflation, however, sales in 2010 would be virtually flat with the previous year. Still, this is an improvement over the 1.2% and 2.9% declines in real (inflation-adjusted) sales experienced in 2008 and 2009, respectively. Standard & Poor’s estimates similar low-single-digit increases in traffic and mix changes (i.e., how often consumers visit a restaurant, and the effect of their menu choices on the average ticket) for 2010.

In 2009, sales totaled $566 billion and marked the first annual sales decline (in current dollars) experienced by the domestic restaurant industry in the four decades that the National Restaurant Association has been tracking this measure. This unprecedented decline followed a 3.2% increase in 2008 to $570 billion (as revised), which previously had been the industry’s worst annual sales performance. Only once before in the association’s tracking history—in 1991, another recession year—did nominal sales increase less than 4% a year. On an inflation-adjusted basis, the decline in industry sales in 2009 was 2.9%, almost spot on with our projection of a 3.0% decline.

Standard & Poor’s Equity Research forecasts that US foodservice industry revenues will increase 2.2% in 2011 to $582 billion. We expect menu price inflation of 1.0%, which we base in part on reports from numerous restaurant chains of their inability to raise prices, offset by our expectation for higher commodity

costs.

In other words, there appears to be little, if any, pricing power at restaurants following 2009’s price increase of 2.2%. In addition, we track the consumer price index for “food away from home,” as compiled by the US Bureau of Labor Statistics. This measure slowed to a 1.3% gain in 2010, from 1.8% in 2009 (versus 5.0% in 2008). We expect pricing to increase 1.5%–2.0% in 2011 because food commodity costs, particularly for protein and fruits and vegetables, are expected to rise. Our view is that restaurants will be largely unable or unwilling to raise prices much, if at all, for fear

of losing customers to the competition. This reluctance will result in further price moderation by the end of 2011, which leads us to our 1.0% price increase forecast.

There remains significant price competition in nearly every sub-segment of the restaurant industry, in our view. Chains on the high end have been more aggressive in actually cutting menu prices, while mid- and lower-tier chains—full-service as well as quick-service—have relied more on promotions, along with creating lower-price tiers on their menu. For example, in 2009, McDonald’s Corp. added several breakfast items to its dollar menu.

Table B01: Projected Foodservice Industry Sales

PROJECTED US FOODSERVICE INDUSTRY SALES(In billions of dollars)

-- % CHANGE --

2009- F2010-

2009 F2010 F2011 F2010 F2011

Commercial foodservice, total 517.3 520.4 531.8 0.6 2.2 Commercial eating & drinking places 1 399.0 399.6 408.6 0.2 2.2

Full-service restaurants 182.0 180.2 183.8 (1.0) 2.0 Limited-service restaurants 160.0 161.6 165.7 1.0 2.5 Commercial cafeterias 7.5 7.7 7.9 2.4 3.0 Social caterers 6.8 6.9 7.1 2.0 2.0 Snack & non-alcoholic beverages bars 24.2 24.4 24.8 1.2 1.5 Bars/taverns 18.5 18.8 19.3 1.5 3.0

Managed services 39.3 39.9 40.9 1.5 2.5 Lodging places 25.8 27.2 28.0 5.5 3.0 Other commercial sales 53.3 53.7 54.4 0.8 1.2

Institutional foodservice 2 46.4 47.2 48.4 1.7 2.6 Military foodservice 3 2.1 2.2 2.2 3.0 2.7

TOTAL US FOODSERVICE SALES 565.8 569.7 582.4 0.7 2.2

Note: Totals may not add due to rounding. F-Forecast. 1Only for establishments withpayroll. 2Sales by institutional organizations (including business) operating their ownfoodservice. 3Continental US only.

Sources: National Restaurant Association; Standard & Poor's forecasts.

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INDUSTRY SURVEYS RESTAURANTS / MARCH 3, 2011 3

We expect traffic to be up 0.5%–1.0% in 2011, which reflects company commentary in second-half 2010 and early 2011 on traffic, as well as our overall economic view that employment gains will be relatively modest through the rest of the year. We still expect diners to watch their consumption of appetizers, desserts, and higher-priced beverages; we think this should result in a 1.0% negative mix as part of the sales equation in 2011.

The end of federal stimulus clouds industry outlook for 2011 It is quite probable that the economic recovery since the third quarter of 2009 has been due largely to a boost to consumers and businesses from the American Recovery and Reinvestment Act of 2009 (ARRA), otherwise known as Stimulus II. In late February 2009, Congress passed the ARRA with a total size of $787 billion, of which about two-thirds was scheduled to be spent within 24 months.

It is likely that the ARRA’s effect on consumer spending has been somewhat larger than that of Stimulus I in 2008. Stimulus I had consisted of more than $100 billion in tax rebate checks for most Americans, which were sent out mostly in the second quarter of 2008. We think the positive (if temporary) effect that stimulus checks had on restaurant sales was seen in the US Census Bureau’s tally of monthly retail sales at food and drinking establishments. Restaurant sales growth held up generally well in 2008 until November, when sales growth slowed dramatically to 0.5% from a year earlier, and December, when sales were flat. This notable slowdown corresponded closely with the commencement of the sharp rise in joblessness, in our view.

Sales generally trended lower in the first half of 2009 as unemployment rose further, until the effects of ARRA began to be felt in the second quarter. Because ARRA’s stimulus worked through a reduction in monthly payroll taxes, rather than a one-time rebate check, its effects have likely been more diffuse as well. One can argue that the hundreds of billions in tax cuts, state aid, and infrastructure spending did have a positive material effect on employment in 2009, albeit by making the unemployment rate “less worse” than it otherwise would have been. On the other hand, one can make a case that most businesses still have substantial excess capacity and will more likely than not keep staffing at current levels, or seek to augment permanent staffing with temporary workers only where needed.

Additionally, states and localities that received aid did not actually increase payrolls and spending as much as envisioned. After using the aid to plug existing gaps in budgets, many states and municipalities are facing new holes in their fiscal plans, and are likely to enact more budget cuts for fiscal 2011. Cuts in government payrolls and the tax increases needed to balance state and local budgets could significantly offset the positive effects of ARRA.

In any case, it is likely that federal stimulus—barring Congressional action to extend or expand parts of the ARRA—will have little effect on the consumer beyond 2011. It was believed in some circles that a third round of stimulus was under consideration that would be more focused on job creation and education and training, but the Republican victories in the November 2010 Congressional elections now make this extremely unlikely. Indeed, it appears that spending will fall, while still-substantially Democratic delegations make sizable tax cuts also unlikely.

Against this likely backdrop, our industry outlook for 2011 is for a rather modest increase in sales. We expect overall traffic to be up slightly, with a shift from full-service restaurants to quick-service chains, as in 2010. We expect price increases to remain tough to come by, and expect consumers to continue eschewing extras such as appetizers, desserts, and more expensive beverages.

Has the savings rate peaked? One additional positive factor for consumer spending has been a drop in the savings rate. After hitting 5.9% in 2009, Standard & Poor’s estimates that the rate declined to 5.8% in 2010 and projects it will decline further to 5.6% in 2011. Such drops in the savings rate should prove a modest boon to restaurant companies on the theory that consumers who are saving less are likely spending more on discretionary purchases, such as dining out.

The savings rate, which averaged 2.6% in 2008, began to increase when consumers realized that their homes were no longer a sure store of wealth due to price declines and that more active saving was

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4 RESTAURANTS / MARCH 3, 2011 INDUSTRY SURVEYS

necessary. Although readings of the S&P/Case-Shiller Home Price Index improved throughout most of 2009 and 2010, the pace of improvements has slowed decidedly since May 2010, and even turned negative in October and November. Indeed, in November 2010 (latest available data), the 20-city index was still 28.6% below its peak in the spring of 2006, according to Standard & Poor’s. One theory for the modest weakening in prices blames the expiration (on April 30, 2010) of the $8,000 first-time homebuyers’ tax credit, which had been expanded to most homebuyers.

However, not all “savings” are created equal. Because of the way that savings are counted, a reduction in debt is equivalent in most cases to “savings.” Thus, when debt is either paid back or forgiven, there is no true money set aside. This statistical phenomenon has led to something of a paradox in 2010: as consumers simultaneously both increased spending and reduced their debt outstanding by a record amount, the savings rate bounced around roughly between 5% and 6%.

How can a record reduction in debt occur even as consumer spending is rising? What this most likely means is that in the aggregate, consumers are once again spending freely (although they won’t admit it), even as record amounts of debt are being written off under government-sponsored mortgage debt restructuring programs, as well as by private lenders. Anecdotally, stories abound of those who have kept their credit lines current in order to maintain their lifestyle, even as they have voluntarily defaulted on their mortgages.

Travel influences restaurant spending Another factor that has a pronounced effect on the restaurant industry, but does not receive as much attention as we think it should, is the current state of the travel industry. Travel has a significant impact on dollars spent on food consumed in restaurants. Smith Travel Research, an industry data source, predicts that the hotel occupancy rate had increased 5.3% in 2010, compared to a 9% decline in 2009. For 2011, the firm forecasts a further 1.6% increase in occupancy rates.

How important is hotel travel to restaurant sales? According to the National Restaurant Association’s 2007/2008 Operations Review, travelers and visitors in 2007 (latest available) accounted for a median of 15% of sales at quick-service restaurants, 20% at casual dining establishments, and 40% at fine dining restaurants. We believe the decline in travel-related restaurant meals over the last few years has been significant, due to less discretionary income available to consumers and business cutbacks on travel.

However, as the recovery continues and businesses once again become willing to spend on travel, we think restaurants will see a modest uptick in travel-based traffic. That said, we think travel is unlikely to be the large positive contributor to the restaurant industry in 2011 that it has been in the past.

RESTAURANTS FOCUS ON GLOBAL OPPORTUNITIES

Global expansion is nothing new for most US restaurant operators, especially those in the quick-service segment. Indeed, efforts by companies like Yum! Brands Inc. and McDonald’s to expand into the so-called BRIC nations (Brazil, Russia, India, and China) have been ongoing for over a decade now. More recently, other companies have entered these markets.

In January 2011, Starbucks Corp. generated headlines when it announced that it was expanding into India through a partnership with Tata Coffee Ltd., a division of the Tata Group conglomerate. The agreement will give Starbucks access to Tata Coffee’s sizable sourcing and roasting operations. In addition, the two will jointly develop Starbucks retail outlets, focusing first on upscale hotels and the like before moving into standalone retail outlets. Tata Coffee is the largest grower of plantation coffee in Asia and already India’s third largest exporter of instant coffee. Standard & Poor’s believes the agreement could significantly ramp up domestic distribution for Tata Coffee, as well as increase exports to surrounding regions.

In May 2010, Brinker International explained that once it completes efforts to stabilize US operations around its Chili’s and Maggiano’s Little Italy chains, it will focus on international expansion. In February 2011, Brinker opened its first Chili’s in Moscow and has plans to open 25 restaurants in Russia by 2017. The Chili’s chain entered India in mid-2009 and had four restaurants there as of this writing. According to an article in Nation’s Restaurant News, the company expects to open its first Chili’s in Brazil later in 2011.

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INDUSTRY SURVEYS RESTAURANTS / MARCH 3, 2011 5

CIVETS: the next BRICs? While the BRIC countries remain a key focus for many operators, especially those that were not part of the initial wave to invest in these nations, many restaurant companies are now pursuing efforts elsewhere. While we have seen a notable uptick in all geographic areas, specific targets now include a group of countries known as CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa) and the Middle East.

US-based restaurant companies seem drawn to the CIVETS countries for a number of the same reasons that previously brought them into the BRIC nations. First, and probably most important, economic prospects in these countries have been rapidly improving, with further growth and diversification likely to continue. Coupled with this growth is usually a motivated and sizable youth population that has growing disposable income and a desire to adopt the cuisine and other aspects of middle-class life. Finally, the CIVETS nations generally offer relative (or at least improving) political stability and capable financial systems that usually encourage foreign investments.

Colombia. Although its protracted battle against guerrillas demonstrates some of the risks associated with moving into less-developed regions, Colombia’s improving political stability and 16% annualized GDP growth over the past six years also show the appeal of such opportunities. One drawback is its relatively low population growth. According to an October 2010 article in Nation’s Restaurant News, Colombia has about 53,000 restaurants.

Indonesia. Though demand for fast food is growing rapidly in Indonesia, the biggest challenge for US restaurants is to adapt their menus (and the related supply chains) to a predominately Muslim culture.

Vietnam. According to the above-mentioned NRN article, Vietnam has about 530,000 foodservice establishments, of which about 430,000 are street stalls. With coffee companies holding the number one and two chain spots, the country seems ripe for opportunity. Yum Brand’s KFC, which has been in the country for a decade, has nearly 100 units in Vietnam.

Egypt. In addition to quick-service prospects, Egypt also has shown high demand for casual dining establishments. Indeed, Chili’s Grill & Bar (a division of Brinker International Inc.) and T.G.I. Friday’s (owned by Carlson Companies) have long been players in the Egyptian market, especially in Cairo. However, January’s political upheaval in Egypt, including widespread and violent rioting, points out the potential risks of operating in less-stable countries.

Turkey. With large cities like Istanbul and Ankara, Turkey has drawn considerable interest from US restaurants. It has the highest per capita GDP of the CIVETS countries, at about $12,750 per person.

South Africa. With what is likely one of the more foreign-investment–friendly economies in this group, South Africa continues to attract interest.

Middle East attracts restaurant companies Beyond CIVETS, the Middle East continues to draw new investments from restaurant operators, especially full-service operators, as evidenced by a number of recently announced projects. In October 2010, Darden Restaurants announced that it is partnering with Americana Group of Kuwait to bring at least 60 Red Lobster, Olive Garden, and LongHorn Steakhouse outlets to Bahrain, Egypt, Kuwait, Lebanon, Qatar, Saudi Arabia, and the United Arab Emirates over the next five years.

In January 2011, The Cheesecake Factory Inc. announced plans to develop 22 restaurants over the next five years in the Middle East, including the United Arab Emirates, Kuwait, Bahrain, Qatar, and Saudi Arabia, and potentially expanding into North Africa, Central and Eastern Europe, Russia, and Turkey.

LABOR AND COMMODITY COSTS REMAIN A KEY FOCUS FOR RESTAURANTS

The good news is that labor costs are likely to remain subdued, despite recent increases in the federal minimum wage. Record high unemployment for unskilled workers should prevent upward pressure on wages, even as the economy recovers.

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6 RESTAURANTS / MARCH 3, 2011 INDUSTRY SURVEYS

The federal minimum wage underwent a three-step increase from 2007 to 2009 totaling $2.10 per hour, bringing the federal minimum wage to $7.25 an hour on July 24, 2009. Nevertheless, labor costs remained subdued in 2009 and 2010 due to the large available labor pool amid record unemployment for unskilled, mostly young workers. Since most restaurant chains compete with many other employers for the same employees, the increases in the minimum wage have likely put upward pressure on wages even for employees making more than the minimum. Granted, the rise in unemployment greatly mitigated this pressure, but we believe labor costs are generally higher than they otherwise would have been.

We note that the increase in the minimum wage has affected some chains more than others. Some larger national chains, such as McDonald’s, already pay wages in excess of the mandated minimums to most of their employees. In addition, because numerous states already had a minimum wage that exceeded the new federal minimum, the impact of the increase was likely limited to those chains operating in states where the federal rate prevails. Chains like Texas Roadhouse Inc. that operate in regions where the average hourly wage is somewhat lower than the national average are likely to see labor costs rise more in line with the increase in the federal minimum wage.

Although the overall unemployment rate fell to 9.0% in January 2011, teenage joblessness remains stubbornly high. Moreover, the unemployment rate for teenagers—25.7% in January, up from 25.4% the previous month—could remain at sharply elevated levels if the restaurant industry and other employers of large numbers of unskilled or inexperienced workers remain cautious in hiring. This caution is reflected in the change in hourly wages in the leisure and hospitality industry: from September 2009 to September 2010, wages rose 1.5%, according to the Bureau of Labor Statistics.

Food commodity cost outlook remains elevated Most restaurants enacted only modest price increases in 2010 in an effort to preserve sales, regardless of the likely negative effect this might have had on profit margins. Unfortunately for most operators, the cost of most protein foods (i.e., meats, eggs, fish, and dairy) rose sharply during 2010, even as top-line growth returned for many companies. Because many publicly owned restaurant companies negotiate most of their

commodity purchases well in advance, however, the inflation in commodity costs may not have been entirely felt in 2010.

The National Restaurant Association estimates that average wholesale food costs rose 5% in 2010, with beef up 14%; pork up 33%; milk up 27%; cheddar cheese up 17%; and butter up 41%. It has a more benign view for broilers and eggs, with prices up only in the single-digit percentages. For 2011, the group sees beef up 1%–9% and cheddar up 1%–6%, with most other items up or down slightly.

Will restaurants be able to raise prices more than we expect to offset cost increases—both anticipated and unanticipated? We think the current environment, in which very little pricing power exists, will persist through

2011. The importance of price as a competitive factor is greater than at any time in the recent past, and we see no end to the trend.

According to the World Agricultural Supply and Demand Estimates report, published monthly by the US Department of Agriculture (USDA) and approved by the World Agricultural Outlook Board, expectations for accelerating growth in emerging market demand for many agricultural products has largely contributed to a resumption of rising expectations for commodity prices (demand in developed economies is relatively stable). Uncertainties persist due to the continued use of corn to produce fuel. In addition, other factors—

Chart H06: Beef Pork Poultry prices

70

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110

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1998 99 00 01 02 03 04 05 06 07 08 09 2010

Beef & veal Pork Chicken

BEEF, PORK AND POULTRY PRICES(Index, 1982=100)

Source: US Bureau of Labor Statistics.

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INDUSTRY SURVEYS RESTAURANTS / MARCH 3, 2011 7

such as protectionist movements in various countries, or unpredictable weather conditions such drought or excessive precipitation—could alter global supply and demand balances.

Following are current outlooks for various commodities from the USDA. Keep in mind that many restaurants, particularly large restaurant chains, purchase commodities on a forward basis or enter into hedges, so the prices they pay may differ from spot prices. In general, when spot prices are rising, prices actually paid may be lower than spot prices; conversely, when spot prices are falling, prices actually paid may be higher.

Wheat. After reducing acreage for 2010 plantings in response to stabilization of wheat prices in 2009, which in turn followed record highs in 2008, US wheat production for 2011 is expected to benefit from more ideal weather. Fortunately for US farmers, export demand has been stronger than expected due to lower yields in several key producing countries. Ending stocks are projected to be higher than earlier forecast as well. For the 2010/11 marketing year, farm prices are projected at $5.30–$5.70 per bushel, reflecting an increase from the previous estimate.

