Zach Sherman (00:12)
Hi everyone. Welcome back to Handling the Heat, the podcast by restaurantequipment.bid, where we dive into the real stories behind the people powering the food service industry. Today, we’re joined by John Hamburger, president of the Franchise Times and one of the most respected voices in restaurant finance. John brings a unique high level view of the restaurant landscape, from deal making and valuations to the operational challenges operators are facing right now. We talk about the state of the industry in 2025.

What’s driving traffic declines, why delivery has reshaped the economics of dining, and how some brands are managing to grow while others are struggling to keep up. Whether you’re running one store or scaling a large chain, this episode is packed with insights on what’s changing and what still works.

Zach Sherman (00:58)
John, thank you so much for coming on Handling the Heat. Very excited to talk to you ⁓ about how the restaurant industry has been transforming over the last couple of years, given your background. But before we get started here, John, what’s something you’ve eaten recently that you’ve really enjoyed?

John Hamburger (01:15)
Yeah, well, Hi Zach ⁓ you know, yesterday I had three soft tacos at Taco Bell. my favorite.

Zach Sherman (01:22)
This is good.

What kind of, ⁓ do you do the Supreme or do you go with just the regular soft tacos there? Awesome. Yeah. Awesome. Cool. Well, John, thank you so much for coming on. Super excited to get your take on how things have been going in the restaurant industry. Usually in, ⁓ our episodes, we’re talking a lot with operators, but from your higher level perspective and

John Hamburger (01:28)
Just the regular. Yeah, the number three.

Zach Sherman (01:47)
you know, kind of this bird’s eye view of how everything’s been going. I’m really excited to talk to you about the current state of the restaurant franchise industry as of 2025. There’s been lot of change economically, a lot of change from the customer perspective and really excited to get into it. So from your perspective, start you off with an easy question here, John, how would you describe the current state of the restaurant industry in 2025?

John Hamburger (02:14)
Yeah, would, Zach, I would say that ⁓ the word comes to mind challenged. And I think that people were expecting coming into 25, you know, after the election that it would be a rebound year for, you know, sort of restaurant on the deal side, you know, restaurant deals. ⁓ I think there was optimism that ⁓

know restaurant sales would improve, same store sales. And what we found is kind of the opposite. It’s pretty challenging out there for operators right now. ⁓ Traffic is soft. think some of the numbers you’re seeing from some of the chains in terms of ⁓ their traffic is not very good. And you know if you look at Wall Street, the Wall Street restaurant analysts now, you know they haven’t been… ⁓

they haven’t been this ⁓ gloomy. I can’t remember when. ⁓ so that’s, think, something that’s ⁓ different that, COVID was very tough, but restaurant operators came out of it pretty good. There was some real optimism and now traffic is challenged. there’s a lot of reasons we can get into it as to why.

know, restaurant traffic is challenged. And I mean, there’s, there’s obviously, if you listen to the transcript or you read the transcripts of the conference calls of the public chains, you know, some of their, they call them their low income customers have dialed back. And in the last quarter, some of the chains even talked about their middle income customers, you know, cutting back. And I think it has a lot to do with, with pricing.

know, restaurant pricing has been pretty aggressive. And, know, rightly so, think, you know, costs, labor, lot of operating costs have gone up. But I think, I think that the pricing has pushed the envelope with the customer to where, you know, people, you’ve heard this and I hear it all the time. I can’t believe what that meal cost. And I think there’s, and I think that’s what’s going on. And so I think people have cut back a little bit. And restaurants.

Restaurants are one of those disposable ⁓ expenditures that people can cut back on. And another interesting stat I like to throw out there is that I think it’s 25 straight months ⁓ restaurant pricing has exceeded grocery pricing. And in the last year, it’s exceeded grocery pricing by a two to one margin. And so I think

Zach Sherman (05:02)
Wow.

John Hamburger (05:03)
I think people look at that and think, you know, I can make a meal at home and instead of eating out tonight, I’ll do something at home. And that’s what restaurants are having to deal with. And there’s a lot of internal things going on too, you know, with restaurants. There’s this kind of this transformation that’s taken place, really accelerated during COVID, ⁓ this sort of this digital transformation where, you know, delivery, you we call it off-premise.

where ⁓ in-store dining is down, people are either taking it out, they’re getting it delivered, catering is on the rise. And I think some chains, Zach, are better able to deal with that. They’ve got a product that’s better for that than other restaurants. Or, you know, other restaurants may have sort of a legacy style of operation where, you know,

newer up and coming restaurants, you know, they’re geared for selling product off premise. And I think that’s caused some disruption. You get a lot of complaints. I hear a lot of complaints from restaurant operators that say third party delivery isn’t profitable for them. You know, they’re just trading dollars. They mark it up to kind of cover the DoorDash or Uber Eats commission. But then, you know, you’re just, the costs involved in that have been high.

