All posts by Roger Lipton



I cannot resist commenting on, and correcting the latest version of revisionist economic history.

Just yesterday Maria Bartiromo was interviewing Peter Navarro, President Donald Trump’s Director of Trade and Manufacturing and a frequent economic spokesperson. After predictably predicting a weak stock market, burdened by the poor policies of President Biden, his description of the last ten years went like this: “Under President Obama, coming out of the 08-09 crash, the GDP grew by a meager 2%, and the debt doubled. Under Donald Trump, we grew at 3% and the economy was roaring before the pandemic hit.”

Not quite:

Under President Obama, the GDP grew by an average of 1.6%, held down by a negative 2.5% in ’09, coming out of the crash. Excluding ’09, GDP grew at an average of 2.2% over seven years.

Trump’s four years went +2.3% in ’17, +3% in ’18, +2.2% in ’19 and -3.7% in pandemically driven 2020. Excluding the last year, out of Trump’s control, just as Obama’s first year, Trump’s economy grew at an average of 2.5%.

So: A reasonably fair comparison would be that Trump’s economy, buttressed by lower taxes, a trillion dollars of overseas corporate capital repatriated, less legislative burden, and a friendlier business climate, grew three tenths of one percent faster than Obama’s. If one wants to include the first year under Obama and the last under Trump, under control of neither, the average would be 0.95% under Trump and 1.6% under Obama.

As far as the debt is concerned, under Obama the debt went from $10.6 trillion at 1/20/09 to $19.9 trillion at 1/20/2017, an increase of $9.3 trillion over EIGHT YEARS. The debt under Trump increased to $27.8 trillion at 1/31/21, an increase of $7.9 trillion over FOUR YEARS.

Don’t believe anything you hear and very little of what you read!

With that off my chest, the fiscal/monetary chickens are coming home to roost. The factors that we have been discussing for years are becoming too obvious for the financial markets and policy makers to ignore.

The table just below shows the monthly deficit numbers. For the month ending April, the deficit was “only” $226B, down from the explosion of $738B in the first full month of the pandemic last year. Still, we are running 30% ahead of a year ago, which finished in a $3.1 trillion hole, and there is huge spending ahead of us this year. With the trillions that are being thrown around, it seems likely that the deficit for the current year will be over $4 trillion. Keep in mind that our Federal Reserve is buying the majority of the debt that we are issuing to fund this deficit, so we are literally “monetizing” the debt by paying for the deficit with freshly printed Dollars. It is in this context that we have suggested that there is no need to raise taxes on anyone, rich or poor. None of it will supply more than a few hundred billion dollars per year, and there is much less aggravation for everyone if one of Jerome Powell’s hundreds of PHDs pushes a computer button and produces the US version of a digital currency. Of course, inflation will be the cruelest tax, especially on the middle and lower class citizen, but they will likely never understand the cause.

Inflation in consumer goods, rather than the asset inflation we have seen in the last ten years, is finally rearing its beautiful (as far as the Federal Reserve is concerned) head. Post pandemic demand, along with looser purse strings as pandemic relief checks are distributed, is replacing the pandemic induced reduction of demand that has suppressed the economy over the last year. As we wrote last month, some very bright economists are agreeing with Jerome Powell that inflationary indications are “anchored” and “transitory”, but we believe transitory may last longer and not so well anchored as expected. The last twelve months of the CPI are now above 4%, and the CPI is widely considered to be understating the inflationary facts of life.

We consider that there has been an undeniable bubble in all kinds of assets, from Tesla to Bitcoin, to collectible homes worth a hundred million dollars to crypto-art and lots of individual stocks that trade for 50x sales instead of a more modest multiple of earnings or cash flow. Investors of all stripes are reaching desperately for a “return”, as evidenced by the historically low yield spread between high yield debt and US Treasury securities, as well as the asset classes referred to above. As we write this, a number of these upside distortions are in the process of being corrected. Tesla is down from over $900 to under $600. Bitcoin is $43k, down from $64k three weeks ago, the bloom is coming off the SPAC rose, and GameStop is down well over 50% from its ridiculous high. However, the process has just begun and will no doubt play out over a number of years.

Gold and gold mining stocks seem to have consolidated adequately since last August, when interest rates went modestly higher, and have just now established new bullish chart patterns. Negative “real interest rates”, subtracting the inflation rate from the yield on short term treasuries, has a strong correlation with the price of gold. The more negative the “real” interest rate, the more attractive is gold bullion, with no dividend or interest. Almost to the day, last August, when interest rates moved higher, reducing the degree of negativity, the gold price started drifting lower. Real treasury rates never turned positive, but the smaller degree of negativity reduced the urgency for ownership of gold. While interest rates have not gone back down to levels of nine months ago, inflation has picked up substantially, so short term treasuries yield several points less than the 4.2% trailing twelve month inflation rate and gold therefore protects purchasing power very well without paying interest or a dividend. The result is that gold bullion, as well as gold mining stocks have now broken out above their 200 day moving average price lines, so technicians will reprogram their algorithmically driven computers. While gold bullion is still down a percent or two for the year, gold mining stocks are positive for the year and have never been fundamentally cheaper.

It continues to be our conviction that gold mining stocks, in particular, are the single best place to protect one’s purchasing power over the long term, and our investment partnership is invested accordingly. Since there seems to be an increasing interest in this subject, in very quick summation:  I am personally the largest Limited Partner, by far, as well as the Managing General Partner of RHL Associates LP, as I have been for the 28 year life of the Partnership. The minimum investment is $500k and the fee structure is “1 and 10”. Funds can be added on the first of any month and withdrawn at the end of any quarter with 30 days written notice. We remain open to new investors, keep our investors apprised on a monthly basis as to our performance, and can be contacted through this site or by email at

Roger Lipton




FAT Brands (FAT) continues to grow its multi-branded system of franchised restaurants, now with 650 franchised stores in their portfolio, and the ability to grow much further. The recently reported first quarter, obviously still affected by the Covid pandemic, was in line with expectations and sets the stage for growth within the current portfolio and the acquisition of additional brands in the near future. As we have written in the past (use the SEARCH function on our Home Page), the Balance Sheet, while leveraged, seems manageable. Based on expectation of normalized post-pandemic cash flow, lenders are prepared to go further. The Enterprise Value of FAT seems high on the surface relative to reported results, but post-pandemic expectations indicate that the Enterprise Value is substantially below larger multi-branded peers. If results come through as expected, the valuation spread should narrow.


FAT Brands reported operating results for the quarter ending 3/31/21, with progress on multiple fronts. It should be noted that gross revenues and bottom line results are heavily influenced by the acquisition in September, 2020 of Johnny Rockets, which substantially increased the total number of franchised locations within the FAT portfolio.