Corn. In recent years, farmers increased corn acreage: the use of corn to make ethanol for fuel raised demand and put upward pressure on prices. Due to the increase in acreage, stabilization in the amount of corn used to produce fuel, and a record crop of 13.2 billion bushels, corn prices have moderated and the outlook is more stable. In 2010, greater demand for fuel production offset lower exports. Farm prices in the current year are forecast at $4.90–$5.70 a bushel, compared with the 2009/10 average of about $4.75.

Rice. Of much greater importance in many other countries than in the US, global rice production improved in 2009 due to better weather in several of the primary producing countries. A poor harvest in 2008 did not keep pace with consumption in many places around the world, which led to export restrictions in several countries and other artificial market controls. The sharp increase in rice prices spurred US farmers to plant substantially more acreage (primarily of long-grain rice) in recent years. This resulted in record US rice production in 2010. Used perhaps more extensively by restaurants serving Mexican or Asian cuisine than at other restaurants, rice was expected to cost somewhat less in 2010/11 for both long-grain and short-grain product, and the record production forecast is further pressuring prices. The USDA projects the average farm price to fall to $10.50–$11.50 per hundredweight (cwt) for long-grain, from about $9.50 in 2009/10, and to $17.00–$18.00 per cwt for short-grain, from $17.50.

Oilseeds. A variety of crops are used to make oils, including soybeans, cottonseed, sunflower seed, canola, and peanuts. Over the past several years, domestic oilseed production declined as farmers shifted acreage to the corn used for fuel production. However, the drop in corn prices in 2009 caused a return to more acreage of oilseeds. Another product affecting the production and price of oils is soybean meal, which is used as an ingredient in processed foods and as livestock feed. Most soybeans are used to make either oil or meal, so relative pricing can cause a shift in production of the two. In 2009/10, growers maintained the acreage that was shifted back to soybeans from corn in 2008/09. Prices across the soybean complex in 2010/11 are expected to remain at or below the lower levels seen in 2009/10, although moderately higher export demand appears to have put a floor under price declines.

Livestock and poultry. The USDA expects beef production in 2011 to decrease about 1% from 2010. Prices are projected to rise 11%–14%. Pork production declined about 3% in 2010 and is forecast to rebound by 2% in 2011. Prices are likely to continue rebounding after falling sharply in 2009, most likely due to groundless “swine flu” concerns. (The H1N1 flu virus was never transferable from processed pork products to humans.) For producers of broilers, higher demand led to better pricing and an increase in production in 2010, and we see similar trends continuing in 2011. This compares to lower returns and reduced flock sizes in 2009. Turkey production is seen nearly flat, while prices are expected to be up about 12%. Egg production likely increased in 2010, and will continue to increase in 2011, reversing its gradual long-term decline. Prices were slightly lower in 2010, and we see a modest increase in 2011.

Dairy. Milk production is expected to rise slightly through 2011 in response to a rebound in prices. Production had been following prices lower: prices were hurt in part by lower export demand, which led to a shift in supply back to the domestic market. After falling by about a third in 2009 from its 2008 peak, the

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price of milk rebounded by about 24% in 2010 and will likely rise moderately in 2011. Cheese prices increased 15% in 2010, and are expected to climb a further 5%–10% in 2011. Prices for butter, nonfat dry milk, and dry whey (key ingredients in processed foods) also rebounded in 2010, and are on pace to increase again in 2011. A composite index of prices for various milk and milk byproducts, which are heavily used by restaurants and in processed foods, rose about 24% in 2010 to $15.92, from $12.84 in 2009. The level of this price index was $18.34 in 2008.

INDUSTRY CONSOLIDATION CONTINUES

In 2011, given our forecast of only modest sales growth for the industry and with cost pressures likely to intensify, we would expect more operators to fail. Indeed, industry research firm NPD Group Inc. announced in January 2011 that their US restaurant unit count had declined by 1% (a loss of 5,551 restaurants) in fall 2010 compared with fall 2009.

With more than 925,000 food service locations in operation—about one for every 330 people in the US—one can make a case that there are too many restaurants. The National Restaurant Association estimated that the number of restaurant locations held steady during 2009, signifying that the number of locations opening offset closures. We had thought that a material consolidation would take place in 2009, but it is likely that very low interest rates, landlords’ willingness to renegotiate lower rents (rather than lose a valuable tenant), as well as the sharp drop in commodity prices, helped save more than a few operators.

The list of operators that closed locations grew substantially through early 2009, but closings took at least a temporary hiatus that summer, propelled by cheap financing made possible by the Federal Reserve. In 2010, due to the Federal Reserve’s near-zero interest rate policy, several publicly traded restaurant companies, such as O’Charley’s Inc. and Ruth’s Hospitality Group Inc., were able to obtain new financing. As in those instances, the terms of new financings often carry reduced maximum borrowings and much higher interest rates, but less onerous operating covenants. We would characterize some of these deals as last-ditch efforts to buy some time for fundamentals to improve. Still, we believe time is quickly running out for companies to work out new “extend and pretend” financing with their creditors.

With so many kinds of restaurants with varying operating models, it is difficult to pinpoint how many restaurants the US can support, particularly during a severe economic downturn. With the recent recession turning out to be deeper and longer than the average post–World War II recession, one might consider a scenario where the industry would shrink to where there is one restaurant for every 350 people. This would entail the closure of about 70,000 locations, in our estimation. The average number of persons working at a restaurant is about 13.4 (though headcount varies tremendously across all the many types of restaurants in the industry). If 70,000 food service locations were to go out of business, about 940,000 of the nearly 13 million people working in the foodservice industry would lose their means of support.

FULL-SERVICE CHAINS: PRICES UNDER PRESSURE

Standard & Poor’s projects that sales at full-service restaurants will increase 1.5% to $178.7 billion in 2011, on a 1.0% increase in guest traffic, 1.5% higher average menu prices, and a 1.0% positive effect from mix changes. Our expectation of a 1.5% sales increase for this segment contrasts with the 2.5% increase that we see for the foodservice industry overall. We expect slightly improved unemployment, the modest return of business travel spending, and an overall feeling of improving certainty about the future of the economy to benefit full-service restaurants more than quick-service operators.

With guest traffic still likely to increase only modestly across nearly all full-service categories, from fine dining to family restaurants, managers will carefully weigh whether to absorb cost increases in order to minimize lost traffic, despite the potential that this will squeeze margins. Most likely, managers will be loathe to raise prices on their menus, choosing instead to effectively lower costs by reworking recipes or reducing portion sizes.

For casual dining, the sub-segment of the full-service category that perhaps enjoyed the greatest growth over the past decade, we think consumers have become very sensitive to the minimum and maximum prices in

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restaurants. Over the course of 2010, we think this resulted in consumers becoming price sensitive to $8 as the starting price point for entrées, whereas previously we viewed $10 as the level where consumers felt comfortable. For family dining, bar and grill, and buffet-style steakhouse chains, we think the new entry point may be $6, or as low as $5.

The price promotion that received perhaps the most attention during 2009 (and was repeated in 2010) was Denny’s Super Bowl XLIII ad promoting a free Grand Slam at all 1,500 Denny’s restaurants for an eight-hour period on the Tuesday following the game. In all, about two million Grand Slams were served, which, along with the commercial, cost about $5 million, according to the company. We think that this promotion, while expensive, instantly re-acquainted consumers with Denny’s and its value proposition (after years in which the chain appeared to struggle to connect) and also boosted repeat business. Denny’s purchased three ad spots during the 2010 Super Bowl and repeated the free Grand Slam promotion, which ran on February 9 from 6 a.m. to 2 p.m.

Other restaurants that provide higher-priced fare are also jumping on the value bandwagon through a variety of means. Prix fixe meals for 30%–50% off what they would cost à la carte help lure traffic at fine dining establishments. From the corner location of your favorite bar and grill, to that little undiscovered jewel that serves all your favorites, new smaller portion appetizers, entrées, and desserts are being offered to retain customers. Limited-time offers, such as coupons, special or “happy” hours, and the more timely “recession busters” and derivatives thereof, are a more direct approach to generating traffic based on price. Some chains prefer to appeal to a more specific target audience with family prices, based on four people, or “two-for” offers for couples.

Nevertheless, value is relative. Full-service operators, particularly at the very high end, have adopted a practice that seeks to offset, at least partly, the negative effect on profit margins of promotional activities used to attract the more price-conscious diner: sharply raising appetizer, side dish, and dessert prices, while keeping entrée and drink prices steady. For customers who aren’t as price sensitive, or simply don’t pay attention, these increases boosted their average check but avoided the “sticker shock” of large jumps in entrée prices. Other strategies for preserving business that were adopted during the recession are likely to be maintained, such as more emphasis on take-out and catering. Many operators have also reduced staffing, and may attempt to keep staffing low even as business turns up. This tactic is very risky, in our view, since it would probably hurt the service component of the full-service restaurant’s value proposition.

QUICK SERVICE: CUSTOMERS CHOOSE VALUE

Standard & Poor’s forecasts that the quick-service restaurant segment will perform relatively well overall in 2011, with a sales increase of 1.8% to $165 billion. The projected advance reflects virtually no menu price increase. We expect guest traffic to rise about 1.0%, partly reflecting a continuing of the trend for customers to trade down from full-service restaurants. We expect the breakfast and lunch day parts to continue to outperform the dinner day part. We expect a smaller negative mix shift of only about 0.25%, down from a larger negative mix effect in 2010, which we think was driven by more heavily promoted value menu options. We project the snack and nonalcoholic beverages segment, which often competes for the same customer but is much smaller than the quick-service category, will experience a sales increase of about 1.0% to $24.6 billion in 2011, on a 1.5% rise in traffic, no change in menu prices, and a 0.5% positive mix.

Reinventing fast food Fast-food chains have been focusing on under-served parts of the day in order to offset slumping traffic during the traditional lunch and dinner periods. The rationale is that rent and other costs are largely fixed, and some staffing is already required during off-peak periods. Thus, if additional gross profits on incremental sales from nontraditional day parts at least cover staffing costs during the off-peak periods, the increased attention makes sense.

The most prominent day part addition in recent years was the breakfast segment. The NPD Group has determined that breakfast accounted for 60% of traffic growth over the 2005–09 period (latest available), while lunch was flat and dinner traffic declined about 2% per year.

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Nontraditional day parts account for the rest of the increase in traffic. Chains such as Taco Bell and others have strong late-night business, promoting menu items that are easily transportable. McDonald’s, which has dominated breakfast, is fighting back against these upstarts. In 2010, McDonald’s upped the ante by adding a $1 breakfast value menu to its tiered breakfast menu (which has both value and premium items, just as its sandwich menu has). The company has added premium coffee drinks in its US restaurants and has started rolling out other specialty beverages, with a separate counter and additional staffing, in order to challenge beverage specialists such as Starbucks and Dunkin’ Donuts. As part of its commitment to offer healthier products, McDonald’s began selling fruit and maple oatmeal in January 2011.

Value menus squeeze margins These recent efforts notwithstanding, we believe rising costs and weak pricing power remain a key issue for the fast-food sector. Though food costs were relatively stable in 2008 and 2009, they climbed substantially in 2010 and may continue to do so in 2011.

With value menus now pervasive at most quick service and some lower-scale, full-service chains, we believe that competitive pressure on menu pricing is intense. We do not see pricing power reemerging any time soon. Customers have become accustomed to value-priced menu options. In addition to the lack of ability to raise prices, attempts to cut costs have been controversial. We cite an instance when, in response to record cheese prices in late 2008, McDonald’s removed one slice of cheese from the double cheeseburger on its value menu. In response, Burger King heavily promoted its $1 double cheeseburger with two slices of cheese—in ads that directly compared it with McDonald’s double cheeseburger with one slice. However, this addition to Burger King’s BK Value Menu caused some franchisees to sue to block the company from forcing them to sell this item for $1; Burger King eventually relented and raised the price to $1.19. The franchisees contended that their franchise agreements do not give the company any control over pricing.

As the low end of the full-service segment is downsizing menu items to compete directly with quick-service premium offerings in the $3–$5 price range, fast food operators are beginning to fight back. Burger King has opened Whopper Bars in select locations, such as airport waiting areas, where customers can custom-build their own burgers. A selection of beers is available at some Whopper Bars, with a burger and beer combo selling for about $8, which is very price competitive with neighborhood bar and grill menu offerings.

INDUSTRY’S EFFORTS ON REGULATORY, LEGISLATIVE MATTERS

The restaurant industry actively lobbies government and elected officials on a number of regulatory and legislative issues that are likely to affect the industry. The top issue that dominated the first year of the Obama Administration was healthcare reform. On March 23, 2010, President Obama signed into law the healthcare reform bill, known as the Patient Protection and Affordable Care Act (PPACA; H.R. 3590).

The healthcare reform bill appears to largely shield the restaurant industry from an increased reliance on employer-subsidized coverage, in favor of a system that would formalize greater responsibility by individuals for paying for coverage. While much of the legislation will not take effect for several years, we think the present status quo situation will continue. We do not expect a material change in the relatively higher rates of non-coverage within the restaurant industry relative to other industries, as well as in the differences in employer-paid coverage offered to supervisory and full-time employees versus nonsupervisory and part-time employees.

Another issue the industry has fought for years is menu nutrition labeling, but it appears that this battle may be close to being lost. Various state legislatures have passed laws requiring nutritional information on menus in most restaurants. As various courts subsequently upheld these laws following challenges by the restaurant industry, it has essentially come around to supporting what it views as the lesser of two evils: a national standard for menu labeling, rather than a different standard in each state.

On December 22, 2010, the US House of Representatives passed the Food and Drug Administration Food Safety Modernization Act. The legislation, which the Senate had passed earlier that week, was signed into law by President Obama on January 4, 2011. The National Restaurant Association was pleased with the signing of the bill. The new regulations center on preventing food-borne illnesses, rather than responding

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after an outbreak has already occurred. This bill comes after several prominent outbreaks over the past few years, involving salmonella in eggs and peanuts, and E. coli in spinach and other leafy greens. Better food safety would be a boon for the restaurant industry due to higher quality and safer ingredients. Further, better food safety would hopefully prevent future outbreaks, which are likely very expensive to remedy. That said, we note that some portions of the new law do not take effect for nearly 18 months.

Finally, immigration reform remains an issue that neither party in Congress, nor the administration, appears willing to consider. The National Restaurant Association supports immigration reform, to the extent it neither impinges on business’ ability to hire workers at will, nor increases the costs to verify that workers are eligible. These efforts would essentially shift most responsibility for worker verification from employers to border security and a “workable” employment verification system. In our view, the track record of border security in the US is questionable at best. An employment verification system, as we believe the industry trade group has proposed, would do little to thwart hiring of illegal workers. One could argue that any kind of employment verification system would possibly entail increasing penalties for businesses that fail to verify and that knowingly and repeatedly hire illegal workers.

One area where the restaurant industry is not bucking the trend in regulatory matters is on the environment. Most likely this is because the case is fairly strong that doing so often leads to lower costs. Some areas in which “going green” has caught on within the industry are sustainable building practices, switching to renewable energy sources, upgrading facilities with more efficient appliances and lighting, adoption of local sourcing of foods, and sustainable procurement practices.

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INDUSTRY PROFILE

Satisfying the consumer’s appetite

The US foodservice industry comprises a large and varied range of away-from-home eating facilities: everything from commercial eating and drinking places (restaurants, bars, cafeterias, and so forth) to food contractors and institutional providers. The National Restaurant Association, an industry trade group, estimates that overall US foodservice industry sales were $580 billion in 2010, up 2.5% from $565.7 billion in 2009. Given modest economic growth, Standard & Poor’s forecasts that revenues will rise a similar 2%–3% in 2011.

This Survey focuses on the restaurant sector of the foodservice industry. For additional details and industry breakdowns, see the “Projected US foodservice industry sales” table in the “Current Environment” section.

INDUSTRY SEGMENTS

The publicly traded companies that dominate the restaurant industry are varied. They range from fast-food operators, such as McDonald’s Corp., Burger King Holdings Inc., and Wendy’s/Arby’s Group Inc. (formed by the September 2008 acquisition of Wendy’s International Inc. by Triarc Companies Inc.), to companies that run full-service chains, such as Darden Restaurants Inc. (operator of the Red Lobster, Olive Garden, and LongHorn Steakhouse restaurants), Brinker International Inc. (operator of Chili’s Grill & Bar and Maggiano's Little Italy), and DineEquity Inc. (operator of IHOP and Applebee’s). There are also a few public companies in the fine dining sub-segment of the full-service part of the industry. More often, such

restaurants are traditionally run by individuals, families, or limited partnerships. They are typically located in cities or resort areas, and cater to business people, the affluent, and those who aspire to affluence.

Fast food Quick counter service, meals to eat in or take out, low prices, and plain décor are features common to fast-food (or limited-service) restaurants. These outlets tend to specialize in a few menu items: hamburgers, pizza, sandwiches, and/or chicken. Another trait of fast food outlets is that generally they do not serve alcohol. According to estimates by the National Restaurant Association, sales at limited-service establishments in the United States rose 1.5% in 2009 to $160.0 billion (28.3% of total 2009 US foodservice industry sales).

The fast-food industry is less fragmented than its full-service counterpart. This is

partly a result of the segment’s focus on quick service and price. Larger chains tend to have an advantage because their economies of scale allow them to develop the operational expertise to improve efficiency and speed transactions, and to purchase supplies more cheaply. Sales figures and comparisons that follow reflect the latest available data.

Sandwich chains. The main attraction at a sandwich chain is the hamburger. However, many chains offer a larger variety of main-course items, such as chicken and fish sandwiches. Many offer salads as a popular

Chart H04: Restaurant market shares

RESTAURANT MARKET SHARES—2009

Convenience store1.2%

Bakery café1.2%

Family5.1%

Coffee3.6%

Pizza6.1%

Chicken6.3%

Contract10.1%

Casual dining15.2%

Sandwich42.7%

Snack2.7%

Hotel2.9%

Buffet0.8% Other

2.1%

* Total sales are the combined domestic sales of the top 100 chains.Source: Nation's Restaurant News.

TOTAL: $205.7 BILLION*

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and healthy alternative to sandwiches. Tacos and burritos are also included in the sandwich category, and a number of chains have taken advantage of the tortilla’s portability to offer a variety of wraps. Nontraditional service hours, including the breakfast, snack, and overnight parts of the day, have been a major source of growth for sandwich chains in recent years. New menu items, such as dessert-like coffee drinks and fruit smoothies, are seen as a future source of growth, as well.