So there’s a lot of issues out there restaurants are dealing with right now.

Zach Sherman (06:33)
Yeah, no, that’s interesting. And let’s unpack that a little bit, John, because I think it’s interesting to juxtapose the operational challenges, both from a customer perspective and from the internal operations of a company with you see these massive numbers getting thrown out, valuing chains, like, for example, the Jersey Mike’s $8 billion sale. Right. And then you have all of these other operational challenges that are all encompassing of the restaurant industry. ⁓ How do you kind of reconcile with

you know, on the day-to-day operational challenges that you’re talking about with the, you know, big checkbooks of the people that are finding these operators that are performing well in comparison to maybe their peers.

John Hamburger (07:15)
Yeah.

Well, I think, you I think that, you know, you mentioned Jersey Mike’s and I think there was a recent deal. Dave’s Hot Chicken was sold to Rourke Capital. And, ⁓ you know, these are ⁓ Jersey Mike’s and ⁓ Dave’s Hot Chicken and a year ago or so, Tropical Smoothie Cafe and Seven Brew. You these are pretty high growth, you know, high growth ⁓ restaurant chains.

And so they’re paying big dollars, big multiples to buy these. But if you take into consideration the growth that’s taking place in these chains, they, the buyers, think that this is reasonable. And a lot of these chains are franchisors. So if you look at restaurants over the last, I don’t know, 10, 15 years, royalty income of a restaurant chain is valued higher than

⁓ operating income. And so that’s how they get away with paying these high prices for some of these change. But you’re right. You know, it’s kind of a tale of two different types of restaurants. You’ve got restaurants that, you know, you take a restaurant like Noodles or Bloomin’ Brands, which owns Outback Steakhouse and Carrabba’s. ⁓ You know, they’re trading at Red Robin. You know, they’re trading at really

⁓ pretty low. It’s much lower than it was the last 10 years. And so I just think that people are again making a decision about which chains are growing, which chains aren’t, which chains are delivering margins, decent margins, which chains aren’t. And that’s the difference in the valuations.

Zach Sherman (09:04)
Yeah,

but the issues that you’re talking about are seismic, right? They impact the good operators, they impact the troubled operators. And I think that customer perception of the restaurant is a really interesting point that you brought up. Because when I read the news and I see a dozen eggs is $10, I’m looking at McDonald’s cheeseburger for $5 and thinking, this is gonna be more nutrition, more bang for my buck.

But it sounds like those ⁓ what the publicly traded companies are calling lower income customers are not seeing it in that way.

John Hamburger (09:42)
Yeah, well, know, this whole thing about the lower income customer, you know, they’ve been talking about that for, you know, probably two years now, it seems, where, hey, we’re seeing softness with our lower income consumer. And what’s troubling about that to me is that, you know, they define lower income as anyone under 75,000. But you know, those are heavy users, have been traditionally heavy users of quick serve restaurants.

And then now possibly talking about ⁓ people under 150,000 cutting back, well those are users of fast casual and casual dining restaurants. And so that is a little bit troubling. It’s interesting though, restaurants have tested and tried this, they call it the barbell strategy. We’re gonna have lower priced items, you mentioned the $5 double cheeseburger at McDonald’s.

Five bucks and you get some nuggets and and and coke and in a fries ⁓ And then you know, then you’ve got these higher higher priced items what’s interesting about that is that When you deliver that, know when it gets delivered and it gets marked up and there’s delivery fees and there’s you tip now all of a sudden That’s an expensive deal. And I think I think people are reacting reacting to that. That’s that’s one area

And then, but it’s interesting, you if you take a look at at Chili’s, for instance, I mean, who would have thought that Chili’s would, know, their sales, their same store sales have been up 30 % plus, you know, in the last year, year and a half. Who would have ever thought that a casual dining chain could even conceive of a turnaround and make it work? And so, you know, there’s always hope in these restaurant chains that

the combination of product and marketing will turn that around and start to draw some of these customers or increase their frequency.