Compared to Q1/20: Total Revenues were up 50% to $6.6M, System-wide sales growth was 35.3%. U.S sales growth was 28.1%, Rest of World sales growth was even higher, at 54.2%, because Johnny Rockets is more developed outside of the US. System-wide same store sales growth was 7.8%, US SSS was 7.8%. Rest of World SSS was up 4.9%. Income from Operations was $104k vs. a loss of $578k in ’20. After higher interest ($2.748M vs. $2.074M) and a couple of minor changes, the GAAP net loss was flat at $2.43M vs. $2.37. Corporate EBITDA was $585k vs. an EBITDA loss of $362k in Q1’20.  Adjusted EBITDA was $1.1M vs. $283k. Within the first quarter, advertising expense was $1.2M vs. $.9M, refranchising losses were down 100k to $0.4M, G&A was $4.9M vs. $3.5M, which included increases in compensation and legal expenses, partially offset by lower accounting and T&E. Overall, as expanded upon with commentary from the conference call below, results were consistent with expectations and set the stage for more normalized results as ’21 unfolds.

The balance sheet at 3/28/20 does not reflect the major transaction, with affiliate, Fog Cutter Capital, pending in Q2, but does reflect the completion of an offering of $144M of Fixed Rate Asset-Backed Notes. As the Company has described before, and we have written about, the new financing reduces the average fixed interest rate of the debt from 8.75% to 5.92%. The further availability of similar capital, as well as the merger, set the stage for the addition of more franchising brands.


As pointed out on the conference call, the strongest brands in Q1 were Fatburger, Buffalo’s and Hurricane Grill, with system-wide sales growth of 18%, 19% and 16% respectively. SSS at those brands were also up: 6%, 26% and 20% respectively. Very importantly, versus Q1’19: Buffalo’s increased 9% and Hurricane Grill was up 10%. The pandemic was still an important influence on results as 107 locations were still closed, primarily at Johnny Rockets’ special venues and within the Ponderosa/Bonanza steakhouse brands.

The total store count was 651 system-wide at 3/31, with 5 locations opened in Q1, 3 more since then, and another 36 to come in ’21. FAT still has 107 temporarily closed locations, expected to reopen in Q2/Q3.  In addition to previously announced multi-unit deals in France, Kuwait and Africa, new development agreements have been signed in California, Arizona and Mexico.

Management reiterated, and updated their previous guidance, including the acquisition of Johnny Rockets, in a normalized post-Covid environment. Expectations are based on demonstrated results from calendar ’19, with the addition of a full year from Elevation Burger (acquired in mid ’19) and the most important contribution from Johnny Rockets. As presented by CEO, Andy Wiederhorn, had the pandemic not come along, revenues without Johnny Rockets would have been $23.5-$24.0M in ’20 and Johnny Rockets would have added $10-12M, for normalized total Revenues of $34-$36M. 2019 Adjusted EBITDA in ’19 was $7.9M, a full year from Elevation Burger would have brought that close to $9M and Johnny Rockets would have added an additional $9-10M. Total normalized EBITDA would therefore be $18-20M once the pandemic is out of the way. Management best guess seems to be that results will normalize by Q4’21 or Q1’22.

Relative to growth in units, management suggested that the expected 40-50 new locations in ’21, while gratifying, has no doubt been reduced by the pandemic. Therefore, with sales steadily improving as the worldwide pandemic winds down, a normalized environment should at least match that pace in ’22 and beyond.

Lastly, management reiterated their active consideration of further acquisitions, and the expectation that a transaction will be concluded in a matter of months. More capital is available from lenders, so cash, the common stock, and the 8.25% preferred stock, could all be potential currency.

CONCLUSION: Provided at the beginning of this article



We wrote a month ago about the labor crisis within the restaurant industry.  Today, the business press, in writing and on TV, has more than discovered the situation, with a continuous din. Our discussion below is intended to provide more insight as to how it plays out. Since something like 20 million Americans are employed within the hospitality industry, encompassing restaurants, retail and hospitality, the implications for our overall economy are significant.

The restaurant industry is now forced to pay anywhere from $12 to $16/hr. for starting crew members and, even at that wage, it remains difficult to find candidates to interview. Some companies are offering referral bonuses to existing employees, $50 to just show up at an interview and many other enticements. On a recent trip to South Carolina, I saw signs to this effect in the windows of almost every restaurant on the commercial strip. The most striking offer was at McDonald’s, a willingness to pay $28,000 as a starting wage to a trainee who would be a manager within 90 days. We don’t know what the “qualifications” would be to get that job, and the prospect might be slated to be a “shift” manager, rather than general manager. However, no matter how well “qualified” that person would be, is seems a sign of clear desperation that a store owner is now required to hand over the keys to a $3M restaurant, for even a shift, after only 90 days of training. Parenthetically, almost all the management teams of publicly held companies have recently reflected the labor “challenge”, though the longer term margin ramifications haven’t been explored.

The debate about the cause of the crisis unfortunately, as most policy discussions do these days, comes down to a political divide. The left suggests that it is the fear of interacting with the public while Covid-19 is not yet eliminated, even $15/hr is barely a living wage, some potential recruits still have to stay home with children that are not yet back in school, and recruits are just looking for the right opportunity. Conservatives suggest that extended and enhanced unemployment benefits amount to more than a full time employee would earn while working and “if you pay people to stay home, they will stay home”.

The enhanced unemployment benefits are slated to remain until September 6th, and it seems unlikely that the Biden administration will modify that. However, South Carolina and Montana announced last week their plan to withdraw from the Federal Program at the end of July, at least a few other states will likely follow,  and the US Chamber of Commerce announced its support of stopping the extra $300/week.

THE RESULT –some obvious, some not so obvious – including some unintended consequences.

  • Crew wages are taking a major step higher, and what goes up will not, in this case, come down.
  • Store level managers and other field supervisors will also receive wage increases over time.
  • Staffing will remain a challenge, at least until September, because only half the country is Red, and Blue states will mostly keep the unemployment programs in place.
  • Store level service will likely suffer and/or training costs will increase materially for raw recruits.
  • Menu Prices will move higher, and customers, with inflation news rampant, will understand.
  • Store level and corporate margins will be hard pressed to move higher (than in ’19), since manu prices can only be raised with great caution. The other “prime cost”, namely Cost of Goods Sold, is likely to trend higher, affected by higher beef, chicken, etc.

Roger Lipton




 FORWARD:  We have no current business relationship with Eggs Up Grill, but we enjoy the store level experience, the opportunity to learn from, and the ability to report on emerging young restaurant chains. Our readers, based on page view counts, apparently value these articles as well. We are always interested in current “Best Practices”, and, just as with our other Up & Comers, we present the Eggs Up Grill in that context.


Spartanburg, SC based Eggs Up Grill was originally founded in Pawley’s Island, South Carolina, in 1997. It was acquired in the spring of 2018, with 24 restaurants in the system, by WJ Partners. CEO, Ricky Richardson, with TGI Fridays from 1996-2016, most recently as President and COO, joined in the summer of 2018. The system, now 47 units (with 35 additional development commitments), with only one company operated location (opened as a training center and innovation kitchen in 2019) grew by 6 in ’18, 6 in’19 and 9 in ‘20, with 1 opened and 11 more scheduled to open in 2021 and 18-20 more in 2022. The regional concentration is apparent with 34 restaurants in South Carolina (and 7 additional under development commitments), 6 in GA (+6 committed), 5 in NC (+7 committed), 2 in FL (+6 committed), 6 committed in VA and 1 committed in TN.  The Brand intends to continue to focus across the southeast US in order to maintain quality support and leverage growing brand awareness.