Several large competitors, with chains that are generally recognizable throughout the nation, dominate the sandwich chain category. With $30.0 billion in US sales in 2009, McDonald’s is the largest fast-food chain by a wide margin. However, the concept faces strong competition from Subway (operated by privately held

Doctor’s Associates Inc.; $10.0 billion), Burger King (about $9.0 billion), Wendy’s (approximately $7.9 billion), and Taco Bell, a division of Yum! Brands Inc. ($6.8 billion).

In 2009, annual sales at sandwich chains in NRN’s Top 100 averaged $1.09 million per unit, according to data from company reports and industry publication Nation’s Restaurant News (NRN). Company results varied widely. Among publicly held companies, McDonald’s was the leader, with an average of about $2.22 million in annual per-unit sales. However, a privately held company that made the list for the first time in 2008 topped the home of the Big Mac for the second straight year. Jason’s Deli, which has about 215 locations in 28 states, topped all sandwich chains with $2.25 million per location, while the predominantly California chain In-N-Out Burger was third with $2.19 million per unit. These three were the only sandwich chains to

top $2 million per restaurant. Other prominent sandwich chains in the Top 100 included fast-growing Chipotle Mexican Grill Inc. ($1.69 million), Jack in the Box Inc. ($1.41 million), and Wendy’s ($1.34 million).

Many Top 100 chains saw average unit sales fall in 2009 due to the recession. These included Jack in the Box, which dipped just over 1% to $1.41 million per unit, and White Castle, which saw a decline of over 5% to $1.31 million. We also note that the fastest growing chain in the country in 2009, Five Guys Burgers & Fries (45% expansion in 2009), bucked the trend, with a 14% increase in average unit sales to $1.08 million.

Some operators within the fast-food segment could also be considered part of the growing fast-casual segment. This group centers on meeting customers’ demand for speed, convenience, and quality—-all at a lower price point than at a full-service restaurant. Some of the largest and most successful players in this growing segment are Panera Bread, Chipotle Mexican Grill, and Five Guys Burgers and Fries. Standard & Poor’s expects the segment to remain a key area for potential growth and for full-service operators in particular to introduce new concepts. For example, P.F. Chang’s China Bistro has scaled down its concept for the Pei Wei brand, and Ruby Tuesday plans to open 200 Lime Fresh locations by the end of 2012. According to research firm Mintel, fast-casual sales totaled about $23 billion in 2010, up 30% from 2006’s tally, and we expect substantial growth to continue in coming years.

Pizza. The nation’s largest purveyor of pizza is Pizza Hut, a division of Yum Brands (US sales of $5.00 billion in 2009), followed by Domino’s Pizza Inc. ($3.10 billion). Papa John’s International Inc. ($2.09 billion) and Little Caesars (a division of Ilitch Holdings Inc.; about $1.19 billion) also are large, nationally known pizza concepts. These four account for 87% of the aggregate sales in the pizza chain restaurant segment.

Table B02: largest restaurant chains

LARGEST US RESTAURANT CHAINS(Ranked by 2009 US systemwide foodservice sales)

------ US SALES (MIL.$) ------ ----------- US UNITS ----------

CHAIN 2008 2009 % CHG. 2008 2009 % CHG.

McDonald's 29,988 31,033 3.5 13,918 13,980 0.4Subway 9,638 9,999 3.8 21,881 23,034 5.3Burger King 9,152 8,882 (3.0) 7,233 7,263 0.4Wendy's 8,009 7,919 (1.1) 5,905 5,877 (0.5)Starbucks 7,755 7,415 (4.4) 10,992 10,553 (4.0)Taco Bell 6,700 6,800 1.5 5,588 5,604 0.3Dunkin' Donuts 4,955 5,110 3.1 6,395 6,566 2.7Pizza Hut 5,500 5,000 (9.1) 7,564 7,566 0.0KFC 5,200 4,900 (5.8) 5,253 5,162 (1.7)Applebee's 4,487 4,373 (2.5) 1,875 1,868 (0.4)Chili's Grill & Bar 3,961 4,000 1.0 1,292 1,297 0.4Sonic Drive-In 3,811 3,837 0.7 3,475 3,544 2.0Olive Garden 3,271 3,365 2.9 685 717 4.7Chick-fil-A 2,962 3,217 8.6 1,423 1,480 4.0Domino's Pizza 3,057 3,097 1.3 5,047 4,927 (2.4)Jack-in-the Box 3,048 3,072 0.8 2,158 2,212 2.5Arby's 3,254 2,983 (8.3) 3,633 3,596 (1.0)Dairy Queen 2,600 2,640 1.5 4,584 4,540 (1.0)Panera Bread 2,447 2,579 5.4 1,197 1,251 4.5IHOP Restaurants 2,419 2,511 3.8 1,380 1,433 3.8Source: Nation's Restaurant News .

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Two newcomers that joined the Top 100 list of pizza purveyors in 2008 saw mixed results in 2009. Papa Murphy’s Take ‘N’ Bake Pizza saw sales rise 8% to $626 million in 2009, by offering pizza (with the customer’s choice of toppings) that is then taken home and cooked. The mostly franchised chain has nearly 1,175 locations in 32 states and Canada. Not faring as well was CiCi’s Pizza ($564 million), which saw sales dip 3%. CiCi’s takes the pizza concept in a completely opposite direction by offering an all-you-can-eat pizza, pasta, salad, and dessert buffet for about $5, as long as you like the selections that CiCi’s offers.

The pizza segment continued to struggle in 2009 to find the right balance of promotions and pricing to keep both customers and profits. Top-ranked Pizza Hut was the biggest loser in the market share battle, as its US systemwide sales fell 9% in 2009.

Chicken. KFC Corp. (a division of Yum Brands) is the leader in this category, with US systemwide sales totaling an estimated $4.90 billion in 2009. KFC stumbled again

in 2009 as sales fell for the second year in a row, while the next largest competitor, Chick-fil-A Inc. ($3.22 billion) saw sales rise 9%. Revenue growth at Chick-fil-A has increased more quickly than at its competitors over the past several years, fueled by aggressive expansion and high customer satisfaction scores, especially for speed of service. The latter is a category in which the company maintains the highest scores in the fast-food industry. Other competitors include Popeye’s Chicken & Biscuits (operated by AFC Enterprises Inc.; $1.49 billion) and Church’s Chicken (operated by Cajun Operating Co.; $858 million).

Full service All full-service restaurants offer some form of table ordering, though their price points range from low to high. These restaurants have much higher per-unit sales volume, on average, than do fast-food outlets. According to the National Restaurant Association, sales at full-service restaurants totaled about $182.0 billion in 2009, down 3.9% from 2008. Sales at full-service eateries accounted for 32.1% of total US foodservice industry sales in 2009.

Casual dining. Casual dining chains (also referred to as the dinnerhouse segment) encompass a host of restaurant types, including seafood, Asian, and Italian. The top 10 chains based on sales had mixed results in 2009, with five showing sales gains and five showing declines. Based on total systemwide sales, Applebee’s Neighborhood Grill & Bar (operated by DineEquity Inc.) leads the segment ($4.37 billion in 2009), followed by Chili’s Grill & Bar (operated by Brinker International; $4.00 billion in the fiscal year ended June 2008), Olive Garden (operated by Darden Restaurants Inc.; $3.36 billion), Red Lobster (also a Darden-owned brand, $2.46 billion) and Outback Steakhouse (operated by OSI Restaurant Partners LLC; $2.25 billion).

Only one of the top 10 casual dining chains ranked by average per-unit sales—Chili’s Grill & Bar—saw an increase in average unit sales in 2009, with a 0.5% gain, according to data from Nation’s Restaurant News. Measured by average per-unit sales, The Cheesecake Factory Inc. was No. 1, with $9.58 million sales per unit in 2009. Olive Garden ($4.90 million per unit) moved into second place, switching places with P.F. Chang’s China Bistro Inc., which fell to third ($4.79 million). Rounding out the top five were Red Lobster ($3.70 million) and Texas Roadhouse ($3.68 million).

Table B03: FASTEST-GROWING US RESTAURANT CHAINS

FASTEST-GROWING US RESTAURANT CHAINS(Ranked by percentage increase in foodservice revenues)

% CHANGE IN

----- REVENUES -----

FISCAL PREV. CURRENT

YEAR END YEAR YEAR

Five Guys Burgers and Fries Dec-09 74.3 69.0Buffalo Wild Wings Grill & Bar Dec-09 20.9 20.4Chipotle Mexican Grill Dec-09 22.3 14.0Chick-fil-A Dec-09 12.2 8.6Zaxby's Dec-09 18.0 8.2Bojangles' Famous Chicken 'n Biscuits Dec-09 8.2 8.1Papa Murphy's Take 'N Bake Pizza Dec-09 16.1 7.8Panera Bread Dec-09 16.3 5.47-Eleven Dec-09 3.4 4.5Steak n Shake Sep-09 (4.9) 4.0IHOP Restaurants Dec-09 4.4 3.8Subway Dec-09 17.2 3.8Panda Express Dec-09 15.5 3.7McDonald's Dec-09 4.9 3.5Dunkin' Donuts Dec-09 3.8 3.1In-N-Out Burger Dec-09 5.3 3.0Wawa Dec-09 2.6 3.0Olive Garden May-10 7.3 2.9Texas Roadhouse Dec-09 9.5 2.6Golden Corral Dec-09 (0.7) 2.5Source: Nation's Restaurant News .

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Family restaurants. A family restaurant aims to appeal to customers of all ages by offering a relaxed atmosphere, low prices, and menus geared to both children’s and adults’ palates. These restaurants are sometimes referred to as “midscale.” Category leader International House of Pancakes/IHOP, operated by DineEquity Inc. (systemwide sales of $2.51 billion in 2009), grew despite the tough economy in 2009, while second-place Denny’s (a division of Denny’s Corp.; systemwide sales of $2.16 billion) saw its sales decline. Cracker Barrel Old Country Store (a division of CBRL Group Inc.; $1.88 billion) was in third place with nearly flat sales growth in its latest fiscal year.

On a sales per unit basis, Cracker Barrel led this segment, averaging an estimated $3.22 million per unit in the fiscal year ended July 2009. This was well ahead of IHOP ($1.76 million per unit), Bob Evans restaurants (operated by Bob Evans Farms Inc.; $1.73 million per unit), Perkins Restaurant and Bakery (a division of Perkins & Marie Callender’s Inc.; $1.60 million per unit), and Steak ’n Shake ($1.48 million per unit).

Coffee/Snack. These chains have grown up specializing in one or just a few particular food or beverage items, although menu expansion has almost always been tried as a way to spur growth. Starbucks Corp. is perhaps the best example of a restaurant chain thriving in the specialty area of the industry. With about 10,500 locations in the United States, sales in the US were approximately $7.56 billion in its fiscal year ended September 2010. While Starbucks does sell food, the company specializes in coffee products. Other examples of chains specialized by product include Dunkin’ Donuts ($5.11 billion) and Baskin-Robbins ($578 million), both owned by Dunkin’ Brands Inc., and Krispy Kreme Doughnuts Inc. ($464 million).

Other Within the restaurant industry, there are chains that do not easily fit into specific categories, due to the kind of product they sell or the way in which they serve the product. Examples include bars and taverns, caterers, and snack and beverage bars. These loose categories accounted for sales of approximately $57.0 billion in 2009, or about 10.0% of total US foodservice sales.

INDUSTRY TRENDS

The restaurant industry is highly competitive. This has forced operators to find ways to continue to boost market share, to find and retain employees, and to control costs, as they strive to maximize profits.

SALES TRENDS FINALLY STABILIZING AFTER YEARS OF DECLINES

In 2009, 59 of the top 100 restaurant chains reported lower sales, but by the third quarter of 2010, industry sales indicated the industry was finally stabilizing, and that a number of companies were even growing. This

comes after years of declines that likely stabilized in 2010. According to industry research firm Technomic Inc., total foodservice sales likely increased 0.3% in 2010 in nominal terms, but declined 1.2% when adjusted for inflation.

Despite the stabilizing trends, many companies are still recovering and repositioning after the downturn. The lack of top-line growth over the past few years has led to a greater focus on the availability and use of capital. This represents a marked change for an industry that has traditionally had ready access to capital from banks and in the capital markets.

In recent years, numerous companies, such as Dunkin’ Brands, Sonic Corp. and Domino’s

Chart H01: US FOOD SALES GROWTH

US FOOD SALES GROWTH (In billions of dollars)

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1984 86 88 90 *92 94 96 98 00 02 04 06 08 2010

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Eating & drinking places All food stores

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Pizza, voluntarily underwent leveraged recapitalizations. Many others were taken private in similarly leveraged transactions by private equity groups. Underlying these strategies was the premise that growth would reduce financial risk over time, and that higher debt would always result in a higher return on equity.

Indeed, a wave of deals in 2010 demonstrates that private equity groups have developed a taste for the industry, though given the sector’s recent run-up in valuation, it remains to be seen whether this trend will continue. The largest of these deals was 3G Capital’s $4 billion takeover bid for Burger King, announced in September 2010 and completed in November 2010. Other firms that saw bids in 2010 include On the Border, Papa Murphy’s, and Rubio’s. Meanwhile, Wendy’s/Arby’s Group put the Arby’s sandwich chain on the auction block in January 2011, just days after Yum Brands announced it was seeking a buyer for Long John Silver’s and A&W All-American Food Restaurants. It remains to be seen if buyers emerge for these properties and, if so, what they are willing to pay.

Clearly, flat GDP growth in 2008 and a 2.6% decline in 2009 have demonstrated the risk in this premise. Most restaurant operators now take a longer-term view when considering changes in their capital structure. Most are increasing the cash that they hold, paying down debt taken on earlier to grow, or buying back stock. Now that trends seem to be stabilizing, many have resumed expansion plans, but the recent downturn has left its mark. Most capital projects now are focused on more modest efforts and utilize less aggressive funding methods. Indeed, cash flow is once again a key driver of near-term operations and prospects.

COMPETING FOR CUSTOMERS

To improve or simply maintain market share in the competitive restaurant industry, companies employ strategies to improve consumer choice, convenience, and value. Techniques include adding cuisine types, discounting prices to attract customers, expanding takeout service, and using technology to improve customer satisfaction. Restaurants are also extending their menus to draw in both value-conscious and premium customers. More fast-food chains are offering breakfast options, and many are catering to a late-night clientele by extending operating hours.

Driven by demographic changes, many restaurants have begun to diversify their menus across various cuisine types. For instance, with the Hispanic and Asian-American segments growing at a faster pace than the overall US population, many restaurants are developing new products to target these groups’ tastes, often attracting other customers in the process.

Hispanic market in focus The Hispanic market has become increasingly important to the restaurant industry, reflecting this community’s growing influence in the US economy. According to the US Census Bureau, nearly 16% of the US population (about 48 million people) identify themselves as Hispanic or Latino. At recent growth rates, the group is expected to rise to 25% of the population within several decades.

However, a recently published study by the US Census Bureau suggests that Hispanic households have somewhat lower disposable incomes relative to other groups, particularly after accounting for housing expenditures. (The study found that Hispanic households on average spent more of their income on housing.) Even after adjusting to equalize household incomes for ethnic groups, the data showed that Hispanic households still spent more on housing.

While the study did not pursue this line of thought, one could hypothesize that this preference or desire for home ownership would result in lower remaining income being available for spending on other types of goods and services, including on food away from home. It remains to be seen if Hispanic households will maintain this preference or if the severe housing recession has altered it. (We also note this same question could be posed for Americans in general.) Moreover, the study did not differentiate among multi-generational Hispanic-American households, and recently immigrated Hispanic households.

Many restaurant concepts have adjusted their menu selections to cater to this group. Moreover, the flavors of the cuisines of diverse Hispanic cultures have influenced American food tastes broadly. Yum Brands Inc. and Jack in the Box have stepped up pursuit of the Mexican-inspired market through their Taco Bell and

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Qdoba chains, respectively, while Chipotle Mexican Grill has developed the niche for Mexican food made with locally grown fresh and organic ingredients.

Besides menu development, each of these companies has increased its sophistication with respect to marketing, hiring, and recruiting franchisees with advanced knowledge of the broad and diverse Hispanic community. McDonald’s is the fifth highest ranked spender on Hispanic media spending. Wendy’s is actively pursuing Hispanic customers in its marketing program through media sources that are popular with this group. Jack in the Box offers classes in English as a second language to attract Hispanic employees.

Brands come and go The industry downturn has resulted in a substantial retrenchment in the trend of restaurant companies developing multiple brands. Popular in the 1990s and earlier in this decade, multiple concepts were favored for two main reasons. First, adding new concepts can boost long-term growth in sales and earnings: because customer tastes are fickle, companies must come up with new ideas to stimulate demand. Second, the strategy gives a company the advantages of diversification, as success in some of its concepts can provide a buffer against poor performance in others.

In several notable instances, however, these multi-brand strategies were not successful enough or failed to satisfy impatient investors. For example, McDonald’s divested Chipotle Mexican Grill and Boston Market, and Wendy’s divested Tim Horton’s and Baja Fresh. Perhaps, in some cases, the problem resulted from a clash of cultures between a relatively large and conservative parent brand and a quick-on-its-feet upstart brand that was more interested in top-line growth than short-term profits.

Other companies have been adding and shedding concepts at the same time. Darden Restaurants Inc. decided to sell Smokey Bones Barbeque & Grill at approximately the same time that it acquired RARE Hospitality International Inc., operator of Longhorn Steakhouse. Some fast-food purveyors have been more successful with their multi-concept strategies. Jack in the Box Inc.’s Qdoba has more than quadrupled the number of restaurants in operation since Jack in the Box acquired it in 2003.

Yum Brands has taken the multi-concept idea a step further, seeking to “multi-brand” individual restaurants by incorporating more than one concept under a single roof. The company believes that by combining two or more of its major concepts (Taco Bell, KFC, Pizza Hut, Long John Silver’s, and A&W), it will draw customers to its locations by creating more choice. It also expects to leverage additional sales against each location’s fixed costs, especially real estate. Yum Brands believes that multi-branded sites achieve 20%–30% higher sales, on average, and derive at least a 30% increase in average cash flow per site. This idea is being taken a step further by Tim Horton’s, the predominantly Canadian coffee shop chain, which is co-branding locations with those of the Cold Stone Creamery ice cream parlor chain owned by privately held Kahala Corp.