Zach Sherman (11:52)
And that was going to be my next question is like, what is the out? What is the fix? Because when you see all these issues, but you also see the winners, right? Like Chili’s, for example, the brand voice of Chili’s I think is great, right? Like you see them all over social media, you see their ⁓ television advertisements and things like that. And it feels cohesive and it draws you in even though I’ve, you

haven’t necessarily been to a Chili’s in a while. think, you know, I’ve seen it and it’s top of mind for me when having these kinds of conversations. But some of the things you can’t really fix, which is the pricing, right? Potentially because food costs, labor costs, you know, the cost of, you know, upkeep and equipment and maintenance and things like that. But what is in your, from your perspective?

what are the things that you can change? What are the levers you can pull to bring more people in from all different tranches of income status?

John Hamburger (12:45)
Well, I think, you know, traditionally what restaurants have done when they get into times like this when traffic is challenged is that they discount, you know, they offer value. you know, if you use the McDonald’s app, for instance, you know, I just saw one the other day, 25 % if you make an $8 purchase or more, you get 25 % off. That’s pretty good. That’s pretty good discount. You know, Subway offers the…

the meal deal, get a six inch and ⁓ a chips and a drink for $6.99. That’s a pretty good deal. ⁓ Burger King, you spend, the Burger King near my office, if you spend more than a dollar, you get free fries. So that’s an example of, how can I try to, during this time, this challenging time, how can I keep traffic coming in? So they use this, they use this.

this value play or discounting to try to do that. In the case of Chili’s, which is really interesting, is Chili’s, you know, they offered this, I think it’s three for me, you get a, the main item is, ⁓ I believe it’s a cheeseburger, I’ve had it, it’s a cheeseburger, fries, drink, and you get a basket of chips. And so the value there, it’s 10.99. It’s pretty good value. I mean, go to McDonald’s and order the top of the line burger, fries, and a drink, and it’s, you know, 12.99.

You know, how does Chili’s do that? And they didn’t chince on it. It’s not a two ounce burger and a half a slice of cheese. It’s really, it’s pretty good value. And they’re finding, or what they’re finding is people are coming in and not everyone’s ordering that. They’re ordering, you know, they’re ordering drinks, margaritas, they’re ordering fajitas. ⁓ And they really worked on training and really worked on making it a good experience when people come in.

⁓ And those types of restaurant chains are able to navigate this downturn. I’ve been through a number of different sort of eras in restaurants where we’ve seen this traffic challenge. And it always emerges, the restaurant industry always emerges out of this. And there’s winners and losers, just like any industry. And I expect that we’ll…

will emerge from this at some point too.

Zach Sherman (15:17)
Yeah, and I think what’s interesting to me in particular is obviously the discounting strategy, right? Which is almost like ⁓ the Costco rotisserie chicken of, you know, chilies, right? You come in, get, someone gets a burger and chips, but you know, someone else is getting a Salisbury steak or something like that, which is, you know, a little bit higher in price.

John Hamburger (15:36)
Hey,

the biggest non-secret out there is, you know, if you’re a Costco member is the hot dog for a buck and a half and you get a drink. I mean, you can’t beat that. I mean, there are deals out there.

Zach Sherman (15:43)
Right, right. Right.

Yeah, you just gotta be willing to go and find them. No, definitely.

John Hamburger (15:53)
If you can download an app, you can find them.

Zach Sherman (15:55)
Right.

that’s so that’s ⁓ a great transition into so that the discounting piece is one of it. But I think what I’ve seen and what I think is also really interesting is the loyalty programs that are coming ⁓ from,

I guess, strategy of discounting more directly to customers, right? And now, especially with the digital age and, you know, there’s the McDonald’s app you brought up that, you know, you could get massive discounts, the Booker King app. You have the ability as an operator to put these discounts out there, get more information about your customer, and then bring them in so that you have a more, you know,

many more touch points than you maybe would have in the past because of your digital experience that you’re building outside of your brick and mortar store.

John Hamburger (16:43)
Yeah, know, know, loyalty, there’s all kinds of studies that loyalty, loyalty customers spend more than non-loyalty customers, you know, so that’s, that’s a, that’s a reason to do that. And I think, I think a number of chains have kind of struggled with how do we, ⁓ you know, how do we build up our loyalty base without discounting? You know, I think in some, in some brands, discounting has become the way they keep the loyalty customers, you know, you go to McDonald’s.

you know, you don’t use the app, you’re leaving a fair amount of money on the table. Now, is that good for McDonald’s? Is it good for the franchisees of McDonald’s? Probably not for the franchisees because, you know, it’s just, it’s discounted and free food. ⁓ But I think operators are kind of, you some have figured it out. They’re gaming, you know, try to keep people engaged in loyalty and… ⁓

it’s kind of a work in progress.