Locations are typically in secondary and tertiary markets, neighborhood stores, usually grocery anchored, using retail centers as the local draw. They are typically 2400-3500 sq.ft., ideally an end cap with a patio, seating 80-100 indoors and 12-24 on the patio. Eggs Up Grill opens at 6am and closes at 2pm, obviously concentrating on breakfast and lunch, with 20-25 team members. A few pictures of the comfortable, functional, interior, are provided below, as well as a brief discussion regarding the qualitative attractions of the Eggs Up brand.

It is noteworthy that 40% of the roughly 30 new stores that will be built in ’21-’22 are by existing franchisees. They are therefore voting with their pocketbook as to their satisfaction with the brand.


 According to the 2020 Franchise Disclosure Document (FDD): The initial cost of a Grill is from $491k to $678k ($584K average), including the up front franchisee fee and opening expenses.  The ongoing royalty is 5% of sales, plus 1% for a Brand Promotion Fund and 1% for local marketing. An important element of this equation is that the active manager must own at least 25% of the operation, and must be approved by the franchisor.

The 36 franchise restaurants that were operating for all of 2020 had average gross sales of $681k in the Covid-19 year, down from $905k in 2019. Last year’s FDD provides a more complete picture of 2019, showing average volumes of the newest location versus older stores. The units open four years or more averaged $933K vs. $897K for all units open only one year or more. The demonstrated sales progress as stores mature indicates an immaterial “honeymoon” effect. Furthermore, as described in the FDD, there is one “outlier, approved by the predecessor owner, that is located at a site that does not meet the current site criteria. It is not at all visible from the street and sits in a strip shopping center behind a competitor’s restaurant. If that restaurant were excluded from the data, the stores open four years or more would have averaged $973k.”

Year to year average sales comparisons of 2020 vs. 2019, were +2.3% in Jan-Feb ’20 (pre-pandemic), -61.7% in March through May, -20.5% in June through September, and -10.2% from October through December. Sales were only down -2.6% in January through February, 2021. Most importantly, subsequent to the latest FDD disclosure, management indicates to us that 2021 same store sales, compared to 2019, are +4.2% in March and +12.4% in April, so the sales recovery is complete.

In terms of operating costs, for the five months in 2020, Jan, Feb, Oct, Nov, Dec, when all franchised stores were open but still with distorted operating expenses, average COGS was 24.2%, Team Member Wages was 26.5% and the Base Rent was 8.8%. The 2019 FDD shows average COGS of 22.7%, Team Member Wages of 28.0% and Base Rent of 7.5%. The comparison of five months (distorted) in ’20 vs. a normal 2019, nets out to similar “prime costs” (COGS plus Labor) of about 50% of sales with a Base Rent of 7.5% of 2019 sales. The much lower than industry average COGS, by about ten full points (1000 basis points) is the key ingredient in allowing franchisees to generate an attractive return on investment.

Based on the numbers above, we estimate that revenues in the first year can conservatively be expected to generate approximately $900k, building to about $1M by the fourth year. Based on the 50% total prime costs and the reasonable rent, we believe a well run location can generate a store level EBITDA of about 15% in the first year and 18% by year four, which would represent $135K at $900K of revenues and $180K at $1M, with a cash on cash return of 23% in year one building to 31% by the fourth year.

We believe the appeal of EGGS UP is not only the attractive cash on cash return, but the lifestyle afforded the franchisee, including the pride of ownership of this wholesome concept, as further described below. We also believe that, since Ricky Richardson and his team are relatively young in terms of tenure at Eggs Up, especially considering the Pandemic interruption for the last fifteen months, the Company is still on the steep portion of their learning curve so sales progress could accelerate, operating margins to follow. Based on current development commitments from franchisees, they apparently believe this as well.


The numbers, as described above, are adequately attractive but far from the whole story.  Eggs Up Grill is uniquely positioned to be an important part of its local community, leading to sustained sales growth year over year.  Franchisees of Eggs Up Grill are provided marketing resources and tools that help the local franchisee become actively involved in their community, helping to grow awareness, appreciation and increasing transactions.  The relatively low required marketing contributions enable franchisees to make their own decisions on how best to market and grow their business in their trade area.

The single shift operation (6 am – 2 pm) provides a range of benefits as well.  Not only do these hours provide the franchisee a unique quality of life for the restaurant industry, but also offers appeal to the employee base.  This appeal (schedule certainty, afternoon and evenings free) leads to high quality team members and higher retention than the industry average. Our personal experience visiting stores (“incognito”) has supported the theory.


Led by Ricky Richardson, the Brand team brings extensive restaurant and franchising experience to Eggs Up Grill.  With successful backgrounds in large, rapid growth concepts (TGI Fridays, Qdoba, Five Guys, etc.) the team has developed a suite of tools to help attract and support franchisees in their businesses, respecting that the Brand’s success is dependent on the success of their franchisees.

This perspective drives not only the current system but heavily influences the expansion strategy.  The focus remains on expansion throughout the southeast US, to produce efficient franchisee support (development, distribution, operations and marketing) and leverage the growing regional brand awareness.  This regional focus also provides favorable economics in terms of real estate, labor and other operating costs.


While It’s not a “lights out” concept, Eggs Up Grill offers good quality, basic products at a fair price delivered in a comfortable environment by a uniquely friendly team. “Culture” is an overworked term; you have it or you don’t, and Eggs Up qualifies. Targeted to the broad swath of “middle America” there should be ample room for significant growth. At the same time, the southeastern regional concentration, growing steadily outward from the core region should minimize missteps and allow for course correction when necessary. The qualitative appeal of the Brand is crucial, as described above.

From a numbers’ standpoint, perhaps the simplest testimony to the staying power and the potential of Eggs Up Grill is that franchisee commitments over just the next two years should increase the system by over 60% and 40% of that expansion is coming from existing franchisees. We all know how challenging the restaurant industry has become, but a sound strategy, combined with the necessary daily “blocking and tackling“ can still succeed.

Roger Lipton




The capital markets traded to the upside in April, as the Biden administration lays out their agenda and the Federal Reserve assures everyone that they continue to have everything under control. We suggest that you come to your own conclusions. Ben Bernanke had no clue that the financial crisis of ’08-’09 was coming, though there were quite a few warning bells ringing. You never know which snowflake will start the avalanche.