Private equity firms were active in acquiring multiple restaurant brands, in the hope that common oversight might create synergies and potential cost savings, as well as reduce risk to the parent company and its affiliated investors through diversification. However, it appears these deals often were based primarily on low-cost capital and overstated business strategies. In our view, the recent bankruptcy filings for the Uno Restaurant Holdings, Bennigan’s, and Steak & Ale chains, as well as the company that owns Village Inn and Bakers Square will likely not be the only private equity–related bankruptcies before the current industry downturn ends.

Easier than home cooking The home meal replacement (HMR) market is of particular interest to restaurant operators, as a way to increase sales with incremental or, in some cases, no additional capital investment. We believe the strong demand for takeout food, prepared and packaged for busy customers to eat at home, should continue to grow solidly over the next few years. According to Technomic Inc., a market research firm, takeout sales account for about 60% of total sales at limited-service chains.

Although takeout has always been a focus for quick-service restaurants, it has received similar attention from casual-dining operators only in recent years. The constant drive to increase the return on assets has

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spurred full-service chains to invest significant sums to improve pick-up access and packaging, and on menu development. According to Technomic, takeout food has been growing about twice as fast as the overall restaurant industry. A leader in this category was Outback Steakhouse, which has aggressively sought takeout customers by retrofitting its units to serve them. Applebee’s has significantly improved takeout packaging and rolled out curbside delivery service at its restaurants. It also has begun to test technology that would enable it to use handheld remote devices to accept credit cards for payment.

The buffet restaurant segment is also increasingly emphasizing takeout. Golden Corral Corp. has rolled out “Golden to Go” takeout stations and reserved parking for takeout buyers at many of it locations, charging customers by the pound. Luby’s Inc., where takeout accounts for about 15% of systemwide sales, has adopted a new cafeteria prototype with curbside-to-go service. Buffets Holdings Inc., which owns the Ryan’s Grill & Buffet Bakery chain and others, is looking for ways to introduce takeout to its all-you-can-eat buffet formats. The challenge for many of these chains is not to undermine the existing concept by cannibalizing sales or disrupting the normal operating flow of the restaurant.

Although an increasing number of restaurants are seeking ways to win in the growing and lucrative carryout market, success in this sector is not guaranteed, and pitfalls are manifold. Competition is everywhere—from local food stands to casual restaurants to supermarkets that offer takeout and delivery.

In serving the takeout market, supermarkets have some advantages: a successful formula that they have used for years, and experience in managing food spoilage and wastage to avoid hurting profitability. In contrast, restaurants are relatively inexperienced in this business segment and are bound to have difficulty in gauging demand, average order size, and quantity of food to order and prepare. They also have the disadvantages of higher cost structures and labor costs that comprise a higher percentage of sales. The higher labor costs and food wastage can erode their profitability in the takeout sector.

Standard & Poor’s anticipates that, over time, full-service casual dining and fast-growing quick-casual chains will gain a larger share of this market. However, we think they will remain second to limited-service chains, where takeout has always been a significant part of the business. Supermarkets will likely remain major players in takeout food and a potent threat to restaurants, given their numerous regular customers and convenient locations.

FAST-FOOD CHAINS MOVE OVERSEAS

Quick-service restaurants have been expanding rapidly overseas. Yum Brands generated over 50% of systemwide sales from overseas markets in 2009, with about 10% of sales coming from Mainland China. McDonald’s revenue base is just as diversified, if not more so. In 2009, about 43% of its systemwide sales were from the US; Europe accounted for about 29%; and Asia/Pacific, the Middle East, Africa, and other countries, primarily the Americas ex-US, 28%.

Nevertheless, success in the global markets has not been without difficulty. In Europe, for example, chains found that sales growth from 2003 through 2005 did not rebound as quickly as in the US due to a less robust economic recovery. Sales growth was healthier from 2006 to 2008, with nearly all the primary international operators touting pacesetting foreign sales, but 2009 was a difficult year, in our view.

China and the other BRIC countries (Brazil, Russia, and India) are increasingly targeted by restaurant companies. China, in particular, has been a key focus, and about one-fourth of the net increase in new restaurants at McDonald’s during 2009 was in China. The company is currently focusing on drive-through outlets there, which it says are critical to its long-term development in China. In 2006, McDonald’s entered a strategic alliance with Sinopec Shanghai Petrochemical Co. Ltd., China’s largest gas retailer, in an effort to take advantage of the trend of rising car ownership in China.

The dominant overseas player in China remains Yum Brands. (Yum’s China division now covers only Mainland China; the division’s former non-mainland groups were reclassified into other divisions in 2009.) In 2009, revenues of Yum’s China division slowed a bit from the 46% pace in 2008, growing 9%. In Mainland China, where Yum opened over 500 new locations in 2009, same-store sales slipped 1% (excluding

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the effects of currency translations) during the year. Numbers such as these have attracted other chains such as Dunkin’ Donuts, and have led to a native Chinese fast food industry that is just in its infancy. (For further discussion of global expansion by restaurants, see the “Current Environment” section of this Survey.)

INDUSTRY FOCUSES ON HEALTH

In recent years, the fast-food industry has been hit with lawsuits alleging that specific corporations are responsible for obesity-related health problems faced by consumers—particularly children. Plaintiffs have sought remedies such as menu changes, nutritional labeling, advertising restrictions, and monetary damages. Lawsuits have also centered on better disclosure of menu contents, as evident by a recent suit against Yum Brand’s Taco Bell that claims the chain’s beef actually only contains 36% beef.

These lawsuits reflect an American culture that has become significantly more health-conscious and litigious over the last several decades. This is a result of rising obesity rates, skyrocketing healthcare costs, and growing concerns about the impact of obesity on overall health. Customers who might have paid lip service to healthy diets in the past are now beginning to practice what they preach.

An important driver in the new health-conscious trend has likely been various diet crazes. Though the popularity of low-carbohydrate diets, such as the Atkins Diet and the less intense South Beach Diet, seems to have ebbed, whole-health diets and back-to-basics eating seem to have taken their place. An increasing awareness of foods’ glycemic index, or the effects of carbohydrates on blood sugar levels, also seems to be on the rise.

In response to strong customer demand, and perhaps to help insulate themselves from potential liabilities, many restaurant chains have made significant changes to their menu offerings. In the casual dining industry, for instance, Brinker International announced a new menu at its Chili’s unit that includes significant low-fat and low-carbohydrate options. Ruby Tuesday Inc. dedicates a section of its menu to “Smart Eating” foods. Some restaurant companies have sought to distinguish themselves by combining with brands associated with the new trends. For instance, Applebee’s now dedicates a segment of its menu to items that were developed with and approved by Weight Watchers International Inc.

The fast-food industry has seen even more dramatic changes, perhaps because it has the most to lose from consumer perceptions about the healthfulness of its food offerings and from potential lawsuits. For instance, Wendy’s has promoted four meal combinations (which were already on its menu) with less than 10 grams of fat, added fruit and more salad offerings to its menu, and changed its combo meal to allow customers to substitute chili, a baked potato, or a side salad for the French fries at no additional cost. The company also has promoted its corporate website as a source of nutritional information about its menu items.

McDonald’s has developed a wide range of “Healthy Lifestyle” programs and initiatives, including the addition of menu offerings that the company believes will attract health-conscious consumers. The company has put its marketing muscle behind its salad offerings and developed new Happy Meals that include yogurt, milk, vegetables, or fruit, depending on the location. It also decided to discontinue the “supersize” French fries and soda offerings that had once been a strong focus of its marketing.

Over the years, McDonald’s has sought to promote nutritional education and awareness among its customers. Since 2003, the company’s Global Advisory Council on Healthy Lifestyles, which includes experts in fitness, nutrition, and active lifestyles, has helped to guide the company on activities to promote balanced, healthy lifestyles among its customers. In the latter part of the past decade, the company conducted a marketing campaign focused on promoting a balanced lifestyle and nutritional health. McDonald’s has collaborated with the World Health Organization and the US Department of Health and Human Services to educate consumers on the importance of nutrition and fitness. Finally, the company has moved to educate consumers by printing brochures that direct them to nutritional information on its corporate website.

In the latest health initiative, many cities are implementing health grade requirements for restaurant operators. In New York City, for example, a policy was implemented in July 2010 that subjects restaurants to an annual inspection, after which the restaurant is given a letter grade that must be posted.

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Establishments that receive grades lower than ‘A’ will be visited by health department officials more frequently. New York is not the only city with such a system, as Los Angeles has been using a similar system for over 12 years. Other cities now include Dallas, Louisville, and San Diego, as well as states like North Carolina, South Carolina, and Mississippi. Standard & Poor’s expects the health grade trend to continue expanding to new cities, as restaurant goers continue to raise their disclosure expectations.

Fast-food chains recently dealt with new laws in various states and cities across the United States to ban trans fats from the food they serve. Despite legal challenges and other efforts by individual restaurants as well as chains and industry groups, these laws have largely been upheld by the courts. Although not the first such law, a new law went into effect in July 2008 in New York City (which had been passed by the city’s Board of Health in December 2006). It requires restaurants in the city to remove trans fats from the ingredients of the items on their menus. Since then, numerous municipalities have followed New York’s lead.

Chains such as Burger King and Wendy’s are using new kinds of trans-free cooking oils or have already reduced the amount of trans fat in the oils they use for frying and cooking. McDonald’s has switched to zero trans fat for its French fry cooking oil as well as the fats used as ingredients and to cook nearly all other items on its menu. According to the company’s nutrition website, remaining items, such as fried pies and baked cookies, were switched to zero trans fat by the end of 2008.

Other recent governmental efforts are aimed at helping consumers to be better informed about their dining decisions. Various states and municipalities have begun requiring chain restaurants to post calorie and fat information for items on their menu. A 2008 Los Angeles City Council moratorium on new fast-food restaurants was subsequently extended. The moratorium covered a portion of the city where it was deemed that a lack of alternatives to fast-food establishments was resulting in rising obesity.

High-profile salmonella and E. coli outbreaks in the recent past increased calls from Congress in 2007 and 2008 to increase funding for, and to make changes in, FDA food safety activities. On January 4, 2011, the Food and Drug Administration Food Safety Modernization Act was signed into law by President Obama. (For further discussion of the bill, please see the “Current Environment” section of this Survey.)

FOOD-AWAY-FROM-HOME TRENDS STABILIZE

The long-term trend toward eating out more ended in 2006 and eroded further in recent years. According to updated data from the US Department of Labor’s Bureau of Labor Statistics, consumption of food away from home accounted for 43.5% of total food expenditures in 2010, up from 41.9% in 2008, but down from the high of 44.1% in 2006. The percentage spent away from home was up slightly from 2000, at 41.4% of total food spending. The amount per household spent on food away from home in 2010 was

$2,668, down from $2,698 in 2009.

It remains to be seen if the percentage of pay spent on away-from-home food will continue rising to its 2006 high, or even higher. Some, but not all, of the factors that supported the long-term climb in eating out over nearly 50 years should eventually support increased demand in the future. One of the linchpins in the trend toward eating out is steady growth in disposable income. According to the US Department of Commerce, chain-weighted US disposable personal income per capita increased at a compound annual growth rate (CAGR) of 1.17% between 2003 and 2010. Aided by tax cuts in 2008, nominal disposable personal income grew at a CAGR of 4.5%.

Chart H03: PURCHASED MEALS & BEVERAGES AS % OF DISPOSABLE INCOME

PURCHASED MEALS & BEVERAGES AS A % OF DISPOSABLE INCOME

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Purchased meals & beverages as % of disposable income (right scale)

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The resumption of the long-term trend toward eating more meals away from home will likely depend on a resumption of personal income rising faster than price increases in the restaurant industry and for food in general. Higher growth in personal income from 1985 to 2005 meant that total food expenditures declined from 11.7% of disposable personal income to 9.9%, but subsequently rose to 12.4% in 2010. Food away from home rose to 43.5% of total food expenditures, from 41.3%, during this 20-year period.

Further boosting the dining-out trend is the decline in free time. Dual-earner households account for more than 50% of US families, according to the Bureau of Labor Statistics. In many families, both parents hold full-time jobs, which leaves less time to prepare meals at home. With the rise of dual-income and single-parent families, and with numerous moderately priced restaurants to choose from, dining out is often the most convenient choice. Any prolonged period of high unemployment, sufficient to reduce the expectation of having two incomes to support household spending, could cause a permanent trend change in food consumed away from home.

A key challenge for the restaurant industry as baby boomers start to retire will be to entice this generation of retirees to eat out more than prior retirees. A significant part of demand for food away from home is driven by being at work. In 2009, the National Restaurant Association reported that those 65 or older spend approximately half as much on food away from home as do those from age 45 to 54. It remains to be seen if future retirees—members of the baby boom generation, who have lived their entire adult lives eating out—will continue to do so in their golden years.

HOW THE INDUSTRY OPERATES

Over the past 50 years, eating out had gradually become part of the way of life for many Americans. As a percentage of total food expenditures in the United States, meals eaten away from home as a percentage of total food expenditures have risen fairly steadily from just 26% in 1960, according to the US Department of Agriculture. According to the National Restaurant Association, a trade group, projected industry sales for 2010 were $580 billion, which would account for 3.9% of the projected US gross domestic product. With a projected 12.7 million employees in 2010, the industry is the nation’s largest private-sector employer.

Contributing heavily to this trend has been the rise of fast-food dining that began in the 1950s with industry trendsetters Jack in the Box Inc. and McDonald’s Corp. By offering drive-through service and revolutionizing work flow processes, these companies significantly improved customer satisfaction while lowering wait times. The establishment of large chains, in both the fast food and casual dining categories, has helped to streamline operations and lower costs further.

Economic trends have played an important role in the popularity of eating out. With the rise in single-parent and dual-income households, domestic life has become more time-pressured. Restaurants provide a quick option for feeding the family. In addition, median household income has continued to increase, boosting the propensity to eat out. The convenience of eating out and the large number of reasonably priced options mean that restaurant meals will likely remain an integral part of daily life in America.

RESTAURANTS: FROM TAKE-OUT TO FULL-SERVICE

Foodservice businesses are a highly diverse group, ranging from corner pubs and fast-food franchises to such deluxe restaurants as highly regarded Jean-Georges in New York, known for its top restaurants, or Joel Robuchon in Las Vegas, where the restaurant scene has come into its own over the last decade. The industry is divided into three general categories: commercial, institutional, and military. (A more detailed breakdown of the various categories is listed in the table entitled “Projected US foodservice industry sales” in the “Current Environment” section of this Survey.)

Commercial restaurant service, which comprises everything from restaurants and cafeterias to ice cream parlors, bars, and cafés, is by far the largest category; its sales in 2009 were an estimated $517.3 billion, according to the National Restaurant Association, down 0.7% from 2008. Institutional foodservice, consisting of sales by institutional organizations and businesses operating their own foodservice, totaled

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about $46.4 billion, and military foodservice was worth an estimated $2.1 billion. For 2010, institutional foodservice sales are expected to be $47.2 billion, while military sales are expected to come in at $2.2 billion. (Institutional and military foodservice are not covered by this Survey.)

In the commercial foodservice business, the largest segments are full-service and limited-service restaurants. Full-service restaurants usually feature moderate to high prices and sit-down service. Average check prices generally exceed $8. Meals are served with flatware and china, and alcoholic beverages are often available. Limited-service (also called fast-food or quick-service) restaurants typically offer rapid food preparation and low prices, with or without seating. Food packaging is often disposable, and the average check price is almost always less than $7. Take-out orders account for a large portion of this business. In recent years, another concept, aptly named “quick casual,” has emerged to bridge the two categories. Quick-casual restaurants have a slightly higher average check price than fast-food concepts, generally $7 to $10, presumably in exchange for higher-quality food and fresher preparation.

LOW ENTRY BARRIERS, HIGH RISK/RETURN

Small operators run a substantial majority of all restaurants, according to the National Restaurant Association, which estimates that 91% of all operators have fewer than 50 employees. This includes the large number of small franchisees that operate single or a few locations of the major fast-food brands.

The restaurant business’s low barriers to entry are partly responsible for its popularity among small-scale entrepreneurs. Some of these ventures succeed, but because of the industry’s intense competition and high fixed costs, many fail. For restaurants that do succeed, however, the payback on investment can be considerable. Once sales reach the break-even point, a relatively high percentage of incremental revenues can become profit.

In recent years, casual dining chain concepts have taken market share from independent operators through geographical expansion. Fast-food chains have long used proliferation to their advantage: McDonald’s now has about 14,000 units in the United States and 32,700 worldwide. Now, however, multi-concept casual dining operators, such as DineEquity Inc. (formed through the 2007 acquisition of Applebee’s by IHOP) and Darden Restaurants Inc. (operator of the Red Lobster, Olive Garden, and Longhorn Steakhouse chains, among others), have come to dominate the mid-price segment.

Large restaurant chains have been able to realize economies of scale that have made competition extremely difficult for small operators. Advantages include purchasing power in negotiating food and packaging supply contracts, as well as increased sophistication in real estate purchasing, location selection, menu development, and marketing.

FRANCHISING: A QUICK WAY TO GROW

Many restaurant chains choose to grow their concepts by franchising. Franchising permits restaurant companies to expand their brand-name recognition rapidly, without bearing the full cost of acquiring land, buildings, and equipment. In a typical franchise relationship, such costs are borne by the franchisee, which also pays a royalty to the parent company for the right to be part of its chain.

The practice of franchising involves a business contract between two companies: a franchisor (or parent company) and a franchisee (or individual business operator). It gives the franchisee the right to construct and operate a restaurant on a site accepted by the franchisor and to use the franchisor’s operating and management systems.

Under these arrangements, the franchisor charges the franchisee a one-time fee, which may include, for instance, an initial nonrefundable fee of about $5,000 and other technical assistance fees of typically about $50,000. Most also require franchisees to contribute 2% to 5% of sales to cover both local and national advertising. In addition, the franchisee makes royalty payments based on gross receipts from restaurant operations, with specified minimum payments. In the United States, royalty payments are generally 4%–5% of total receipts. Franchise contracts vary in length, but may be for periods of 10 to 20 years.

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Franchising is a widespread phenomenon around the world, but it is especially prevalent in the restaurant industry. According to a PricewaterhouseCoopers report for the International Franchise Association, an independent trade group, franchisees of restaurants in 2009 were expected to operate nearly 229,000 restaurant locations in the United States, up 1.4% from 2008, with a combined 4.4 million employees and $251 billion of economic output.

The percentage of franchised versus company-operated units varies widely among individual chains. For example, fast-food giants McDonald’s, and Yum Brands Inc. franchised 89% and 84% of their US units at year-end 2010, respectively, versus only 46% at Jack in the Box. Even among concepts owned by the same company, however, franchising strategies can vary. At Jack in the Box Inc.’s Qdoba chain, franchisees accounted for 69% of total units.