Zach Sherman (17:45)
Yeah, and especially with all the development happening on the technology side, who knows what it looks like a year from now, five years from now, it could be a totally different experience for that loyalty development.

John Hamburger (17:59)
Well, it does seem to me that in QSR, ⁓ people just aren’t going into the restaurants. They’re choosing to pick it up, use the drive-through, use delivery, get it catered at the office or catered at an event. That’s really been interesting how that off-premise number has grown. And that changes everything.

You know, how do you design the buildings? How big are the parking lots? you, does the drive, you have a drive through at ⁓ the end of the end cap. So it’s a lot of, a lot of changes that restaurant operators have had to go through to try to figure this all out. How do you, how do you price a delivery order? You know, how do you discount a delivery order? ⁓ You know, these are things that 10, 15 years ago, restaurant operators didn’t have to deal with.

You know, it’s funny, when I got into the restaurant business, the marketing, the main marketing that it was the 10 o’clock news, you the local news, people ran restaurant ads like crazy. restaurants thought about how do we get more customers? What’s our marketing mix? How many weeks of television can we buy in a market?

And today, there’s so much. You’ve got social media promotion. You’ve got some televisions left. ⁓ And then you’re using marketing through the delivery sites. It’s just a different deal. You used to be able to figure this out. How much TV can I buy? And now you need an MBA to figure out how to allocate the marketing. It’s very difficult right now for chains, I think.

Zach Sherman (19:54)
Yeah, no, definitely. And there’s so many different channels too, of like, are you reaching these people? And you need to make sure that it’s a cohesive experience throughout all of those channels to all of your customers or potential customers.

John Hamburger (20:06)
It’s,

I wrote in a newsletter this month, said it’s turned into like selling soap and toothpaste. You know, it’s a numbers game. ⁓

Zach Sherman (20:19)
Yeah, no. And John, so we’ve talked a lot about how people are getting into the stores, whether it be off-premise purchases or sitting in a dining room or whatever else. ⁓ And the changes that the chains and restaurants are doing in order to facilitate that transition, right? And try to cope with all of these changes in the customer mentality, the customer requirements.

How else from an operational perspective, and again, none of this matters if nobody’s walking through the door, delivery person or actual customer, but how else are chains dealing with the operational challenges that they’re going through? Pricing of food, pricing of equipment, the labor shortage and the pricing of labor across the country. What else are you seeing separate and apart from bringing people in the door? It’s like, once they’re in the door, how do we make sure we’re running an efficient operation?

John Hamburger (21:18)
Yeah, well there’s a lot of ⁓ trial and error testing ⁓ that’s going on right now trying to figure it out. give you an example, I was talking to the CEO of a small chain the other day and he’s figured out that ⁓ his off-premise, his type of product, the off-premise part of the business has been pretty strong.

So he’s adding drive-throughs where he didn’t have drive-throughs, know, really focusing on the delivery, how do we make money on delivery, and then really trying to build up the catering business, which is kind of a margin enhancer for ⁓ the whole off-premise. So there’s an example of a small chain trying to figure out how to ⁓ keep a good margin. On the other hand, I talked to an operator the other day who doesn’t like delivery.

So he doesn’t deliver in his stores. He delivers locally. So that’s an example. He’s willing to deliver locally, ⁓ sort of in a micro area, rather than use the delivery service providers. There’s an interesting story I wrote about a ⁓ month or so ago of an operator in Seattle, a casual dining operator, kind of fine casual dining operator. And you think of a more difficult place to operate than Seattle.

you know, rising wages, rising minimum wages. But what this particular operator did is narrowed the number of hours that they were open from just Tuesday to Wednesday evenings and using the rest of the down hours, know, lunches and Sundays and Mondays for events, for catering, for special parties, private parties.

and was able to turn their business around. So restaurants are really, you know, the thing I’ve loved about the restaurant business is that they’re so entrepreneurial, you know, in trying to figure out how to attract customers and how to make a buck. you know, that’s what’s fun about the industry.

Zach Sherman (23:32)
Yeah, and I think the adaptability of a restaurant to be able to have a party one day, do a catering event another day, and then just run regular lunch traffic the day after, I think, is a really interesting way of dealing with all these changes that ultimately root from what does the customer actually want? Like, it doesn’t really matter, I guess, what the operators want because they need people walking through the door.