For those of you that like to know the latest deficit and debt numbers look like, the US deficit for the month of March was $660 billion, up from $119 billion in ’20, just before the pandemic related spending took off. The deficit for the first six months of the current fiscal year has therefore been $1.7 trillion, up from $741 billion in ’20. Since the comparisons from here will be up against the huge spending from April through September of the fiscal year ending 9/30, the comparisons will be “tougher”, depending on what stimulus programs are implemented.

Safe to say that the deficit for the current year ending 9/30/21 will be substantially more than the $3.1 trillion of last year. No doubt the total debt, not including unfunded entitlements, will be in the area of $30 trillion somewhere in the fourth calendar quarter of 2021. This continues to be of prime importance because heavy debt burdens the recovering economy and enormous spending, mostly financed by our Federal Reserve’s currency creation, will be necessary to keep the economy from collapsing. With the 2022 very important congressional election season beginning in just a matter of months, you can bet that the Biden administration will spare no expense to make the economy look good.


There is an increasingly active debate developing as to whether inflation, or possibly some form of deflation, is in our future, and when. Keep in mind that both can happen, just as we have already seen higher prices in assets such as stocks, bonds, real estate and others. On the other hand, general income levels have not moved by much and “core inflation”, excluding food and energy, is still subdued.

Both inflation and deflation can be good for gold. The miners did very well during the deflationary 1930s, in spite of a fixed gold price, because their costs were coming down as the worldwide economy collapsed. Gold did even better in the inflationary 1970s, moving from $35 when Nixon eliminated convertibility in 1971 to $850 early in 1980. On balance, we prefer inflationary trends and that is what central banks around the world are desperately trying to provide.

There are some very obvious short term trends that point to inflation. There is major upward pressure on the minimum wage, with an apparent shortage of workers. There have been shortfalls in supply, and higher prices for semiconductors, lumber, copper, agriculture, gasoline, used cars, and housing. Interest rates, while still low, have moved upward, which could signal the bond market’s expectation of higher inflation. The M-2 money supply has moved up by 24% in just the last year, the most rapid rate in 150 years, and economics 101 dictates that more money chasing the same amount of goods should be inflationary at some point. Most importantly, consumers increasingly expect inflation to accelerate, and that expectation alone can be a critical ingredient. Lastly, the weakness in the US Dollar points to higher domestic inflation.

On the other hand, some of the most intelligent observers, including Lacy Hunt, Gary Shilling, and David Rosenberg, believe that the likely inflation coming out of the pandemic, over the next six months, will be modest. Fed Chairman, Jerome Powell, calls it “anchored” and “transitory”. Hunt and Schilling have had three decades of accurately calling for low interest rates, a sluggish economy, and subdued inflation, largely as a result of the debt burden. David Rosenberg, perhaps the economic commentator with the most well documented view, is looking for a short term economic bounce, accompanied by a modest uptick in inflation, but a return to economic malaise within six months.

Powell believes the Fed can control inflation by reversing the accommodation, allowing interest rates to rise, just as Paul Volker did in from 1979 to 1982. Hunt and Shilling and Rosenberg believe that the economy will go nowhere because of the debt and the aging demographics. The debt, in their mind, is a huge problem over the long term, but the Fed activities preclude a full scale  economic collapase. It seems to us that one of the most important ingredients in the reasoning of Powell, Hunt, Shilling and Rosenberg is that inflation is been “anchored” for the last ten years, even though the deficits and debt have gone through the roof. Therefore: the same beat can go on for the foreseeable future.

Though these are very smart people that we are trying to interpret and “second guess” to a degree, we are inclined to think that inflation will be higher, and longer, than is suggested above. Historical precedents may not apply because this monetary experiment is of a different magnitude than has ever been seen before.

Firstly, the Fed can’t “pull a Volker”, if inflation takes off, because the $28 trillion of debt now compares to $1 trillion in 1980, and today’s many trillions of unfunded entitlements were of little concern forty years ago. The annual operating deficit was only about $100 billion in 1980 compared to perhaps $4 trillion today. Even with an economy that is 6-7 times larger today, the problems are of a different order of magnitude. Raising interest rates, as Volker did, would trigger a massive decline in asset prices and a terrible depression.

The assumption by Powell and the others is that, based on the lack of inflation the last ten years, as deficits and debt built up, there is reason to believe that further monetary accommodation will, similarly, not create an inflation problem. We have seen that, though the Fed took its balance sheet from $1 trillion to $8 trillion in the last ten years, financing most of the annual deficit with newly printed dollars, the “velocity” of the monetary aggregates collapsed at the same time so the new currency did not pressure the CPI upward.

The Fed wants 2%+ inflation, and $7 trillion of new currency did not get the job done. In an extreme example, do you believe that $100 trillion of new currency, chasing the same amount of goods and services, would drive prices higher? We would say: highly likely. Seven trillion dollars didn’t get the job done. One hundred trillion dollars probably would.

The only remaining question becomes: What amount of new currency, between $7 trillion and $100 trillion, would kick off inflation? We think we are going to find out. Nobody knows how the above discussed elements will interact, but we expect a stagflationary period during the foreseeable future, likely with an even weaker economy and higher inflation than in the 1970s.  We also expect gold and the gold miners to be among the very best asset classes to own in the turbulent period ahead.

Roger Lipton.



There will be more business done in 2021 than in 2020, as pandemic related restrictions ease. There will be some similar challenges, such as maintaining financial liquidity, ongoing negotiation with landlords for sites old and new, allocating limited labor between dine-in and off-premise demands, and others. In addition, in the midst of this state of flux, there is an emerging enormous uncertainty relative to the availability of labor. It has never been this difficult to properly staff a retail facility. The reasons for this crisis can be debated, but a crisis it is.

I was traveling in South Carolina last week, and dined at several well known full service chains. Two of them had restricted dining room seating, which we were told was the result of an inability to find servers. The third chain seated us, but the service was very slow and we were told it was due to the shortage of kitchen staff. The McDonald’s had a “help wanted” sign in the window, the dining room was closed, and each of the double drive thru lanes had about ten cars waiting. We’ve read about a number of chains that have chosen not to open their dining rooms for the time being, because the incremental sales in the dining rooms do not justify the extra labor. They are keeping it simple with just the drive thru lanes in operation.

This is not the first that you have heard relative the labor shortage, including the report of a McDonald’s in Tampa that offered $50 last week to anyone who would come in for an interview.

However, we suggest that the worst is yet to come in terms of industry “disclosure”, and even the awareness of the longer term problem. What we call the unmasking will not really take place for six months to a year, because the very strong YTY sales comparisons, reduction of losses and/or a return to profitability provides relief of sort. YTY operational results, however, will be distorted, including changes in terms of dine-in and off-premise contributions to sales and profits. Management will be hard pressed to predict what normalization will look like, and it will be at least equally hard for analysts. It is elementary that comparisons between 2021 and 2020 sales and margins are of little use. 2019 is the “base year”, for better or worse, and 2021 results vs. 2019 provide a better indication of how far back a company has come.

Just as it will be close to a year from now that operations will have normalized, it will be a while before the labor situation normalizes, hopefully for the better.