Why franchise? Many restaurant chains opt to franchise their businesses to enjoy superior returns. Franchising eliminates the need to focus on the day-to-day concerns of operating units, while generating a steady stream of royalty fees. Furthermore, since franchise royalties are based on a percentage of sales, rather than profits, they can ensure a steady stream of revenue even in a difficult operating environment. In return, the franchisee enjoys the benefits of brand-name recognition and, often, training and marketing support from the parent company. The franchisee also can participate in cooperative purchasing, enabling it to sell food at a lower price than an independent operator can.

While franchisors avoid some of the hazards of expansion, they face other risks. Licensing and franchising involve some loss of control of the business. With the day-to-day operating decisions made by franchisees, one poorly run franchised unit can reflect badly on the whole chain. Individual franchisees depend on the overall success of the entire chain to maintain their own standing.

Strong and vital franchisees are essential to the continued success of many restaurant chains, particularly in the fast-food segment. Companies that employ the franchise business model rely on maintaining successful franchisees and attracting new, entrepreneurial-minded franchisees to assure long-term success and safety. A company that tries to profit at the expense of its franchisees—for example, by charging high prices for supplies—can damage the trust needed to have a good working relationship between franchisor and franchisee.

Successful refranchising Some companies, such as Yum Brands, regularly buy and sell restaurants as a means of strengthening their operations, a practice known as refranchising. Acquired restaurants, which may not have been performing up to expectations under franchisee ownership, can be improved and then operated profitably by the company or sold to another franchisee. In other cases, restaurants may be acquired due to geographic or operational benefits to existing company-operated units. Selling restaurants generates cash that can then be used to fund new development, acquisition, and remodeling programs. The gains can be substantial.

Refranchising frees up invested capital and generates franchise fees. While this tactic can improve overall returns, its ultimate success depends on a company’s ability to find qualified franchisees to purchase its restaurants. Nonetheless, in an industry that requires relatively high capital expenditures, the popularity of these cash-generating programs is easy to understand.

RESTAURANT MANAGEMENT AND TRAINING

There is a strong correlation between the quality of restaurant management and the long-term success of a concept. Restaurant management structure varies by concept and sales volume. Every restaurant typically employs a general manager, an associate manager, and one to five assistant managers. General managers are primarily responsible for the day-to-day operations in one restaurant, overseeing customer relations, foodservice, cost controls, restaurant maintenance, personnel management, implementation of company policies, and the restaurant’s profitability. Associate and assistant managers support the general manager’s duties and fill in when needed. For chain restaurants, general managers report to district managers, who in turn report to regional managers, who are responsible to the corporate executive management.

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Training takes a variety of forms. For employees who have development or supervisory responsibilities, extensive restaurant operations training courses are standard at most companies. CBRL Group Inc., which operates Cracker Barrel Old Country Stores, sends new managers through an 11-week training program, consisting of eight weeks of in-store training and three weeks at corporate headquarters. In addition, training is conducted for all restaurant employees. Brinker International Inc.’s training program includes a four- to five-month period for managers and supervisors. Training teams also instruct employees on opening a new restaurant, remaining on location for two to three weeks to ensure a smooth transition to operating personnel.

Franchisers such as Applebee’s International Inc., McDonald’s, and Wendy’s operate extensive training programs in a classroom setting. These companies also give periodic training to their restaurant employees. McDonald’s dubs its school “Hamburger University.”

Often, a company may raise staffing levels in order to improve service and thus increase sales. In a competitive environment, customer satisfaction levels can be an important determinant in improving sales volumes. If a company can use its increased manpower to speed service times, fast-food restaurants may serve more customers at the register over a period of time, while casual dining restaurants may increase the speed in which tables turn.

COST STRUCTURE

The costs of owning and operating a restaurant vary by format. Obviously, larger units cost more than smaller ones, as do upscale formats with a greater investment in interior design and higher spending on costly food items. To justify the expense, large units are typically located in areas with greater population density or that have a larger geographic draw. They generally see greater revenues than smaller units, though this is not always the case. In any event, if a unit’s volume does not reach the company’s revenue

projections, its profitability also will be below plan, and it is likely to be shut down.

Food and beverages, labor, and real estate constitute the restaurant owner’s largest cost categories. (See “The restaurant industry dollar” table for these and other costs as a percentage of sales for different industry sectors.)

Food and beverages Not surprisingly, the cost of food and beverages is one of a restaurant’s largest expense categories. Companies negotiate directly with national and regional suppliers to ensure consistent quality, freshness, and competitive prices. The larger the customer, the greater the bargaining power that it has over suppliers.

Many companies engage in forward pricing to stabilize food costs. Forward pricing is a hedging strategy whereby a company negotiates with a supplier to purchase a certain amount of a product at a given price. Some supply contracts signed by larger chains can lock in less volatile food products, such as beef, at stable prices for an entire year. Some of the products subject to the greatest price variability, especially dairy products, can be locked in only for shorter periods.

Labor Labor is the restaurant industry’s second largest expense, though the proportion of total cost varies by restaurant type. We estimate that, at casual dining restaurants (average meal prices of $15.00 to $24.99), salaries, wages, and employee benefits represented about one-third of sales; at major fast-food restaurant chains, these factors accounted for less than 30% of sales. At fine dining establishments, labor typically represents about 40% of sales.

Table B04: restaurant Industry dollar

THE RESTAURANT INDUSTRY DOLLAR—2009(As percent of total)

LIMITED-

$25 AND SERVICE

UNDER $15 $15-$24.99 OVER RESTAURANTS

Cost of food and beverages 32.2 31.8 31.9 31.9Wages & benefits 33.7 33.2 33.7 29.4Restaurant occupancy costs 4.9 5.1 6.1 7.7Other 26.2 26.4 26.5 25.1Income before income tax 3.0 3.5 1.8 5.9Source: National Restaurant Association.

FULL-SERVICE RESTAURANTS

---- AVERAGE CHECK PER PERSON ----

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Restaurant sales and profits can be greatly influenced by the efforts of general managers and area managers. In recent years, companies have placed a premium on retaining their best operators. In many cases, managers’ pay relies on incentives and often is tied to restaurant-level profit performance. Companies award stock options to personnel from the highest levels of management down to the restaurant-level manager. Starbucks Corp., Brinker International, and the CBRL Group all issue significant amounts of options to compensate management.

Real estate A restaurant owner can purchase or lease an existing space, or build a new one. Many chain operators choose to build their own units, so that individual restaurants all conform to the same design concept. The land on which a restaurant is built can be purchased or leased. Both options have pros and cons.

When a company purchases real estate, it must cover the purchase price. To finance such a purchase, the company must have good financial resources, with cash on its balance sheet and borrowing power. Once real estate is purchased, the company can benefit from appreciation. If real estate values decline, however, so does the value of the company’s investments.

Brinker International estimates that the average cost for land, or the value of the lease for the land when capitalized (valued as an asset on the balance sheet), is $946,000 for a Chili’s unit and $4.8 million for its upscale Maggiano’s Little Italy chain. Purchases are either financed with loans or paid out of current funds.

Leasing requires less capital and offers greater flexibility than do outright purchases. Leases are finite in duration and eventually expire; thus, they give restaurant operators the option of relocating or closing units, if site selection is poor and the units are not drawing enough volume. On the other hand, leasing leaves operators vulnerable to rising rents or the loss of a lucrative location.

Whether owned or leased, site selection is critical to the success of a new restaurant. Companies devote significant time and resources to analyzing each prospective site. The main criteria are customer traffic levels and convenience. Proximity to sites that draw large crowds, such as retail centers, office complexes, and hotel and entertainment centers, is desirable. Some chains, such as Subway (operated by privately held Doctor’s Associates Inc.), choose to locate units in strip malls or malls to increase visibility. Other chains, such as McDonald’s, prefer freestanding locations in high-traffic areas, to better control their costs. Accessibility concerns, such as the availability of parking and ease of entry, are also important. In addition, a company will review potential competition in a trade area, local market demographics, and site visibility.

The bottom line After food, labor, occupancy, and other expenses are subtracted, what is left is operating profit. Profitability, however, varies widely among the various industry segments and even among individual units in a chain; the level of sales at a given establishment is a key determinant. Expense structures also vary from company to company. Some businesses are simply better than others at reining in costs.

It’s a cash business Because virtually all sales in the restaurant industry are transacted in cash or equivalents (such as credit cards), many restaurant companies operate with negative working capital. (Working capital equals current assets minus current liabilities. It is sometimes referred to as net working capital, as current assets can be considered working capital needed to support the business.) A working capital deficiency occurs when current liabilities exceed current assets. Inventory, financed from normal trade credit, turns rapidly in the restaurant business. This is also one reason why debt levels are relatively low compared with other industries, especially those that must support high levels of slow-moving inventory, such as retailers.

CREATING AND TESTING NEW FOODS

In recent years, competition has fostered innovation as restaurants have sought to boost volume. In the process, they have made new product introductions an important part of the equation. Although customers may not be aware of it, most fast-food and restaurant chains spend a great deal of time researching and developing new products.

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Menu offerings evolve along with consumer taste. To develop prototype products, restaurant chains conduct consumer research and keep up on the latest trends in food. When a new product is introduced, three key elements determine its success. The product must meet consumer expectations and thus generate incremental sales. Its day-to-day preparation should be compatible with company standards and operations. Finally, it should deliver financial benefits.

The type of new product introduced—sandwich, salad, main course, dessert, and so forth—must fit clearly into the chain’s menu and meet its customers’ expectations. Thus, while a chain such as Wendy’s would be unlikely to unveil a new pizza topping, it could be expected to create a new sandwich item.

In the highly competitive fast-food category, new menu items can be crucial to driving sales as they can help to raise traffic—without the margin pressure of price discounting. Price wars are common throughout the industry and favor well-financed behemoths McDonald’s and Burger King Corp. Smaller regional companies, such as Jack in the Box, focus on new product development to differentiate themselves from competitors, thereby reducing the potential impact of large-scale industry discounting.

Over the past several years, McDonald’s has had great success in driving sales through new products. Items recently added to the menu, such as the Snack Wrap or Southern Style Chicken biscuits and sandwiches, have helped to both drive customer traffic and raise the average check. The company’s product development process is driven predominantly by customer feedback. Approximately every six weeks, the company gathers 80 to 100 customers at a selected McDonald’s unit to get input on new ideas, as well as existing menu items. New menu item ideas are categorized by food category, price sensitivity, and health concerns.

Armed with an increased understanding of customer trends, the company can experiment with various food ideas at McDonald’s Hamburger University campus in Oak Brook, Illinois. Products are chosen for tests in select markets and then select regions; such tests often last for six months to ensure marketability. Testing often is supported by advertising, which can take anywhere from several weeks to three months to arrange.

Before an item can be rolled out across the McDonald’s restaurant system, the company must arrange for a supply of ingredients. In some cases, this may take several months due to the vastness of the company’s needs. For instance, when the company decided to promote its Apple Dippers product in 2005, the company became the largest single user of apples in the country. A full growing season was actually needed to create a supply equal to the demand. Given the rigors of the McDonald’s testing process, and the operational and procurement efforts needed to support a rollout over the company’s nearly 14,000 US restaurants, the company’s new product introduction process generally takes from six months to two years to complete.

KEY INDUSTRY RATIOS AND STATISTICS

Restaurant sales are driven by consumer spending, which in turn is influenced by the health of the overall economy. To gain knowledge of the economy’s current and anticipated state of health, and its potential impact on the restaurant industry, analysts consult the following indicators.

Real growth in gross domestic product (GDP). Reported quarterly by the Bureau of Economic Analysis, part of the US Department of Commerce, inflation-adjusted (or real) GDP growth is a measure of the health of the overall US economy. The Bureau of Economic Analysis also issues advance and preliminary estimates of GDP before reporting the final GDP figure for the quarter. Most major economies are cyclical, advancing and contracting with the business cycle. The business cycle dating committee of the National Bureau of Economic Research establishes the official beginning and end of recessions.

Real GDP shrank 2.6% in 2009, in contrast to a 0.4% increase in 2008. As of February 2011, Standard & Poor’s Economics estimated that real GDP grew 2.9% in 2010 and forecast an increase of 3.1% in 2011.

Disposable personal income. Reported each month by the US Bureau of Economic Analysis, disposable personal income is a measure of aggregate consumer income, minus taxes and adjusted for inflation. Changes in this measure are important, because they influence the level of consumer spending that can be

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expected. When personal income is growing, consumers are more willing to loosen their purse strings. Conversely, when it is stagnant or weak, consumers are less willing to spend. They may shift to eating at less-expensive restaurants or at quick-service chains or to cooking at home.

Growth in disposable income decelerated in 2009 despite the effect of tax rebates, with real disposable income rising 1.0%, down from 3.9% in 2008. As of February 2011, Standard & Poor’s Economics expected real disposable personal income to record a 3.1% gain in 2010 and a 4.4% increase in 2011.

Consumer confidence. This index is compiled monthly by the Conference Board, a private research organization, which polls 5,000 representative US households to gauge consumer sentiment. Its two components—the present situation index and the expectations index—reflect consumers’ views of current and future business and economic conditions, and consumers’ expectations about how they will be affected. This qualitative measure of consumer attitudes is expressed as an index, with 1985 used as a base year (1985=100). A reading above 90 is considered a strongly positive outlook on the economy.

Factors that influence the index include perceptions of employment availability and current and projected income levels. When consumer confidence is high or rising, it is usually accompanied by increased spending and borrowing. Conversely, consumers who are uncertain about the future are likely to pare or postpone their expenditures. In January 2011, the Conference Board’s consumer confidence index stood at 60.6, and

had risen to levels not previously seen since spring 2010 (62.7 in May 2010).

The consumer price index (CPI). Released monthly by the Bureau of Labor Statistics (BLS, an agency within the US Department of Labor), the CPI measures changes in the price of commodities, fuel oil, electricity, utilities, telephone services, food, and energy, and thus serves as an inflation indicator. The “core” CPI smoothes out the index by removing the volatile food and energy categories. Restaurants, like most companies, try to pass on increased costs for supplies and labor to customers. Given the highly competitive environment, though, restaurant chains are generally reluctant to raise menu prices.

Driven by decreased energy prices, the overall CPI rose 1.6% in 2010, following a 0.3% decline in 2009. As of February 2011, Standard & Poor’s Economics was forecasting that the CPI would rise 1.9% in 2011.

Unemployment rate. Wages are often the largest single expense at restaurants. Restaurants rely heavily on the availability of a dependable work force at the low end of the national pay scale. Employee turnover rates are relatively high, especially at quick-service restaurants, where annual turnover often exceeds 200% for non-management positions. A steady stream of acceptable replacements is needed. When unemployment rates are relatively low, restaurants often have to raise pay levels to attract and retain workers.

Chart H02: CPI for food away from home

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1990 92 94 96 98 00 02 04 06 08 2010

Source: US Bureau of Labor Statistics.

CONSUMER PRICE INDEX FOR FOOD AWAY FROM HOME (Year-to-year percent change)

Chart H05: US unemployment rate

4.04.55.05.56.06.57.07.58.08.59.09.5

10.010.5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

US UNEMPLOYMENT RATE (Monthly data; in percent)

Source: US Bureau of Labor Statistics.

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Released monthly by the BLS, the unemployment rate tracks the number of working-age people currently searching for employment as a percentage of those employed or looking for work. After bottoming in late 2007, the unemployment rate rose to 10.0% as of December 2009, but then fell to 9.0% (as of January 2011) as the economy continued its recovery and many of the jobless dropped out of the labor force and, therefore, were not counted as unemployed. As of February 2011, Standard & Poor’s Economics was forecasting the unemployment rate to average 8.9% in 2011.

Commodity costs. Food commodity costs are one of the largest input costs of a restaurant company; they can significantly affect profitability. Rising costs can erode profit margins if the company cannot pass the added expense on to the customer in the form of a price increase.

Industry expansion rates. The growth rate of overall restaurant locations should be in line with increases in demand to ensure a healthy overall business. In the early 1990s, restaurant industry expansion caused supply to significantly outpace demand. This situation led to store closings and concept failures.

Interest rates. Many growth companies cannot finance expansion strategies wholly from current cash flow and must therefore access capital markets. If a company chooses debt financing, prevailing interest rates may affect corporate profitability. Ten-year Treasury notes often are seen as the most reliable indicator of long-term interest rate trends and are traded daily on secondary bond market exchanges.

Reflecting Federal Reserve policy, short-term rates dropped dramatically through 2008, to its current target of 0.0% to 0.25%. Volatility in the credit markets sparked by concerns about subprime mortgage defaults also pushed down 10-year Treasury yields. After hitting a peak of 5.25% in June 2007, the rate on the 10-year Treasury note was about 3.33% as of January 2011. Standard & Poor’s expected rates to rise to 4.1% by the end of 2011.

HOW TO ANALYZE A RESTAURANT COMPANY

The first, and perhaps the most important, step in analyzing a restaurant company is relating the fundamental outlook for the restaurant industry to the company under consideration. A range of factors, both quantitative and qualitative, can be helpful in comparing and contrasting a company to its competition, sub-industry peer group, and to the restaurant industry in general.

Although absolute numbers are critical to the assessment of any company, comparative analysis is needed to measure the relative success of a company under given industry conditions. If a restaurant’s same-store sales are declining while the rest of the industry is showing gains, clearly there is cause for concern and further investigation. However, if a company’s competitors are also experiencing weak financial performance, even as the industry is doing relatively well, then the problem may lie beyond the company.

Further study then would likely suggest where the problems lie. Is it indicative of a change in consumer tastes or preferences? Have costs, prices, or other factors changed in ways that make the potential investment return of the business more or less attractive? Analysis then could suggest either how to address the problems or that they may be too large or too broad for the company to fix. Conversely, if a company’s financial performance is stellar versus its peers, analysis could show if or for how long the outperformance can be sustained.

QUANTITATIVE ISSUES

Aspects of a restaurant’s business that can be measured quantitatively include same-store sales, systemwide sales, operating margin, return on assets, and cash flow. These hard numbers are the basis for analyzing company trends over time, in order to determine whether the business is achieving improvements in its performance. In addition, comparing the company’s results with those of its peers is useful in determining relative performance.

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Same-store sales The most closely watched quantitative indicator is same-store sales, defined as year-over-year sales changes for units open and operating at post-startup levels in both years. A company that experiences declining same-store sales while the rest of the industry posts strong revenue gains is losing market share, and reasons for this loss need to be closely examined. It is important to note that some chains compare same-store sales for units open only 13 months—a less reliable indicator of sales strength than the 18-month period. Stores often take several months, if not years, to reach the maturity necessary to make meaningful comparisons.