John Hamburger (23:59)
Right. Yeah, it would be tough to hold a wedding in a Burger King or McDonald’s, but you know.

Zach Sherman (24:05)
Yeah, I’m sure that

we’ve seen something on social media somewhere where someone’s doing it. Cool. ⁓ so I guess, John, the other question that I’m curious your perspective on is we’ve talked a lot about active operators, right? People that are in business, you know, one to 5,000 stores, right? And how they’re dealing with the adaptability of it. But the other thing that

John Hamburger (24:09)
Someone should try it.

Zach Sherman (24:32)
We’ve talked to you on this podcast and in my day-to-day work, we see people that are starting up and they have no footprint. They know that they have an idea. They have the product that they want to put out into the world and they have what they believe to be a strong potential customer base. How would you, given what you’ve shared about the overall industry and active operators, think about starting up any kind of food or bev type of ⁓ store?

John Hamburger (25:02)
Yeah, well, that’s a good question. A number of people that start restaurants, you know, come out of the industry. You know, they’ve they’ve been a server, a bartender, you know, a manager. And so so they’ve had some experience, you know, working, working in a restaurant. And in those particular cases, I think I think the odds are a little better for them than say someone who’s just decided they wanted to be in the restaurant business and they were they were in the plumbing business or

know, widget business and decided to get in. You know, the couple of things that I would recommend is one, that they find, ⁓ you know, advice, you know, an accountant that actually has done restaurants, you know, and understands the restaurant business, that understands the technology, the potential technology that you can employ ⁓ in a restaurant. I think that would be really important for them to find people.

around them that ⁓ have that experience or been successful in that, you know, to ask. It’s interesting, you you see some growth chains come up and ⁓ you’ll talk to them and, they picked up the phone and they called Howard Schultz or they picked up the phone and, you know, called Patrick Doyle at Restaurant Brands International. You know, they’re not afraid to reach out and ask, ⁓ you know, for advice. ⁓

And that’s what I would tell someone.

Zach Sherman (26:36)
Yeah, no, that’s great. And I think, you in any industry, but in the restaurant business in particular, given all of the fluctuation of the customers and the operational costs and, you know, how to do things efficiently is, you know, it’s good to have those kinds of mentors around you.

John Hamburger (26:51)
The advice might come back is just stay the hell out of the restaurant.

Zach Sherman (26:54)
Yeah, no, and I’ve heard that advice get thrown around before, but it’s the few that stay that wanna, you know that they really wanna be there. ⁓ So the last question, John, that I have is, what do you think, given all these changes, and maybe they’re, I feel like I kinda know your answer, given your way of describing the fluctuating restaurant business ⁓ over the,

the past couple decades, but I’m curious, John, what do you think the kind of next iteration of the restaurant business looks like?

John Hamburger (27:33)
Yeah, well, I think that, you know, this is just one of the themes that I’ve written about in the past is that, you know, with delivery, ⁓ with ⁓ all the digital ordering ⁓ that’s out there, ⁓ you’ve taken a restaurant that maybe had its own little trade area, and with delivery, you’ve extended that trade area.

And there’s been a number of different studies. think NPD and the National Restaurant Association have done these studies of the extension of the trade area. And what that’s happened, all of a sudden that trade area expands. It’s just like increasing the restaurant base by 20, 30 % more units. And so I think that during this period, the next couple of years, we’re gonna see a settling, a little bit of a shakeout.

You’re seeing restaurants ⁓ chains announcing their closures. Jack in the Box is gonna close 200 stores. Red Robin is closing stores. That’s, think, what you’re gonna see here over the next couple years as this, we figure out exactly where the industry’s going and how many units we’re gonna need to satisfy the customer base. So it’s gonna be.

There’s going to be some closures, I think, of chains that haven’t been able to adapt either because of their location or type of business, the type of food they serve. You know, I would expect some angst on some. Now that doesn’t mean, know, just yesterday I saw Kava, you know, report, you know, 2.9.

million dollar average unit volumes, 25 % margins. And where was CAVA 10 years ago? ⁓ It was a fledgling little deal. So there’s always opportunity in this industry. Right product, right margin, right customer. That’s the beauty of the industry.

Zach Sherman (29:49)
Awesome, I agree. Well, John, thank you so much for the time. Really appreciate your insight. This was a super interesting conversation and excited to see how these restaurants deal and adapt with the never changing customer ⁓ needs and requirements across the country.

John Hamburger (30:06)
Yeah, thanks, Zach.