In terms of what to expect, we have to give some consideration to the cause of the labor shortage. Last year, as the pandemic storm was most intense, it is clear that some workers were legitimately concerned with the possibility of infection. Unemployment benefits and stimulus checks no doubt made the decision to stay home that much easier.  At the moment, however, with 100 million Americans fully vaccinated, and restrictions easing, restaurant operators we have spoken to feel that some workers are using the Covid as an excuse, saying they “have been exposed” and are therefore quarantining themselves.

It has been suggested that people don’t seem to want to work in restaurants as much as they used to. The hospitality industry involves long hours, often at inconvenient times, and the compensation is not necessarily higher than elsewhere. Other jobs may be considered more “stable” and have fewer health risks in today’s environment.  We’ve read that candidates are just “taking their time”, sorting through the possibilities, trying to locate the right opportunity. We discount none of the just stated factors, and the reduction of immigration under the Trump administration may be playing a role as well.

Taking the above rationale into consideration, we believe that the most recent intensification of the labor crisis, at a time when the pandemic is easing and people seem anxious to get back to their previous routines, coincides almost precisely with the extension of unemployment benefits and the most recent stimulus checks. Studies have been done that show that workers receiving unemployment checks get very active looking for new work during the two weeks just before their benefits run out. In essence: “If you pay people to stay home, they will stay home.” The Federal Reserve Bank of Kansas City, with insight into manufacturing firms across Denver, Oklahoma City, and Omaha, said recently: “Stimulus and increased unemployment money are wrecking the labor pool. Lower level employees are quitting to make just as much not working”. Anecdotally, here in NYC, a restaurant owner told me last night that he can’t find kitchen help. A family with four or five children has received thousands of stimulus dollars, so the financial pressure is removed for the time being.

There is overall hope, as suggested below, but the outlook for relief on the labor front is not promising. The Biden administration is bent on providing financial “support” to US citizens in many forms. Economists debate the future course of the US economy. Some bullish observers believe that the economic rebound in 2021 is just a beginning.  Other strategists suggest that the “high” coming out of the pandemic will run its course over the next six months or so. They expect the economic recovery will be short lived and the debt burden, the underutilized manufacturing capacity, and aging demographics will undercut longer term economic growth. We believe that either way, the labor situation in particular will be troubled. A strong economy will provide a lot of alternatives for potential restaurant workers. A weak economy will require further government stimulus, which we fully expect as 2022 is a very important congressional election year. In short: “Help continues to be on the way !!” Our expectation, therefore, is that the labor crisis will not abate any time soon.


Even for the companies with the best employee “culture”, it is very difficult to deliver the bodies to the right positions at meal periods. The premier fast casual operator, who “wrote the book” in terms of employee culture, is Starbucks and a staffing shortage closed the Starbucks near my office twice in the last couple of weeks. An individual store operator can roll in the family at peak hours and the price is right, but a multi-unit corporate operator doesn’t have that luxury.

It is easy to suggest that a restaurant company develop a corporate culture that will maximum staff loyalty, in turn generating customer satisfaction and positive operating results. However, you either have it or you don’t at this point, and it is likely too late if you don’t. In addition to tripling down on your employee culture, you should consider a pay level that provides “golden handcuffs” to a well trained, reliable employee. Compare that retention rate to the cost to find, hire, train and retain a new employee to replace the experienced associate who has moved on. As the unmasking takes place over the next year, the gap between the haves and have nots will widen and become more apparent.

Simplification of operations can be a big help, and many companies are doing this. Menus should be streamlined, and service styles (i.e. drive-thru, pickup, dine-in, delivery) analyzed and adjusted to maximize sales and profitability. Unit expansion should be as close to home as possible, whether company or franchised. Labor and other services can be moved around the system far more efficiently within a limited geography. A franchised store must be monitored as well as a corporate unit, and the franchisor’s resources can be more easily applied.


People have to eat, so good operators are going to figure a way to satisfy customers. It may or may not look exactly like it does today but necessity is the mother of invention. I wasn’t the first to say that 😊 An important new feature of the restaurant industry is that a great number of competitors’ locations will have closed, making it a little easier on the survivors.

On my same trip last week to South Carolina, I had breakfast at a franchised location of a fifty unit chain, all in the southeast, that closes at 2pm. I will write more about this chain sometime soon, but it wasn’t “sexy”. Perhaps 2,500 square feet, functional décor, a basic menu. All they had was a very friendly staff, a clean store, attentive service, well prepared food at a fair price. They are doing comfortably over $1M per store with relatively low cost of  goods, comping positively by 10% over 2019, system units growing by 15% per year.

It can be done.

Roger Lipton




Ark Restaurants represents one of the few investment opportunities in the small cap restaurant space for significant appreciation over the next few years. Unlike most restaurant stocks that are trading at valuations that significantly discount their future, Ark’s current valuation gives almost zero credit for the large amount of optionality embedded in their business model and Meadowlands Racetrack investment.


Ark Restaurants is a unique restaurant company with a 37 year operating history that focuses on large, one-of-a-kind restaurants located in such landmark locations as Bryant Park in NYC and the Sequoia in Washington D.C. The company also operates restaurants in Alabama, Florida, New Jersey and Nevada. The restaurants typically have 200-500 seats (an Olive Garden has about 250 seats) and require specialized management skill to operate efficiently. As of January 2, 2021, ARKR owned and/or operated 18 restaurants and bars, 17 fast food concepts.

In fiscal 2020, as a result of Covid 19 related shutdowns, sales declined 34% and the company lost $7.7M. In 2019 the company generated $7M in free cash flow and paid a $1 per share dividend (the company paid a $1 per share dividend since 2010). As the economy opens back up, the company expects to reach cash flow breakeven by at least Q3, 2021.

The purpose of this report is not to analyze these results, but to highlight several value creating strategies that could drive the stock price significantly higher in the next two or three years. We are going to focus on two specific areas. The first is the company’s strategy of acquiring restaurants and the land (or secure 20+ year leases, possibility with right of first refusal). The second is their 7.45% ownership in the New Meadowlands Racetrack LLC.   We believe these strategies could result in a share price in excess of $30 per share in the new few years.  We believe management’s interest is strongly aligned with outside shareholders due to it 40% ownership of the company. It should also be noted that Michael Weinstein is 77 years old and the average age of the other eight directors is 73 years old, including four 77 years old or older.

Brief Summary of Earnings Power and Liquidity

In 2019 Ark generated $10.6M in cash flow and approximately $7M in free cash flow. The company was using the FCF to make approximately $3M in debt amortization payments and $3.5M in dividend payments. We believe that the cash flow of the company in 2022 could be similar. The company should be able to service its debt without difficulty. While the timing of the resumption of the dividend is unclear, the company will have the flexibility to either reinstate a dividend or accelerate debt pay down.