Gains in same-store sales can be achieved through increases in prices and through increases in customer count, or traffic. Price increases are often necessary to offset wage and commodity cost inflation. From 2001 through 2003, many operators raised prices only modestly (2.3% annually, according to the Bureau of Labor Statistics), due to relatively slower demand growth compared with prior years. From 2004 through 2006, somewhat higher costs for food (especially beef) and utilities led many restaurant chains to raise menu prices at a slightly faster 3.1% annual pace. Hikes in the minimum wage, as well as acceleration of certain food costs starting in late 2007, contributed to increases in prices for food away from home in 2007 (4.0%) and 2008 (5.0%). Prices for food away from home increased only 1.8% in 2009 and 1.3% in 2010. We expect price increases to be very modest in 2011, as most chains have little pricing power, in our view.

Traffic gains often reflect customer satisfaction. Diners are the ultimate judges of whether a restaurant’s food, price, and service meet their needs. If a chain fails to please customers and to report sufficient sales gains, its long-term growth—even its survival—can be in doubt. A company that is expanding rapidly by adding new units can boost overall sales growth, but it is important to monitor sales trends at existing units to be sure the concept is doing well

One additional component of same-store sales is product mix. Shifts in mix can reflect menu changes, advertising and promotions, or changes in customer preferences—any factor that affects the size of the average check, other than price increases. Restaurants can raise the amount of the average check by adding higher-priced items to the menu, such as an increased assortment of appetizers and alcoholic beverages, or can lower it by featuring value products in an advertising campaign designed to spur traffic. Consumer choices also can alter product mix. In difficult economic times, for example, customers tend to avoid ordering desserts and drinks, or select less expensive options.

The same-store sales trends of a company should be considered within the context of the demographic and geographic markets it serves. A key issue facing the industry in 2011 is how companies respond to declining employment and consumer income, which has had a pronounced impact on regions particularly hurt by the downturn in housing. Restaurant sales have been especially weak in regions like the Southwest and Southeast where the economy has been particularly hurt by falling home values and ongoing foreclosure activity. In California recently, home sales have perked up as buyers have been tempted by prices as much as 50% or more below their all-time peaks, but we believe overall economic weakness is likely to persist. Moreover, because these regions have had the fastest growing populations in recent years, they are where restaurant companies have been expanding the most. In other regions, such as the Midwest, weak economic conditions outside of housing are having a negative impact on the sales trends of restaurants located in those areas.

Other nonrecurring factors can influence same-store sales comparisons. These may include the inclusion of an extra 14th week in a quarter or 53rd week in a year. Often these extra weeks are at the end of the year, and the week between Christmas and New Year’s Day is one of the strongest sales weeks throughout the year. Whether this week falls into the fourth quarter of the current fiscal year or the first quarter of the next can skew comparisons.

Average weekly sales Some chains report the average weekly sales of their restaurants. For companies that are expanding rapidly, average weekly sales may be preferable to same-unit sales as an indicator of sales trends. Units that have been in operation for at least 18 months may not comprise a large enough percentage of the store base to give a true indication of the state of the business. Also, if average weekly sales growth is significantly lower (or higher) than same-store sales growth, it may indicate that new locations are opening to lower (higher) volumes than existing stores.

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Systemwide sales This measures the total revenues from restaurants operated by the company, its franchisees, and, in some cases, its licensees and affiliates. Sales from franchisees, and from affiliates that are less than 50% company-owned, are not recorded in a company’s revenues, although fees charged by the company to the franchisees are often incorporated.

Systemwide sales growth is an important factor in projecting the top-line growth potential of a company. It can occur through expansion of sales capacity or through same-store sales growth. Many restaurant companies rely more on expansion than same-store sales growth to achieve earnings growth. For instance, The Cheesecake Factory Inc. is an operator that has experienced consistently stellar restaurant traffic, but because it almost always increases prices only in response to cost inflation, rather than to boost margins, the same-store sales growth at its restaurants tends to be fairly moderate. However, Cheesecake Factory has been able to consistently outperform the industry in terms of sales per unit and has generally reported higher same-store sales than its peers.

Operating margin Operating margin is arguably the most important profitability measure in assessing a restaurant company; it indicates how adept a company is at making a profit on its sales dollar. To arrive at this figure, the analyst must first calculate the company’s total cost of restaurant sales, including such line items on the income statement as food, beverage, labor, and direct operating costs (such as uniforms, linen, china, utensils, menus, and decoration), plus occupancy, and allocated general and administrative expenses. The total cost figure is subtracted from restaurant sales; the result is operating profit, which can then be divided by sales to give the operating margin.

Operating margin can be affected by a number of variables, including food and beverage costs, product mix, sales volumes, and competitive pricing pressures. Labor costs also affect margins. A lack of qualified workers can put upward pressure on salaries and benefits. Conversely, an ample supply of people in the 16-to-24 age category, the traditional source of labor for restaurants, can keep wage costs from escalating.

Another source of wage pressure is legislated increases in the minimum wage. After having remained at $5.15 per hour since 1997, a 41% increase in the federal minimum wage over three years was enacted in 2007. The minimum wage subsequently rose in three $0.70 increments on July 24 in 2007, 2008, and 2009, to an ending $7.25 an hour. About three-fifths of the states, however, have state minimum wage laws that set the hourly rate higher than the federal minimum (the remainder either have no minimum or set the state’s lowest wage automatically equal to the federal). For tip-earning employees, employers are required by law to ensure that such employees’ compensation (tips, plus direct hourly pay of a minimum of $2.13 an hour) is at least equal to the federal hourly minimum.

We think that many restaurant employees, particularly in upscale casual dining and fine dining restaurants, earn more than the minimum wage—in some cases, significantly more. Furthermore, we believe that wage increases at the minimum, or bottom of the scale, put pressure on wages further up for employees who are beyond entry level or have attained seniority.

Companies often pay managers short-term cash bonuses as performance incentives; these vary from year to year depending on how performance measures up against various internally set sales and profitability targets. However, many companies do not regularly report on the details of this expense, making periodic comparisons more difficult. We believe that, in recent periods, some restaurant companies may have “managed” how and when they accrue bonuses, in order to meet their publicly stated financial targets.

Margin analysis should always be considered within the context of the segment of the restaurant industry that the company serves. For example, operating expenses may be higher in the casual dining segment than for the fast-food chains because of higher real estate costs, as sit-down dining requires more space both in the restaurant and for parking than high-volume fast-food chains.

More recently, chains have sought to improve margins by rotating menu selections to take advantage of the food products that can be acquired cheaply. For instance, at a time of declining seafood prices, Applebee’s.

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(operated by DineEquity Inc.) and Red Lobster (operated by Darden Restaurants Inc.) are particularly known for seasonal promotions.

Return on assets A company’s decision on whether to purchase or rent its locations can affect its reported operating margins. Chains that own their restaurants tend to have higher profit margins, as the depreciation expense is often less than what they would pay for rent. However, a company that purchases property must invest more capital in its stores. When comparing the financial results of companies that have different ownership profiles, return on assets (ROA) is a useful tool in analyzing relative performance.

Reviewing a company’s ROA over a multiyear period can reveal trends regarding the success of recent investments and may be a valuable guide in estimating prospects for future growth. A company is more likely to reinvest in its current business if its ROA is either high or trending upward, whereas a company with declining or low returns might reevaluate how it invests its capital.

Cash flow A corporation’s financial flexibility reveals much about its health. Projected cash flow—net income, plus noncash items such as depreciation and amortization—can be compared with expected cash needs. Capital resources are needed primarily to undertake the construction, acquisition, maintenance, and refurbishing of restaurants. Some companies are self-financing, with the ability to fund their capital expenditure programs from internally generated funds. Many more, however, require external sources. For the large publicly held chains, capital is generally provided via public stock offerings and debt financing.

Free cash flow (cash flow from operations less capital expenditures) can measure a company’s present ability to return funds to its shareholders and debt holders; it also may be a measure of a company’s maturity. If a company believes that its concepts have significant growth potential and high returns on investment, it is more likely to use its cash from operations to fund capital expenditures. However, as a company’s concepts mature, its return on new investments tends to slow, making the company more likely to return cash to its stakeholders.

Capital expenditures should be analyzed, to separate funds being used to expand a company’s business from investments required simply to maintain existing business. While funds for expansion are intended to increase future funds available for shareholders, amounts required to renovate, remodel, and maintain existing structures can be recurring, and should be seen as a consistent drain on cash from operations. Companies such as CEC Entertainment Inc. (operator of Chuck E. Cheese’s restaurants) have consistently large remodeling requirements that should be factored into the overall analysis.

QUALITATIVE ISSUES

The key qualitative issues affecting a restaurant business are management’s expertise and its design and execution of the business strategy. Although these factors do not lend themselves to numerical analysis, they are nonetheless crucial to success.

In evaluating a restaurant company’s management team, an analyst should first ask whether its strategy makes sense in light of current and long-term industry trends. If the strategy is a good one, is the current management capable of executing it? What is management’s record for working together as a team? The quality of management often spells the difference between success and failure. We look for seasoned management teams that have performed well in both good times and bad.

A company’s expansion strategy is key to its long-term profitability potential. Companies may choose to grow via internal unit expansion or via acquisitions. In addition, many chains are hedging their bets on the success of one format and developing or acquiring other restaurant formats. For example, Brinker International Inc., with about $3.7 billion in revenue owns Chili’s Grill & Bar as its largest chain, but it also operates Italian- and Mexican-themed restaurants. Darden Restaurants Inc. pursues a multi-concept strategy via the 2007 acquisition of RARE Hospitality Inc., operator of the Longhorn Steakhouse and Capital Grille chains.

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Management’s selection of an industry segment for expansion is a key strategic decision. Certain segments may have lower levels of competition or higher potential growth. For instance, several fast-food chains have purchased concepts in the fast-casual segment to augment growth. In addition, success in the quick growing bar-and-grill and seafood segments may lead to more favorable results than in other areas of casual dining.

Rather than diversify, some companies prefer to focus on one concept or several similar concepts. These strategies allow a company to develop expertise it might not gain from a split focus. In recent years, McDonald’s Corp., Wendy’s International Inc., and Brinker International Inc. are among companies that have either divested or closed down chains that were not part of their core business or key to their future growth. If a chain was once touted as key to the company’s future growth, but the company later determines that this is no longer the case, it may signal that the company has financial or managerial weaknesses.

Finally, an examination of a company’s financial performance in the context of the industry environment and the competition is important. Because every management team portrays its operations in the best possible light, comparing this rhetoric with a company’s actual results is helpful in predicting the firm’s future prospects.

VALUATION MEASURES

Restaurant stocks generally tend to be somewhat volatile, partly reflecting the underlying cyclicality of the industry. Standard & Poor’s believes prospects for future profit growth are paramount in determining a company’s worth. Common valuation measurements include multiples of earnings per share and cash flow. Keep in mind that valuations depend on various factors, including overall investor sentiment, industry and economic conditions, the level of interest rates, and the extent to which future earnings seem predictable. As is the case with other measures, valuations of a particular company should be compared with those of similar companies in the same industry. An analyst should also examine a company’s or industry’s historical valuations relative to a benchmark price-to-earnings ratio.

For the restaurant industry, wide swings in the valuation ratios can occur over the business cycle, as the sector’s earnings are affected by changing economic conditions, as well as by the sector going into and out of favor with investors. Thus, caution must be exercised in the interpretation of these metrics. A company that appears cheap relative to its peers, for example, may be at certain competitive disadvantages, such as a relative lack of attractive restaurant concepts, higher debt levels, or lower profit margins, to name a few reasons. As a result, other investors may place a lower valuation on the shares of such a company.

It is also important to take into account how management is performing and how well it is using the company’s capital such as by examining the profitability on various assets, as discussed earlier in this section. A change in management can lead to an increase in the value of a company’s stock if investors perceive that steps will be taken to produce higher returns.

Price-to-earnings (P/E) ratio. The most common means of valuing equities, the price-to-earnings (P/E) ratio is calculated as the share price divided by net earnings per share (EPS), for either the past 12 months or projected EPS for a specified future period.

Enterprise value to EBITDA. As an alternative to the standard P/E ratio, to eliminate distortions caused by differing tax rates and leverage, and to better evaluate a company’s operating performance, analysts compare the company’s enterprise value (combination of net debt and stock market value) to its earnings before interest, taxes, depreciation, and amortization (EBITDA).

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GLOSSARY

Fast-food restaurants—Also called limited-service or quick-service restaurants, these outlets specialize in rapid food preparation and low prices (the average check is almost always less than $7), with or without seating (table service is generally not available). Food packaging is often disposable, and take-out orders account for a large portion of this business.

Franchise agreement—A business contract between two companies: a franchisor (or parent company) and a franchisee (or individual business operator). It gives the franchisee the right to construct and operate a restaurant on a site accepted by the franchisor, and to use the franchisor’s operating and management systems. The franchisee pays the franchisor a one-time franchise fee, and then makes royalty payments based on gross receipts from restaurant operations, with specified minimum payments. In the US, royalty payments are generally 4%–5% of total receipts. Franchise contracts vary in length, but may be for periods of 10 to 20 years.

Full-service restaurants—Restaurants that generally feature moderate to high prices (the average check is generally at least $10) and sit-down service. Meals are often served with flatware and china, and alcoholic beverages may be available.

License—A contract similar to a franchise agreement, except that the contractual period is shorter, the rights are not as broad, and an initial fee may not be required. This contract gives the licensee the right to use the licenser’s name for a fee. Licensing is often used for nontraditional points of distribution, such as airports and gas stations.

Quick casual restaurants—Limited-service or self-service restaurants that serve upscale or specialty foods, including gourmet soups, salads, and sandwiches. This category bridges the full-service and limited-service segments, with the average check generally falling between $7 and $10.

Refranchising gains—Gains arising to a company from the purchase and resale of franchised units.

Same-store sales—Year-to-year sales changes at units open for a specified period, often at least 18 months.

Satellite restaurants—Small, low-volume units of a restaurant chain whose menu is an abbreviated version of the chain’s full menu. Satellite restaurants are often located in unique retail settings, like airports or within large retail stores.

Systemwide sales—A figure comprising sales by restaurants operated by the company, franchisees, and affiliates operating under joint venture agreements.

Total revenues—A comprehensive figure consisting of sales by company-operated restaurants and fees from restaurants operated by franchisees and affiliates.

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34 RESTAURANTS / MARCH 3, 2011 INDUSTRY SURVEYS

INDUSTRY REFERENCES

PERIODICALS

Nation’s Restaurant News http://www.nrn.com Weekly; contains articles on a variety of restaurant industry topics.

QSR http://www.qsrmagazine.com Published 10 times annually; covers the quick-service sector of the restaurant industry.

Restaurant Business http://www.monkeydish.com Published 18 times a year; spotlights various industry segments; customizable website.

Restaurants USA http://www.restaurant.org Published 11 times a year; focuses on trends and issues of importance to the restaurant industry.

Technomic Top 500 http://www.technomic.com Annual publication; detailed study of restaurant trends, and segmented look at industry market shares.

TRADE ASSOCIATIONS

International Franchise Association http://www.franchise.org A membership organization of franchisors, franchisees, and suppliers; provides information, products, and services to members.

National Restaurant Association http://www.restaurant.org Trade organization that works to promote the foodservice industry, and to protect and educate its members. Publishes industry data and research, including the Restaurant Industry Operations Report (annual; co-published with Deloitte & Touche) and an annual Restaurant Industry Forecast.

MARKET RESEARCH FIRMS

NPDFoodworld: CREST http://www.npd.com Part of market research firm NPD Group Inc. that tracks chain and independent restaurants, and consumer behavior and attitudes at commercial restaurants.

Technomic Inc. http://www.technomic.com A market research firm concerned with the restaurant industry.

GOVERNMENT AGENCIES

Economic Research Service http://www.ers.usda.gov Source of annual US statistics regarding food consumption, production, and trends; part of the US Department of Agriculture.

US Bureau of Labor Statistics http://www. bls.gov Source of weekly, monthly, and annual data on employment, wages, income, and spending; part of the US Department of Labor.

US Census Bureau http://www.census.gov Source of annual and monthly retail and foodservice sales; part of the US Department of Commerce.