As of Q1, 2021 (ending 12/31/20) the company had $11M in cash and $41M in debt, of which $15M is PPP loans. The company has applied for $4.1M in forgiveness and anticipates applying for an additional $7-$9M in forgiveness. The company also anticipates receiving $3.4M-$3.8M in tax refunds this year. Excluding the debt associated with the PPP loan that is expected to be forgiven, the company’s net debt position should be closer to $12M-$15M once all the tax refunds are received. The company has stated that it believes it could be cash flow positive within the next 6 months.

How the Acquisition Strategy Creates Significant Value

In response to losing over $6M in EBITDA due to lease expirations over the last 6 years, CEO Michael Weinstein has been replacing this lost cash flow by acquiring properties where they own the building and the land (or have a 20+ year lease).

As a result of wage law changes in New York and Washington D.C. in recent years, the company’s payroll expenses increased by over 300bps so Mr. Weinstein embarked on a diversification strategy to reduce the exposure to these states, increasing activities in Alabama and Florida. Since 2014, the company has spent approximately $34M acquiring restaurants in Florida and Alabama. These acquisitions have increased revenue from these two states to over 40% of restaurant revenue. Not only does this strategy reduced exposure to lease expiration and wage hike risk, but it also increases long-term value by sustainable cash flow improvement.

Acquisition Criteria

The acquisition criteria are straightforward but are designed to improve the chances of long-term value creation. The basics of the criteria are as follows:

One-off, non-branded restaurants to reduce competitive bidding. Acquire restaurant buildings and land for 4-6X cash flow, alternatively with a lease of twenty years or more with a purchase right of first refusal.

  • Mostly cash purchase (typically owners are 70-90 years old) to reduce buyer pool.
  • Preferably a restaurant with 200-1000 seats with complex operations.
  • Located in areas (i.e coastal locations) that have limited ability for new construction.
  • Opportunity to increase sales and profitability through professional management.

2020 Example: Blue Moon Fish Company, Lauderdale by the Sea, FL. – Voted “Best Waterfront Dining in Fort Lauderdale by Zagat”

In December 2020, Ark acquired the Blue Moon Fish Co. near Fort Lauderdale, FL for $2.8M. The company paid $1.8M in cash and issued a four-year note in the amount of $1M with a 5% coupon. A lease which expires in 2026, has four, five-year extension options.  The rent payments are approximately $360K per year (6% of revenue) and increase approximately 15% as each option is exercised. The restaurant produced approximately $6M in pre-Covid revenue and $1M cash flow. Management believes there is a strong possibility that capacity can be expanded.

2020 Example: JB’s on the Beach, Deerfield Beach, FL

In 2019, the company purchased JB’s on the Beach in Deerfield Beach, FL for $7.04M. In January, 2020, the company exercised its right-of-first refusal to acquire the land, building and parking lot associated with the restaurant for $11M (original offer price was $18M). The original agreement required the company to fund a $3M deposit, but Ark contributed its rights and interest to a new unaffiliated entity which funded the entire $11M. At this point, Ark continues to operate the restaurant and negotiations continue in terms of the real estate development.

2016 Example: Rustic Inn, Jupiter, FL.

No longer in Ark’s portfolio, the company took over the restaurant, then called the CrabHouse, in 2014, for $250k. They then spent $750k for renovations, reopening in January, 2015 as the Rustic Inn. Ark exercised its right of first refusal in October, 2016, for $5.2M, at the same time selling the same property for $8.25M, which generated a net gain of $1.637M, obviously an admirable return on their $1M investment in just a couple of years.

Another Example, with Dramatic Value Created

Another of the four properties currently owned is the Rustic Inn in Dania Beach, FL that was acquired in 2014 for approximately $7.7M.  The acquisition was financed with an original bank loan of $6M, of which $3.7M is remaining. The seller was a 94 year old owner/operator. At the time of purchase the restaurant was generating $1.5M in cash flow. Since the acquisition the restaurant has increased sales 15-20% (through price increases and better management) and increased cash flow pre-Covid to $3.5M.  Among other things, cash flow was increased through the combination of a reduction of 400-500bps in food costs, as well as the operating leverage on sales increase. These improvements effectively reduced the purchase multiple to a little over 2x cash flow.

At this point, Ark has the financial flexibility to leverage the cash flow if they like, with a sale/leaseback. This potential transaction, providing a $1M rent to the purchaser, for example, could generate something like $10M in proceeds, still leaving the Company with $2.5M of annual EBITDA.



In 2013, the company made a $4.2M investment in the New Meadowlands Racetrack LLC (NMR). Over time the company has increased its total investment to $5.1M for a 7.4% fully diluted stake. Additionally, in 2014 the company loaned NMR $1.5M by way of a 10 year note. The principal and accrued interest currently totals $1.78M.  The managing partner of NMR is Jeffery Gural, who owns the casino Tioga Downs and a racino at Vernon Downs in New York. Hard Rock International has an equity stake in NMR and a long-term agreement for future development at the Meadowlands.

ARKR has also secured the exclusive right to operate the food and beverage concessions (excluding a new Hard Rock Restaurant that could be built on-site) at the new raceway grandstand and casino. ARKR already has a relationship with the Hard Rock as the operator of food courts for them at two casinos in Florida.

Recent Developments

New Jersey’s mobile sportsbooks produced more than $359 million in revenue in 2020. The Meadowlands has been the primary beneficiary of the legalization of sports betting in the state, with a 52% market share of sports betting in New Jersey in 2020. The Meadowlands partners are FanDuel and Pointsbet, rumored to be in the frontrunner to partner with the world famous Las Vegas Westgate SuperBook. Other advantages of the Meadowlands include the fact that it is only six miles away from New York City and is one of only two active sports books in the country within walking distance of an NFL stadium.

New York lawmakers have recently agreed to legalize mobile sports betting. Lawmakers considered and rejected a budget provision that would have permitted up to three additional casinos in downstate areas, including New York City. Licenses for that area are on hold until 2023. While the Meadowlands could see an initial decline in sports betting (an estimated 20%-30% of NJ revenue comes from New Yorkers), the consensus among industry players is that New Jersey casinos will benefit in the long run.

In fact, Mr. Gural was pleased with how the New York sports betting bill turned out. He was quoted in the Wall Street Journal as saying, “It’s the dumbest thing I’ve ever seen. I consider this a gift to New Jersey and to me at the Meadowlands, and my only regret is that Andrew won’t be around to see this totally fail.” In the past Mr. Gural has been quoted as saying “I think the best hope for The Meadowlands is to get a casino. Once downstate New York gets them, hopefully we would then get them, which would create a lot of revenue. I do think, long term, that we will get a casino.” While the New York lawmakers did put the possibility of three new land-based casinos on hold until 2023, this does not change the long-term attractiveness of the Meadowlands as a land-based casino.  In addition to the large increase in revenue from sports betting, the Meadowlands racetrack has seen a 61% increase in handle over the last 10 years. Mr. Weinstein’s decision to invest in NMR seems to point to a potentially substantial long term payoff to shareholders one way or another.


Current investment in NMR is profitable

Even without a casino at the racetrack, the NMR partnership is profitable. On the Q4 2019 earnings conference call, Mr. Weinstein stated that ARKR’s share of the cash flow was around $800K.  However, since it is carried on the balance sheet at cost, and not being distributed to the company, it cannot be counted as income. We believe 2020 attributed cash flow could be similar, if not higher, so this imbedded value continues to build.

Important Equity Stake in New Casino Development

The ultimate reward for shareholders would be the approval of a casino at the Meadowlands. As discussed above, the timing of such approval is highly uncertain. However, we do believe that approval will occur in the future. A simple analysis shows the potential value creation that could occur for shareholders once that happens.

Jeff Gural has estimated a Meadowlands casino could generate $800M-$900M in revenue. For reference, in 2016, the Borgata in Atlantic City had revenue of $812M and EBITDA of $212M. MGM sold the Borgata to MGM Growth Properties for $1.175B in consideration.

Example of Hypothetical Meadowlands Casino:

  • Casino cost $1B
  • Debt to equity 60/40 –
  • ARKR prorated share of equity contribution $25-$35M
  • ARKR expenditures for restaurants $55-$65M
  • Funding – many possibilities – returns discuss below are non-leveraged by Ark
  • Company could execute more sale-leasebacks to fund some of the cash
  • Normalized cash flow could also help fund expenditures
  • Outside investors have expressed interest in the project.
  • Per the Q4 2020 conference call:

“And in the last two weeks, I’ve gotten two calls. …….very wealthy groups, one a family office with some $4 billion. And another one…….not involved in the restaurant business but sees the opportunity. And both of them have said that they would like to partner up with us if we saw anything that was attractive. I know one of the group has gaming interest and sort of would like to buy Ark stock, either a convertible preferred or something that converts into Ark stock because they’re not only looking at the capability of us to acquire other restaurants, but they really got their eye on the Meadowlands to own a piece of that through us.”

Potential Value Creation

 We believe that the single most likely scenario is that NMR buys out Ark’s equity interest, with Ark retaining foodservice opportunities at the site. The majority partners may want to takeout its minority partners to simplify the operating structure. It is difficult to project a value, under this scenario, but we believe the payoff to ARKR would be substantial.

 Should the current partnership structure prevail and the Casino get built with Ark remaining a 7.4% equity partner, we suggest that the new Casino could do a minimum of $1B in revenues and generate $200M of EBITDA. Ark’s 7.4% interest in that EBITDA would be worth about $14.8M annually.

Without considering the degree to which Ark could leverage their total gross investment of $90M, inclusive of building the restaurants, one could create a matrix of values with revenues from $1.0 to $1.5B, and multiples of EBITDA between 6x and 10x. A minimum expectation of $1B in revenues, $200M in project EBITDA, and a valuation of 6x, would generate a value for ARK of about $90M, almost exactly matching their gross investment, but without considering the value of operating restaurants.

Possible, based upon the population density in northern New Jersey, is revenues closer to $1.5B and $300M of EBITDA. Ark’s share of project EBITDA would be $22.2M, worth $133M at 6x, net after debt to ARK of $43M or $12.28/share. At a 10x multiple, Ark’s share would be worth $222M, or $37.71/share net after debt.

The range of expectations and values just above are substantial, and exclude the value of Ark’s right to manage the restaurants at the new casino, in which they have invested $50-60M. Assuming those restaurants generated EBTIDA of $10-12M, only a 20% ROI, a 6x multiple on that would be $60-$72M or $17-$20/share.

The range of expectations goes from zero for the project as a whole but $17-20/share for the right to operate the restaurants, to a value as high of $37/share for the project plus the $17-20/share for the restaurants. These are obviously very substantial possibilities, and are provided not as specific projections, but an indication that the long term potential is large relative to the current price of Ark common stock.

CONCLUSION: Provided at the beginning of this article

Prepared by: Roger Lipton and Tim Heitman



As our readers know, Fat Brands (FAT) has established itself as a multi-branded restaurant franchising company, with about 700 locations, spread among seven brands, the largest and most rapidly growing being Fatburger and Johnny Rockets. Our previous reports describing Fat Brands can be found by way of the SEARCH function on our Home Page.

Management had previously indicated their expectation that the securitized debt which was in place at yearend would be expanded, with a reduced interest rate, in the first half of ’21. On schedule they announced this morning completion of an offering of $144M of Fixed Rate Asset -Backed Notes, structured through their royalty receiving subsidiary. This new facility has an average fixed interest rate of $5.92% per annum, replacing and expanding $80M of notes that carried an average interest rate of 8.75%, and leaving Fat Brands with $64M of availability for future acquisition.

We have no relationship with the underwriters, but, since some firms are better than others in accessing capital, we point out that Jefferies LLC acted as structuring agent and co-lead bookrunner, along with Cadence Securities LLC.

Separately, CEO, Andy Wiederhorn, updated the current fundamentals at Fat Brands, saying “systemwide sales are recovering rapidly, fueled by the return of in-store dining combined with a continued high volume of direct online ordering and third party delivery. On an aggregate basis, YTY sales of new franchise locations have already exceeded both 2019 and 2020 calendar year sales figures, creating a pipeline of over 200 additional units contracted for development.”


From a broader perspective, while the transaction described above clearly indicates that money is very much available, at surprisingly attractive rates if a Company presents itself well, the chart just below is instructive. It shows how, in the current historically low interest rate environment, demand from investors of all stripes have driven interest rates, in this case for “Junk Bonds” to the lowest level in decades. The age old term is “reaching for yield”. We credit Fat Brands’ management for making good use of the current low interest rate environment to strengthen and build their long term positioning within the franchising industry.


Aside from updating the progress at Fat Brands, we have one word of advice to our readers that are operating businesses in the current environment that makes equity and debt available at a very modest cost: ENJOY !

Roger Lipton




There is an increasing amount of discussion about the prospect for government issued digital currencies, and China has already declared this possibility, even within the next year or so. Less currently discussed,  but foremost in the mind of many monetary analysts, is the possibility that China could somehow back a digital Yuan with gold. Since China’s economy, military strength and technological prowess dwarf’s that of Russia, logic dictates that China is the adversary with which we should be most concerned. With that in mind, China has already broadcast their long term desire to have their Yuan replace, or at least join, the US Dollar as a reserve currency. It would be a large step in that direction if a digital Yuan were, explicitly or implicitly, backed by China’s gold reserves. Here are the facts, after just a few definitions:

Generally quoted are tonnes, and troy ounces. In short form, just as a metric yard is about 9% longer than a yard, tonnes and troy ounces are about 9% larger than short tons and ounces.

A tonne of gold, 32,150 troy ounces, is worth about $570M at $1775/troy oz. About 3,500 tonnes of gold were mined worldwide in 2020, worth about $200 billion, and the top ten countries are shown just below.

Lastly, before looking at the first chart, It is pertinent that: in 2007 China’s production  grew to 276 tonnes, for the first time surpassing that of South Africa, which had been the world’s largest producer for 101 years. China has been the world’s largest miner ever since.