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COMPARATIVE COMPANY ANALYSIS — RESTAURANTS Operating Revenues

Million $ CAGR (%) Index Basis (1999 = 100)Ticker Company Yr. End 2009 2008 2007 2006 2005 2004 1999 10-Yr. 5-Yr. 1-Yr. 2009 2008 2007 2006 2005RESTAURANTS‡BH § BIGLARI HOLDINGS INC SEP 627.0 610.1 654.1 638.8 606.9 553.7 364.2 5.6 2.5 2.8 172 168 180 175 167BJRI § BJ'S RESTAURANTS INC DEC 426.7 374.1 316.1 238.9 178.2 129.0 37.4 27.6 27.0 14.1 1,141 1,000 845 639 477BOBE † BOB EVANS FARMS # APR 1,726.8 1,750.5 1,737.0 1,654.5 1,584.8 1,460.2 A 964.6 6.0 3.4 (1.4) 179 181 180 172 164EAT † BRINKER INTL INC JUN 3,620.6 4,235.2 4,376.9 4,151.3 D 3,912.9 3,707.5 1,870.6 6.8 (0.5) (14.5) 194 226 234 222 209BWLD § BUFFALO WILD WINGS INC DEC 538.9 422.4 329.7 278.2 209.7 171.0 NA NA 25.8 27.6 ** ** ** ** NA

CPKI § CALIFORNIA PIZZA KITCHEN INC DEC 664.7 677.1 632.9 554.6 479.6 422.5 179.2 14.0 9.5 (1.8) 371 378 353 309 268CEC § CEC ENTERTAINMENT INC DEC 818.3 814.5 785.3 774.1 726.1 728.0 440.7 6.4 2.4 0.5 186 185 178 176 165CAKE † CHEESECAKE FACTORY INC DEC 1,602.0 1,606.4 1,511.6 1,315.3 1,182.1 969.2 347.5 16.5 10.6 (0.3) 461 462 435 379 340CMG † CHIPOTLE MEXICAN GRILL INC DEC 1,518.4 1,329.7 1,085.8 822.9 627.7 470.7 NA NA 26.4 14.2 ** ** ** ** NACBRL § CRACKER BARREL OLD CTRY STOR JUL 2,367.3 2,384.5 2,351.6 D 2,643.0 2,567.5 2,380.9 1,531.6 A 4.5 (0.1) (0.7) 155 156 154 173 168

DRI [] DARDEN RESTAURANTS INC # MAY 7,113.1 7,217.5 6,626.5 A 5,567.1 D 5,720.6 5,278.1 3,701.3 6.8 6.1 (1.4) 192 195 179 150 155DIN § DINEEQUITY INC DEC 1,414.0 1,613.6 484.6 A,C 349.6 348.0 359.0 273.2 F 17.9 31.5 (12.4) 517 591 177 128 127JACK § JACK IN THE BOX INC SEP 2,471.1 A 2,539.6 D 2,876.0 2,765.6 2,507.2 2,322.4 1,456.9 F 5.4 1.2 (2.7) 170 174 197 190 172MCD [] MCDONALD'S CORP DEC 22,744.7 23,522.4 22,786.6 D 21,586.4 D 20,460.2 19,064.7 13,259.3 5.5 3.6 (3.3) 172 177 172 163 154CHUX § O'CHARLEY'S INC DEC 880.8 931.2 977.8 989.5 930.2 C 871.4 302.2 11.3 0.2 (5.4) 291 308 324 327 308

PFCB § P F CHANGS CHINA BISTRO INC DEC 1,228.2 1,198.1 D 1,092.7 D 937.6 809.2 706.9 C 153.3 23.1 11.7 2.5 801 782 713 612 528PNRA † PANERA BREAD CO DEC 1,353.5 1,298.9 1,066.7 829.0 640.3 479.1 171.4 23.0 23.1 4.2 790 758 622 484 374PZZA § PAPA JOHNS INTERNATIONAL INC DEC 1,106.0 A 1,132.1 1,063.6 1,001.6 968.8 D 942.4 805.3 A 3.2 3.3 (2.3) 137 141 132 124 120PEET § PEET'S COFFEE & TEA INC DEC 311.3 284.8 249.4 210.5 175.2 145.7 67.8 16.5 16.4 9.3 459 420 368 310 258RRGB § RED ROBIN GOURMET BURGERS DEC 841.0 869.2 A 763.5 A 618.7 A 486.0 409.1 NA NA 15.5 (3.2) ** ** ** ** NA

RT § RUBY TUESDAY INC # MAY 1,194.8 1,248.6 1,360.3 1,410.2 1,306.2 1,110.3 797.5 4.1 1.5 (4.3) 150 157 171 177 164RUTH § RUTHS HOSPITALITY GROUP INC DEC 344.6 D 405.8 319.2 A 271.5 D 214.5 D 192.2 D NA NA 12.4 (15.1) ** ** ** ** NASONC § SONIC CORP AUG 718.8 804.7 768.5 693.3 623.1 536.4 257.6 10.8 6.0 (10.7) 279 312 298 269 242SBUX [] STARBUCKS CORP SEP 9,774.6 10,383.0 A 9,411.5 A 7,786.9 6,369.3 5,294.2 1,680.1 19.3 13.0 (5.9) 582 618 560 463 379TXRH § TEXAS ROADHOUSE INC DEC 942.3 880.5 A 735.1 A 597.1 A 458.8 363.0 A NA NA 21.0 7.0 ** ** ** ** NA

WEN † WENDY'S/ARBY'S GROUP INC DEC 3,580.8 1,822.8 A 1,263.7 1,243.3 D 727.3 A 328.6 A 854.0 A,C 15.4 61.2 96.5 419 213 148 146 85YUM [] YUM BRANDS INC DEC 10,868.0 11,286.0 10,416.0 9,561.0 C 9,349.0 9,011.0 7,822.0 3.3 3.8 (3.7) 139 144 133 122 120

OTHER COMPANIES WITH SIGNIFICANT RESTAURANT OPERATIONSCOSI COSI INC DEC 118.6 135.6 D 134.6 D 126.9 117.2 110.6 NA NA 1.4 (12.5) ** ** ** ** NADPZ DOMINO'S PIZZA INC DEC 1,404.1 1,425.1 1,462.9 1,437.3 1,511.6 1,446.5 NA NA (0.6) (1.5) ** ** ** ** NALUB LUBYS INC AUG 292.9 317.7 320.4 324.6 D 322.2 D 308.8 D 501.5 (5.2) (1.1) (7.8) 58 63 64 65 64

Note: Data as originally reported. CAGR-Compound annual growth rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year. **Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change. D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a fiscal year change.

RESTAURANTS INDUSTRY SURVEY Data by Standard & Poor's Compustat — A Division of The McGraw-Hill Companies

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Net IncomeMillion $ CAGR (%) Index Basis (1999 = 100)

Ticker Company Yr. End 2009 2008 2007 2006 2005 2004 1999 10-Yr. 5-Yr. 1-Yr. 2009 2008 2007 2006 2005RESTAURANTS‡BH § BIGLARI HOLDINGS INC SEP 6.0 (23.0) 11.8 28.0 30.2 27.6 18.7 (10.8) (26.3) NM 32 (123) 63 150 162BJRI § BJ'S RESTAURANTS INC DEC 13.0 10.3 11.7 9.8 8.4 6.3 0.5 38.6 15.8 26.5 2,623 2,074 2,355 1,981 1,680BOBE † BOB EVANS FARMS # APR 70.3 (5.1) 64.9 60.5 54.8 37.0 52.9 2.9 13.7 NM 133 (10) 123 114 104EAT † BRINKER INTL INC JUN 79.2 51.7 230.0 213.9 160.2 150.9 85.2 (0.7) (12.1) 53.1 93 61 270 251 188BWLD § BUFFALO WILD WINGS INC DEC 30.7 24.4 19.7 16.3 8.9 7.2 NA NA 33.6 25.5 ** ** ** ** NA

CPKI § CALIFORNIA PIZZA KITCHEN INC DEC 4.6 8.7 14.8 21.0 19.5 17.8 5.4 (1.6) (23.8) (47.1) 85 160 274 389 361CEC § CEC ENTERTAINMENT INC DEC 61.2 56.5 55.9 68.3 74.7 82.5 44.4 3.3 (5.8) 8.3 138 127 126 154 168CAKE † CHEESECAKE FACTORY INC DEC 42.8 52.3 74.0 81.3 87.9 66.5 21.7 7.0 (8.4) (18.1) 197 241 340 374 405CMG † CHIPOTLE MEXICAN GRILL INC DEC 126.8 78.2 70.6 41.4 37.7 6.1 NA NA 83.3 62.2 ** ** ** ** NACBRL § CRACKER BARREL OLD CTRY STOR JUL 66.0 65.3 76.0 116.3 126.6 111.9 70.2 (0.6) (10.0) 1.0 94 93 108 166 180

DRI [] DARDEN RESTAURANTS INC # MAY 407.0 371.8 369.5 377.1 338.2 290.6 176.7 8.7 7.0 9.5 230 210 209 213 191DIN § DINEEQUITY INC DEC 31.4 (154.5) (0.5) 44.6 43.9 33.4 32.1 (0.2) (1.2) NM 98 (481) (2) 139 137JACK § JACK IN THE BOX INC SEP 131.0 118.2 126.3 109.1 91.5 74.7 76.5 5.5 11.9 10.9 171 155 165 143 120MCD [] MCDONALD'S CORP DEC 4,551.0 4,313.2 2,335.0 2,873.0 2,602.2 2,278.5 1,947.9 8.9 14.8 5.5 234 221 120 147 134CHUX § O'CHARLEY'S INC DEC (7.3) (132.5) 7.2 18.9 12.0 23.3 16.1 NM NM NM (45) (823) 45 117 75

PFCB § P F CHANGS CHINA BISTRO INC DEC 43.7 35.0 35.2 33.3 37.8 26.1 6.0 21.9 10.9 24.7 724 580 584 551 626PNRA † PANERA BREAD CO DEC 86.1 67.4 57.5 58.8 52.2 38.6 (0.2) NM 17.4 27.6 NM NM NM NM NMPZZA § PAPA JOHNS INTERNATIONAL INC DEC 57.5 36.8 32.7 63.0 44.3 23.2 47.3 2.0 19.9 56.1 122 78 69 133 94PEET § PEET'S COFFEE & TEA INC DEC 19.3 11.2 8.4 7.8 10.7 8.8 (0.1) NM 17.0 72.4 NM NM NM NM NMRRGB § RED ROBIN GOURMET BURGERS DEC 17.6 27.1 30.7 29.4 27.4 23.4 NA NA (5.5) (35.1) ** ** ** ** NA

RT § RUBY TUESDAY INC # MAY 45.3 (17.9) 26.4 91.7 101.0 102.3 36.5 2.2 (15.0) NM 124 (49) 72 251 276RUTH § RUTHS HOSPITALITY GROUP INC DEC 2.5 (53.2) 18.1 23.7 10.6 6.4 NA NA (16.9) NM ** ** ** ** NASONC § SONIC CORP AUG 49.4 60.3 64.2 78.7 75.4 63.0 27.4 6.1 (4.7) (18.0) 180 220 234 287 275SBUX [] STARBUCKS CORP SEP 390.8 315.5 672.6 581.5 494.5 390.6 101.7 14.4 0.0 23.9 384 310 661 572 486TXRH § TEXAS ROADHOUSE INC DEC 47.5 38.2 39.3 34.0 30.3 21.7 NA NA 17.0 24.4 ** ** ** ** NA

WEN † WENDY'S/ARBY'S GROUP INC DEC 3.5 (482.0) 15.1 (11.2) (58.9) 1.5 8.7 (8.7) 18.9 NM 40 NM 173 (128) (674)YUM [] YUM BRANDS INC DEC 1,071.0 964.0 909.0 824.0 762.0 740.0 627.0 5.5 7.7 11.1 171 154 145 131 122

OTHER COMPANIES WITH SIGNIFICANT RESTAURANT OPERATIONSCOSI COSI INC DEC (11.1) (15.9) (16.5) (12.3) (13.1) (18.4) NA NA NM NM ** ** ** ** NADPZ DOMINO'S PIZZA INC DEC 79.7 54.0 37.9 106.2 108.3 62.3 NA NA 5.1 47.8 ** ** ** ** NALUB LUBYS INC AUG (26.2) 2.5 11.2 21.1 8.6 1.9 28.6 NM NM NM (92) 9 39 74 30

Note: Data as originally reported. CAGR-Compound annual growth rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year. **Not calculated; data for base year or end year not available.

RESTAURANTS INDUSTRY SURVEY Data by Standard & Poor's Compustat — A Division of The McGraw-Hill Companies

Page 39: industry survey - restaurant 2011

Return on Revenues (%) Return on Assets (%) Return on Equity (%)Ticker Company Yr. End 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005

RESTAURANTS‡BH § BIGLARI HOLDINGS INC SEP 1.0 NM 1.8 4.4 5.0 1.2 NM 2.1 5.5 6.6 2.1 NM 4.0 10.4 12.8BJRI § BJ'S RESTAURANTS INC DEC 3.1 2.8 3.7 4.1 4.7 3.6 3.3 4.4 4.8 6.3 5.4 4.6 5.5 5.9 8.0BOBE † BOB EVANS FARMS # APR 4.1 NM 3.7 3.7 3.5 6.2 NM 5.4 5.0 4.6 11.4 NM 9.8 8.6 8.1EAT † BRINKER INTL INC JUN 2.2 1.2 5.3 5.2 4.1 3.8 2.3 10.1 9.8 7.3 12.7 7.4 24.5 19.7 15.2BWLD § BUFFALO WILD WINGS INC DEC 5.7 5.8 6.0 5.8 4.2 11.1 11.1 11.0 11.1 7.0 16.1 15.6 15.2 15.3 9.7

CPKI § CALIFORNIA PIZZA KITCHEN INC DEC 0.7 1.3 2.3 3.8 4.1 1.3 2.4 4.4 7.2 7.6 2.5 4.4 6.9 10.4 10.7CEC § CEC ENTERTAINMENT INC DEC 7.5 6.9 7.1 8.8 10.3 8.2 7.6 7.8 10.1 11.8 41.3 32.6 19.4 19.7 21.5CAKE † CHEESECAKE FACTORY INC DEC 2.7 3.3 4.9 6.2 7.4 3.9 4.6 6.8 8.3 10.4 8.8 10.3 11.6 12.0 14.8CMG † CHIPOTLE MEXICAN GRILL INC DEC 8.4 5.9 6.5 5.0 6.0 14.2 10.1 10.6 8.3 10.4 19.1 13.2 13.6 10.6 13.2CBRL § CRACKER BARREL OLD CTRY STOR JUL 2.8 2.7 3.2 4.4 4.9 5.2 5.1 5.2 7.2 8.5 57.8 66.3 37.4 19.8 14.5

DRI [] DARDEN RESTAURANTS INC # MAY 5.7 5.2 5.6 6.8 5.9 7.9 7.6 9.7 12.8 11.4 23.3 24.7 29.5 32.4 27.0DIN § DINEEQUITY INC DEC 2.2 NM NM 12.7 12.6 0.3 NM NM 5.8 5.5 53.7 NM NM 15.3 13.9JACK § JACK IN THE BOX INC SEP 5.3 4.7 4.4 3.9 3.7 8.9 8.2 8.7 7.6 7.0 26.7 27.1 22.4 17.1 16.4MCD [] MCDONALD'S CORP DEC 20.0 18.3 10.2 13.3 12.7 15.5 14.9 8.0 9.7 9.0 33.2 30.1 15.2 18.8 17.7CHUX § O'CHARLEY'S INC DEC NM NM 0.7 1.9 1.3 NM NM 1.1 2.7 1.8 NM NM 1.9 5.2 3.5

PFCB § P F CHANGS CHINA BISTRO INC DEC 3.6 2.9 3.2 3.5 4.7 6.6 5.4 6.2 6.8 8.9 13.3 11.4 12.1 11.4 14.0PNRA † PANERA BREAD CO DEC 6.4 5.2 5.4 7.1 8.2 11.4 9.8 9.3 12.0 13.7 15.8 14.3 13.6 16.5 18.7PZZA § PAPA JOHNS INTERNATIONAL INC DEC 5.2 3.3 3.1 6.3 4.6 14.7 9.3 8.4 17.3 12.2 37.4 28.6 24.0 41.0 29.5PEET § PEET'S COFFEE & TEA INC DEC 6.2 3.9 3.4 3.7 6.1 10.1 6.3 5.1 5.2 7.8 12.5 7.7 6.1 6.2 9.1RRGB § RED ROBIN GOURMET BURGERS DEC 2.1 3.1 4.0 4.7 5.6 2.9 4.7 6.1 7.5 9.1 6.3 9.8 11.6 13.1 14.9

RT § RUBY TUESDAY INC # MAY 3.8 NM 1.9 6.5 7.7 4.1 NM 2.1 7.6 9.0 9.5 NM 6.1 19.0 18.5RUTH § RUTHS HOSPITALITY GROUP INC DEC 0.7 NM 5.7 8.7 5.0 0.9 NM 7.7 13.8 5.6 6.4 NM 23.3 43.8 NA SONC § SONIC CORP AUG 6.9 7.5 8.4 11.4 12.1 5.9 7.6 9.2 13.1 13.9 NA NA 45.1 20.3 21.0SBUX [] STARBUCKS CORP SEP 4.0 3.0 7.1 7.5 7.8 6.9 5.7 13.8 14.6 14.3 14.1 13.2 29.8 26.9 21.7TXRH § TEXAS ROADHOUSE INC DEC 5.0 4.3 5.3 5.7 6.6 7.4 6.5 7.9 8.9 10.3 12.2 10.5 11.5 12.4 15.0

WEN † WENDY'S/ARBY'S GROUP INC DEC 0.1 NM 1.2 NM NM 0.1 NM 1.0 NM NM 0.1 NM 3.3 NM NMYUM [] YUM BRANDS INC DEC 9.9 8.5 8.7 8.6 8.2 15.7 14.0 13.4 13.7 13.4 233.6 187.0 70.6 57.1 50.1

OTHER COMPANIES WITH SIGNIFICANT RESTAURANT OPERATIONSCOSI COSI INC DEC NM NM NM NM NM NM NM NM NM NM NM NM NM NM NMDPZ DOMINO'S PIZZA INC DEC 5.7 3.8 2.6 7.4 7.2 17.4 11.5 8.9 25.3 23.8 NA NA NA NA NA LUB LUBYS INC AUG NM 0.8 3.5 6.5 2.7 NM 1.1 5.3 10.2 3.9 NM 1.3 6.5 13.6 6.2

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year.