With the two tables above in mind, it is noteworthy that the last time the People’s Bank of China announced their holdings, of 1948 tonnes, it was 2019, and that was up from 1658 tonnes in 2015. Prior to that, they owned 1,054 tonnes in 2009. Prior to that, they owned 600 tonnes in 2002. So…. From 2009 to 2015, the PBOC gold holdings grew by 604 tonnes. From 2015 to 2019 the PBOC gold grew by 290 tonnes.

However…… it is well known by analysts that track the physical movement of gold bullion that no gold production leaves China. It is all absorbed by various government agency. Therefore, China’s gold production from 2009-2015, was at least 300 tonnes per year or 1800 tonnes, three times the 604 tonnes reported. Similarly, from 2015 to 2019, production was at least 1200 tonnes, about four times that reported. Considering that (1) Chinese is notorious for their secrecy (2) they have clearly stated their long term monetary objectives (3) the Shanghei Gold Exchange is by far the largest physical gold marketplace in the world (4) other Chinese governmental agencies have been reported as gold purchasers, it is not hard to conclude that combined Chinese governmental agencies own a great deal more than the 1948 tonnes the PBOC reportedly control. It is easy to surmise that the Chinese may already own more than the 8133 tonnes of the largest reported owner, the USA, possibly a great deal more. If we were to guess, based on “anecdotal” reporting from a variety of sources and the numbers provided above, we suggest the more accurate holdings are upwards of 15,000 tonnes.

Should the Chinese establish a digital currency, backed in some form by gold, or even announce how much higher their gold holdings are than previously indicated, the price of gold would likely appreciate very substantially. It’s been said that “good money chases out bad” so capital would rapidly flow eastward. Just as when Richard Nixon closed the gold window in 1971, the other most tangible result in the US would be the loss of purchasing power by the US Dollar.

As my friend, and brilliant monetary strategist, Luke Gromen, likes to say:

Let’s watch.

Roger Lipton

P.S. It is interesting that Russia, though far smaller and less powerful than China, is the second largest producer, fifth largest stated owner, and most rapid reported accumulator of gold bullion. Russia, relative to the size of their economy and paper currency outstanding, has the highest physical gold holding and is therefore in the best theoretical position to back their currency and/or debt with gold.  Just as with China, nothing would please the Russian authorities more than to replace the US Dollar as the preeminent trading currency.




Inflation is Coming and My Thoughts on Franchising

By Roger Lipton


The U.S. Federal Reserve Bank was formed in 1913 to control inflation and manage the economy so as to avoid severe economic cycles. It has clearly failed in terms of controlling inflation, since a 1913 U.S. Dollar is worth about $.02 today.  More recently, since the U.S. went off the gold exchange standard in 1971, the Dollar has declined by about 85%. In terms of controlling business cycles, the U.S. has ad: the Roaring Twenties, the Great Depression in the 1930s, World War II, which had to be financed with debt in the ‘40s, inflation running to 12% and the Fed Funds Rate at 18% in the ‘70s, the dotcom bubble and burst of 1999 to 2001, the financial crisis of 2008-09, and the monstrous debt buildup and suppressed interest rates over the last 10 years.

More “money” has been created by the Fed in the last 18 months (adjusted for inflation) than was needed to pay for five years of World War II, and the debt as a percentage of GDP is above where it was in 1945. The M2 money supply in the US has increased by 24% over the last 12 months, the highest within recorded data over 150 years, and 27% most recently.

Fed Chairman, Jerome Powell, says there is a need to raise interest rates and reduce the Fed balance sheet, but adds “There will be a time, but not now.” However, the US debt has increased every year since 1957. There was a budget “surplus” in the last three years under President Clinton and the first year under President George W. Bush, amounting to just under $800 billion over four years, but the debt still increased each year due to “off-budget” items. (Only in D.C. can this happen.) Powell has reiterated the Fed’s objective to generate inflation of 2%+, indicating potential rampant inflation can be controlled, but the current financial experiment is unprecedented in time and magnitude. Our bet is that inflation is coming, higher than the Fed expects and it will be difficult to get the genie back in the bottle. Manage your business accordingly.


We wrote here last month that almost all of the mature publicly held franchising restaurant chains are hardly growing their U.S. units. We pointed out that, for a number of reasons, the unit level economics are just not attractive enough for franchisees to encourage unit expansion. Needless to say, higher sales would be transformational. The less obvious, and potentially contentious “adjustment” that could help a great deal is a revision of the franchise structure.

When Ray Kroc started franchising McDonald’s more than 60 years ago, the royalty rate was 1.9% By the 1960s, franchisors had started charging 2%-3%, by the 1970s 3%-4%, and 5% seems to be the standard today, plus at least 2% for advertising and other fees.

Some franchisees, at chains such as Dunkin’, Burger King and Jack in the Box are still making decent returns at  the store level because the store leases were signed 10 or 15 years ago and occupancy expenses are lower  than today’s economics would allow. While single unit franchisees who personally manage their stores can still make a living, a multi-unit owner, who  is the best prospect for unit expansion, paying a non-family store manager, is typically fortunate to be making 17-18% store level EBITDA, of which depreciation is not free cash  flow in the long run. Subsequently, rebating 7 points or more out of 17 or 18 points starts to feel like a pretty big load, and there is still local G&A to be carried. Even if store level EBITDA, before royalties, is in the low 20s, rebating over 7 points is a heavy price to pay. Considering the changing economics over the last two to three decades, there are no material operating expenses that are lower as a percentage of sales, certainly not occupancy or labor, and food costs are unpredictable commodities. The biggest single negative trend that nobody would debate is the intensive competition that has become commonplace.

The time has come for lower fees, especially ongoing royalties. We understand that this suggestion will be resisted by existing large chains, most especially those publicly held, because it would be an obvious reduction of the current royalty stream. However, well established franchisors could, and should, absorb more of the additional systemwide needs, such as technology upgrades. “Mid-cap” franchising companies could put some part of the following suggestions in place.

If I were running an early stage franchise company, I would put in place a sliding scale royalty system, charging 2.5-3.0% at a modest sales level, higher if the franchisee does better. Give them a little room to make money if the store doesn’t do quite as well as everybody hopes. If the store clicks, everybody is happy and the 4-5% on the higher sales won’t seem like such a burden. For my multi-unit franchisees, I would charge lower up front fees for additional stores and this is sometimes already being done (whether  admitting it to Wall Street or not). This is logical and appropriate because less franchise support is required as a franchisee builds local infrastructure.

It seems to us that a young franchise company adopting this strategy would have a huge competitive edge and the total royalty stream is likely to build more rapidly using this progressive approach. Profitable franchisees, and a more appropriate sharing of store level profits, considering today’s economic realty, make for a successful system in the long run.

Roger Lipton has followed the restaurant industry for four decades. Founder of money management and investment banking firm, Lipton Financial Services, Inc., he publishes regularly at   He can be reached at and 212 600 2266.