RESTAURANTS INDUSTRY SURVEY Data by Standard & Poor's Compustat — A Division of The McGraw-Hill Companies

Page 40: industry survey - restaurant 2011

Debt as a % ofCurrent Ratio Debt / Capital Ratio (%) Net Working Capital

Ticker Company Yr. End 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005

RESTAURANTS‡BH § BIGLARI HOLDINGS INC SEP 1.2 0.8 0.5 0.4 0.4 30.2 34.5 33.6 35.7 37.3 857.1 NM NM NM NMBJRI § BJ'S RESTAURANTS INC DEC 1.1 0.6 1.8 2.6 2.2 1.8 3.7 0.0 0.0 0.0 66.2 NM 0.0 0.0 0.0BOBE † BOB EVANS FARMS # APR 0.4 0.3 0.2 0.5 0.5 17.5 20.9 16.3 18.1 20.4 NM NM NM NM NMEAT † BRINKER INTL INC JUN 0.9 0.9 0.7 0.5 0.6 52.8 60.2 50.7 31.6 26.0 NM NM NM NM NMBWLD § BUFFALO WILD WINGS INC DEC 1.5 1.5 2.6 2.9 3.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

CPKI § CALIFORNIA PIZZA KITCHEN INC DEC 0.6 0.5 0.5 0.6 1.0 10.5 29.8 0.0 0.0 0.0 NM NM NM NM NMCEC § CEC ENTERTAINMENT INC DEC 1.0 0.9 0.8 0.9 0.8 64.4 73.1 57.6 32.8 29.1 NM NM NM NM NMCAKE † CHEESECAKE FACTORY INC DEC 0.9 1.0 0.8 1.2 1.3 20.1 37.9 26.4 4.8 3.5 NM NM NM 99.2 66.2CMG † CHIPOTLE MEXICAN GRILL INC DEC 2.9 2.7 2.8 2.9 0.4 0.5 0.6 0.7 0.8 1.1 1.9 2.9 3.1 3.4 NMCBRL § CRACKER BARREL OLD CTRY STOR JUL 0.7 0.8 0.7 0.9 0.6 76.9 84.1 82.0 69.1 17.9 NM NM NM NM NM

DRI [] DARDEN RESTAURANTS INC # MAY 0.5 0.5 0.4 0.5 0.4 40.4 47.1 51.3 30.5 27.3 NM NM NM NM NMDIN § DINEEQUITY INC DEC 1.3 1.4 1.1 1.2 1.1 77.0 78.9 73.0 42.0 44.7 NM NM NM NM NMJACK § JACK IN THE BOX INC SEP 0.9 1.1 0.7 1.2 1.0 40.4 50.5 48.2 24.5 31.7 NM NM NM 395.9 NMMCD [] MCDONALD'S CORP DEC 1.1 1.4 0.8 1.2 1.4 40.8 41.6 31.0 33.7 35.7 NM NM NM NM 492.9CHUX § O'CHARLEY'S INC DEC 0.8 0.7 0.8 0.7 0.8 38.2 42.2 27.2 27.5 32.9 NM NM NM NM NM

PFCB § P F CHANGS CHINA BISTRO INC DEC 0.6 0.8 0.5 0.6 1.1 0.9 20.4 23.1 4.8 2.4 NM NM NM NM 65.7PNRA † PANERA BREAD CO DEC 2.3 1.2 1.2 1.2 1.2 0.0 0.0 14.3 0.0 0.0 0.0 0.0 307.9 0.0 0.0PZZA § PAPA JOHNS INTERNATIONAL INC DEC 1.0 0.8 0.7 0.8 0.9 34.7 47.1 49.7 38.6 22.6 NM NM NM NM NMPEET § PEET'S COFFEE & TEA INC DEC 3.1 2.5 2.5 2.7 4.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0RRGB § RED ROBIN GOURMET BURGERS DEC 0.6 0.5 0.5 0.4 0.4 37.3 44.0 33.3 31.6 21.4 NM NM NM NM NM

RT § RUBY TUESDAY INC # MAY 0.7 0.8 0.9 0.8 0.7 32.4 52.2 56.2 51.8 39.4 NM NM NM NM NMRUTH § RUTHS HOSPITALITY GROUP INC DEC 0.4 0.5 0.6 0.4 0.7 75.0 81.2 52.3 50.0 48.9 NM NM NM NM NMSONC § SONIC CORP AUG 1.7 0.9 0.6 0.5 0.5 96.6 106.6 115.3 27.4 18.7 805.7 NM NM NM NMSBUX [] STARBUCKS CORP SEP 1.3 0.8 0.8 0.8 1.0 15.2 18.0 19.3 0.2 0.2 120.8 NM NM NM NMTXRH § TEXAS ROADHOUSE INC DEC 0.7 0.3 0.5 0.7 0.9 19.1 26.4 15.1 9.7 2.8 NM NM NM NM NM

WEN † WENDY'S/ARBY'S GROUP INC DEC 1.8 0.8 0.8 1.7 1.2 34.8 27.4 61.3 58.3 66.6 371.6 NM NM 435.4 301.8YUM [] YUM BRANDS INC DEC 0.7 0.6 0.7 0.5 0.5 73.1 101.6 71.1 57.5 53.2 NM NM NM NM NM

OTHER COMPANIES WITH SIGNIFICANT RESTAURANT OPERATIONSCOSI COSI INC DEC 0.6 0.8 0.9 1.8 3.0 0.0 4.0 0.2 0.2 0.2 NM NM NM 0.7 0.4DPZ DOMINO'S PIZZA INC DEC 1.3 1.7 1.3 1.1 1.0 755.7 609.1 669.5 422.4 367.0 NM NM NM NM NMLUB LUBYS INC AUG 0.2 0.4 0.9 0.5 0.3 0.0 0.0 0.0 0.0 8.3 NM NM NM NM NM

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year.

RESTAURANTS INDUSTRY SURVEY Data by Standard & Poor's Compustat — A Division of The McGraw-Hill Companies

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Price / Earnings Ratio (High-Low) Dividend Payout Ratio (%) Dividend Yield (High-Low, %)Ticker Company Yr. End 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005

RESTAURANTS‡BH § BIGLARI HOLDINGS INC SEP 83 - 23 NM - NM 43 - 24 21 - 13 20 - 15 0 NM 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0BJRI § BJ'S RESTAURANTS INC DEC 39 - 18 45 - 17 55 - 36 65 - 42 65 - 34 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0BOBE † BOB EVANS FARMS # APR 14 - 7 NM - NM 20 - 13 21 - 14 17 - 13 30 NM 29 32 31 4.2 - 2.1 4.8 - 1.7 2.3 - 1.4 2.4 - 1.5 2.4 - 1.8EAT † BRINKER INTL INC JUN 26 - 10 48 - 8 19 - 10 19 - 13 23 - 18 56 84 16 12 0 5.5 - 2.2 10.8 - 1.8 1.6 - 0.9 1.0 - 0.6 0.0 - 0.0BWLD § BUFFALO WILD WINGS INC DEC 26 - 13 33 - 11 43 - 20 31 - 16 40 - 24 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

CPKI § CALIFORNIA PIZZA KITCHEN INC DEC 92 - 42 50 - 15 49 - 28 32 - 23 34 - 22 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0CEC § CEC ENTERTAINMENT INC DEC 13 - 7 16 - 5 24 - 13 20 - 13 20 - 14 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0CAKE † CHEESECAKE FACTORY INC DEC 31 - 9 28 - 6 29 - 21 38 - 21 34 - 26 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0CMG † CHIPOTLE MEXICAN GRILL INC DEC 25 - 12 63 - 15 72 - 25 53 - 31 NA - NA 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 NA - NACBRL § CRACKER BARREL OLD CTRY STOR JUL 13 - 5 14 - 4 18 - 12 18 - 12 17 - 12 27 25 20 19 22 5.2 - 2.0 6.7 - 1.9 1.8 - 1.1 1.6 - 1.1 1.8 - 1.3

DRI [] DARDEN RESTAURANTS INC # MAY 14 - 8 14 - 5 18 - 10 17 - 13 17 - 11 34 30 27 17 18 4.3 - 2.4 6.1 - 2.1 2.7 - 1.5 1.4 - 1.0 1.6 - 1.0DIN § DINEEQUITY INC DEC 63 - 10 NM - NM NM - NM 22 - 18 22 - 17 0 NM NM 41 44 0.0 - 0.0 17.7 - 1.8 2.8 - 1.4 2.3 - 1.8 2.6 - 2.0JACK § JACK IN THE BOX INC SEP 12 - 7 15 - 6 21 - 13 21 - 11 16 - 11 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0MCD [] MCDONALD'S CORP DEC 16 - 12 17 - 12 32 - 22 19 - 14 17 - 13 49 42 77 43 33 4.1 - 3.2 3.5 - 2.4 3.5 - 2.4 3.2 - 2.2 2.4 - 1.9CHUX § O'CHARLEY'S INC DEC NM - NM NM - NM 76 - 42 28 - 18 43 - 24 NM NM 58 0 0 0.0 - 0.0 15.1 - 1.2 1.4 - 0.8 0.0 - 0.0 0.0 - 0.0

PFCB § P F CHANGS CHINA BISTRO INC DEC 21 - 9 22 - 10 34 - 16 43 - 22 45 - 30 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0PNRA † PANERA BREAD CO DEC 25 - 15 29 - 14 35 - 18 40 - 25 43 - 23 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0PZZA § PAPA JOHNS INTERNATIONAL INC DEC 14 - 7 23 - 10 32 - 20 19 - 15 23 - 12 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0PEET § PEET'S COFFEE & TEA INC DEC 29 - 13 37 - 22 50 - 38 57 - 43 48 - 30 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0RRGB § RED ROBIN GOURMET BURGERS DEC 23 - 8 26 - 4 24 - 17 30 - 18 37 - 24 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

RT § RUBY TUESDAY INC # MAY 13 - 1 NM - NM 60 - 19 21 - 13 16 - 12 0 NM 49 31 3 0.0 - 0.0 0.0 - 0.0 2.6 - 0.8 2.4 - 1.5 0.2 - 0.2RUTH § RUTHS HOSPITALITY GROUP INC DEC 43 - 6 NM - NM 29 - 11 24 - 17 77 - 54 0 NM 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0SONC § SONIC CORP AUG 16 - 7 23 - 6 28 - 21 27 - 20 29 - 21 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0SBUX [] STARBUCKS CORP SEP 45 - 15 49 - 16 41 - 22 53 - 38 52 - 35 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0TXRH § TEXAS ROADHOUSE INC DEC 19 - 10 23 - 8 30 - 20 37 - 20 43 - 29 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

WEN † WENDY'S/ARBY'S GROUP INC DEC NM - NM NM - NM NM - 49 NM - NM NM - NM 600 NM 225 NM NM 1.7 - 1.0 10.5 - 2.7 4.6 - 1.8 6.3 - 3.9 2.8 - 2.1YUM [] YUM BRANDS INC DEC 16 - 10 21 - 11 23 - 16 21 - 15 20 - 17 34 33 30 18 16 3.3 - 2.1 3.2 - 1.6 1.9 - 1.3 1.2 - 0.8 1.0 - 0.8

OTHER COMPANIES WITH SIGNIFICANT RESTAURANT OPERATIONSCOSI COSI INC DEC NM - NM NM - NM NM - NM NM - NM NM - NM NM NM NM NM NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0DPZ DOMINO'S PIZZA INC DEC 7 - 3 16 - 3 58 - 20 17 - 13 16 - 10 0 0 NM 29 25 0.0 - 0.0 0.0 - 0.0 110.2 - 37.8 2.3 - 1.7 2.4 - 1.5LUB LUBYS INC AUG NM - NM NM - 36 28 - 21 20 - 10 39 - 15 NM 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year.

20052009 2008 2007 2006

RESTAURANTS INDUSTRY SURVEY Data by Standard & Poor's Compustat — A Division of The McGraw-Hill Companies

Page 42: industry survey - restaurant 2011

Earnings per Share ($) Tangible Book Value per Share ($) Share Price (High-Low, $)Ticker Company Yr. End 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005

RESTAURANTS‡BH § BIGLARI HOLDINGS INC SEP 4.20 (16.20) 8.40 20.20 22.00 186.80 181.74 202.59 192.02 174.68 350.00 - 98.40 218.20 - 58.40 362.00 - 203.00 422.00 - 265.00 439.00 - 328.20BJRI § BJ'S RESTAURANTS INC DEC 0.49 0.39 0.45 0.42 0.38 9.27 8.52 8.19 7.60 5.51 19.29 - 8.76 17.47 - 6.63 24.80 - 16.07 27.50 - 17.64 24.81 - 13.11BOBE † BOB EVANS FARMS # APR 2.29 (0.17) 1.96 1.68 1.53 19.59 18.03 16.33 16.84 16.38 32.84 - 16.14 34.70 - 12.51 39.83 - 24.58 34.91 - 22.72 26.45 - 19.91EAT † BRINKER INTL INC JUN 0.78 0.50 1.90 1.66 1.21 5.05 4.49 6.05 7.42 7.21 20.09 - 7.95 23.90 - 3.88 35.74 - 18.92 32.02 - 20.99 28.27 - 22.13BWLD § BUFFALO WILD WINGS INC DEC 1.70 1.37 1.12 0.95 0.52 10.63 8.57 7.86 6.56 5.58 44.80 - 21.30 44.98 - 14.50 47.75 - 22.88 29.17 - 14.80 20.85 - 12.58

CPKI § CALIFORNIA PIZZA KITCHEN INC DEC 0.19 0.34 0.51 0.72 0.67 7.44 6.92 7.38 7.00 6.49 17.44 - 8.03 16.91 - 5.24 25.23 - 14.28 23.00 - 16.70 22.87 - 14.63CEC § CEC ENTERTAINMENT INC DEC 2.68 2.43 1.81 2.09 2.13 7.57 5.67 8.19 11.13 9.92 34.77 - 19.29 39.59 - 12.96 43.83 - 24.37 41.14 - 27.69 43.14 - 29.32CAKE † CHEESECAKE FACTORY INC DEC 0.72 0.82 1.02 1.04 1.12 8.49 7.50 8.09 9.05 8.17 22.63 - 6.84 23.25 - 4.96 29.78 - 21.22 39.28 - 21.65 38.49 - 29.29CMG † CHIPOTLE MEXICAN GRILL INC DEC 3.99 2.39 2.16 1.29 1.43 21.65 18.66 16.47 14.02 11.10 98.66 - 46.46 150.00 - 36.86 155.49 - 54.61 67.77 - 39.51 NA - NACBRL § CRACKER BARREL OLD CTRY STOR JUL 2.94 2.87 2.75 2.71 2.65 5.97 4.15 4.40 6.74 16.65 39.50 - 15.44 38.87 - 10.67 50.74 - 31.82 47.95 - 32.04 44.60 - 33.11

DRI [] DARDEN RESTAURANTS INC # MAY 2.92 2.71 2.63 2.63 2.26 5.96 3.93 2.45 7.36 7.99 41.21 - 23.32 37.83 - 13.21 47.60 - 26.90 44.43 - 32.91 39.53 - 25.78DIN § DINEEQUITY INC DEC 0.55 (10.09) (0.13) 2.46 2.26 (86.36) (94.36) (89.61) 15.58 15.38 34.71 - 5.24 55.77 - 5.65 71.70 - 35.57 54.59 - 43.94 50.50 - 37.97JACK § JACK IN THE BOX INC SEP 2.31 2.03 1.93 1.56 1.28 7.34 6.20 4.99 8.36 6.33 28.35 - 16.59 30.35 - 11.82 39.77 - 24.71 32.30 - 16.58 20.98 - 13.68MCD [] MCDONALD'S CORP DEC 4.17 3.83 1.96 2.33 2.06 10.78 9.99 11.14 11.01 10.45 64.75 - 50.44 67.00 - 45.79 63.69 - 42.31 44.68 - 31.73 35.69 - 27.36CHUX § O'CHARLEY'S INC DEC (0.35) (6.34) 0.31 0.81 0.53 8.50 8.69 10.63 11.06 10.03 11.41 - 1.83 15.30 - 1.19 23.45 - 13.17 22.31 - 14.98 22.90 - 12.70

PFCB § P F CHANGS CHINA BISTRO INC DEC 1.90 1.47 1.38 1.28 1.44 12.83 13.02 11.89 10.64 10.47 39.57 - 16.51 33.00 - 14.51 47.10 - 22.16 54.93 - 28.09 65.12 - 42.92PNRA † PANERA BREAD CO DEC 2.81 2.24 1.81 1.88 1.69 15.52 12.57 10.71 10.52 8.49 68.94 - 42.30 65.00 - 30.60 62.78 - 33.33 75.88 - 46.25 72.65 - 39.00PZZA § PAPA JOHNS INTERNATIONAL INC DEC 2.07 1.31 1.10 1.95 1.32 3.73 1.92 1.40 2.57 3.61 29.25 - 15.31 30.68 - 12.78 34.86 - 21.76 37.96 - 28.76 30.13 - 15.67PEET § PEET'S COFFEE & TEA INC DEC 1.48 0.81 0.61 0.57 0.77 12.59 10.91 10.55 9.40 9.02 42.20 - 19.29 29.75 - 17.79 30.37 - 22.98 32.76 - 24.29 37.28 - 23.05RRGB § RED ROBIN GOURMET BURGERS DEC 1.14 1.70 1.84 1.78 1.68 11.51 10.09 11.15 10.69 10.43 26.44 - 9.27 43.58 - 7.49 44.60 - 31.55 52.81 - 32.42 62.91 - 40.34

RT § RUBY TUESDAY INC # MAY 0.74 (0.35) 0.51 1.60 1.67 8.29 7.81 7.72 7.88 8.77 9.38 - 0.85 9.70 - 0.96 30.80 - 9.50 32.98 - 21.03 26.80 - 20.48RUTH § RUTHS HOSPITALITY GROUP INC DEC 0.11 (2.28) 0.78 1.02 0.30 (1.45) (2.01) 0.35 0.01 0.41 4.74 - 0.70 9.00 - 0.90 23.00 - 8.70 24.61 - 16.90 23.06 - 16.30SONC § SONIC CORP AUG 0.81 1.00 0.94 0.91 0.84 (1.52) (3.02) (3.61) 3.32 3.26 12.86 - 6.05 23.33 - 5.78 26.19 - 20.02 24.75 - 18.14 24.03 - 17.77SBUX [] STARBUCKS CORP SEP 0.53 0.43 0.90 0.76 0.63 3.66 2.93 2.74 2.68 2.56 23.95 - 8.12 21.01 - 7.06 36.61 - 19.89 40.01 - 28.72 32.46 - 22.29TXRH § TEXAS ROADHOUSE INC DEC 0.68 0.53 0.53 0.46 0.44 4.20 3.35 3.44 3.06 2.56 12.75 - 6.72 12.39 - 4.09 16.05 - 10.51 17.24 - 9.16 19.13 - 12.65

WEN † WENDY'S/ARBY'S GROUP INC DEC 0.01 (2.60) 0.16 (0.13) (0.84) 0.14 0.28 (0.70) (1.20) (2.67) 5.80 - 3.55 10.11 - 2.63 20.55 - 7.82 20.56 - 12.86 16.00 - 11.60YUM [] YUM BRANDS INC DEC 2.28 2.03 1.74 1.51 1.33 (0.16) (2.28) 0.27 0.81 1.04 36.96 - 23.37 41.73 - 21.50 40.60 - 27.50 31.84 - 22.10 26.90 - 22.37

OTHER COMPANIES WITH SIGNIFICANT RESTAURANT OPERATIONSCOSI COSI INC DEC (0.27) (0.40) (0.42) (0.32) (0.38) 0.22 0.46 0.81 1.26 1.45 1.21 - 0.16 3.24 - 0.15 6.77 - 2.00 11.21 - 4.20 10.39 - 4.40DPZ DOMINO'S PIZZA INC DEC 1.39 0.93 0.61 1.68 1.62 (22.85) (25.31) (24.65) (9.39) (7.93) 10.07 - 4.58 15.18 - 2.61 35.67 - 12.25 28.90 - 21.01 25.91 - 16.41LUB LUBYS INC AUG (0.93) 0.09 0.43 0.81 0.38 5.83 6.73 6.81 6.35 5.56 5.88 - 3.23 11.26 - 3.23 11.83 - 9.21 16.09 - 8.18 14.80 - 5.75

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year. J-This amount includes intangibles that cannot be identified.

The analysis and opinion set forth in this publication are provided by Standard & Poor’s Equity Research Services and are prepared separately from any other analytic activity of Standard & Poor’s.In this regard, Standard & Poor’s Equity Research Services has no access to nonpublic information received by other units of Standard & Poor’s. The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.

RESTAURANTS INDUSTRY SURVEY Data by Standard & Poor's Compustat — A Division of The McGraw-Hill Companies