It’s Going to Take More than a Pandemic to Stop A&W

In March and April of 2020, pivots and radical changes became a way of life for restaurants. A&W was no different. Same-store sales fell mid-teens early and then high single digits by April as mandates clamped dine-in service and consumers started to plot two-week grocery trips like battle plans.

And naturally, one idea that came to A&W CEO Kevin Bazner’s desk was virtual brands and ghost kitchens. Operators asked Bazner if they should consider dedicating excess kitchen capacity to a “second brand.” Essentially, trail the path of endless concepts then and today—perhaps even 100,000 at this point—serving an off-premises audience from a physical, unbranded venue. Say a wings chain from a Chili’s, with the end-user making that connection or not.

“That lasted a very short period of time,” Bazner says of the conversation.

Why 102-year-old A&W hesitated isn’t complicated. Can you recreate root beer in a frosted mug through a ghost kitchen? But why it lost steam quickly is even less so.

Within 10 weeks, A&W’s business started coming back. And suddenly, its same-store sales ran double-digits over the previous year.

Without much debate or deciphering, you can thank the drive-thru. The majority of A&W’s 550-plus stateside restaurants offer one. There’s also what Bazner refers to as the company’s “legacy restaurants,” which additionally boast “drive-ins,” where carhops serve guests at their vehicles. About 25 percent of A&W’s base business falls into that category. So right from the shutdown start, A&W had restaurants with multiple order points ideal for a socially distant world.

In that March-April run, though, Bazner says a lot of ideas came up. But when comps surged, it was almost like A&W held its breath. “I think every week we were pinching ourselves. Is this a bump? Is this a head fake? Are we going to go back into the dumpster tomorrow and into next week?” Bazner says.

Instead, one week passed, and then another. Weeks turned into months. Sales jumped 15 percent in May and 16 percent in June. Then, 2021 approached and A&W realized something about the so-called “new normal” Bazner kept hearing about.

“I’ve said all along, this is our current normal,” he says. “Just continue doing what we do. Quality to our guests, with our food and our service and our assets, and [guests] will come. They’ll keep coming.”

“We can’t win the discount wars,” he adds. “We put quality as our value proposition, day one. And I believe that’s paying off. As we’re getting more customers exposed to us, they’re rewarding us.”

A&W’s same-store sales at single-brand franchised restaurants surged 9.7 percent in fiscal 2020. Systemwide, they rose 8.5 percent. It marked the company’s ninth straight year of positive growth. It carried into the New Year as well, with January comps up 20 percent—the best month in a decade. Core business in March 2021 upped 30 percent versus 2019 levels.

To Bazner’s point, however, he believes you can stretch beyond coronavirus and see A&W’s full picture without looking through a pandemic lens. In 2011, a core group of franchisees purchased the brand, nine years after Yum! acquired it along with Long John Silver’s. Bazner, a longtime A&W pillar from 1985–2002, was asked to return. Unsurprisingly, he led with nostalgia from the outset. Evolution, not revolution, as he says.

Since the ownership switch, comps are up 51 percent. AUVs climbed 40 percent, on average. Zeroing on 2020, comps lifted double-digits seven out of eight months from May through the end of the year, even through peak seasons.

“Our playbook really hasn’t changed,” Bazner says. “If anything, this past year really supported it.”

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“You’d think the low-hanging fruit is gone. We don’t think so,” Bazner says.

A&W’s comeback was built on a “quality initiative.” Namely, return root beer to the house-made and unshakable lever it was for decades. A&W sells root beer 3:1 against other soft drinks.

In the Yum! era, root beer was going to bag in the box, brought into stores, put into mix machines, and dispensed just like other options, alongside other options. About 70 percent of the system got there.

Under new ownership, 100 percent of stores went back to making root beer by the venue, daily, from the original recipe.

Perhaps not as outward yet still a significant trigger, A&W introduced hand-breaded chicken tenders in 2013 in favor of a freezer-fryer product. Within a three-year span, that business grew more than 60 percent on a per-store basis. A&W introduced chicken sliders last year on potato rolls and dedicated more menu real estate to the offerings.

The point being, Bazner says, A&W did the heavy lifting needed to endure COVID from a long-term view—a crisis when brand value was worth its weight in gold. Although pizza dominated initial headlines, the phase that held steadiest, Bazner says, was consumers’ stock in restaurants they trusted. To feel normal or safe, they returned to restaurants with equity. And A&W has more than a century of it.

All that said, the drive-thru element can’t be understated.

One thing that doesn’t get talked about enough, especially in lockdown stretches, is how drive-thru blares as a “WE’RE OPEN” signal to guests. It’s the herd counter to quarantine life. Is it safe to eat at a restaurant? Well, 10 cars are lined up outside A&W.

In this past year, freestanding A&Ws with drive-thrus saw AUVs hike nearly 14 percent. As of December 31, this group reported average net sales of $1,100,600, according to a recent FDD. The first quartile was $1.575 million. C&G restaurants with drive-thrus, or those essentially attached to C-stores, gas stations, and travel centers, posted an average of $651,195 and up to $953,425 in the top 25 percent.

Important to note, A&W does not provide data in its FDD for freestanding restaurants without drive-thrus, of which there are 39; C&G units without drive-thrus (there are 28 of these); and 309 co-branded restaurants.

The reason being none of them will be offered to operators any longer. A&W’s growth resides solely in the drive-thru lane.

During COVID, A&W did more than simply turn the menuboard on, however. The chain worked to create second makeshift drive-thru ordering points. Some operators put extra staff outside with tablets to log-in orders, a la Chick-fil-A and In-N-Out Burger.

Certain restaurants added a second menuboard to handle elevated traffic. A Kansas location even created “bubbles” for employees to wear and guard themselves from the virus and the elements. They had a tablet underneath the plastic, and could talk to guests.

To encourage operators to follow suit in terms of drive-thru focus, A&W is currently working to finalize a program to allow all of its restaurant to make investments in—and even direct some local store marketing funds toward—the consumer drive-thru experience.

This could include re-striping parking lots and updating signage and menuboards outside the restaurant. Bazner calls it a “very cost-effective remodel” that doesn’t touch the inside of the restaurant.

All new A&W locations, for now, will be freestanding with a drive-thru, with a view toward at least having an option to make a second drive-thru lane permanent.

Yet the second order point is something existing stores can retrofit without tearing anything down. That’s where tablets and makeshift lanes, which can be turned off and on by the season, come into play.

“The key is the better you can push people through the drive thru, the better you’re going to do. Certainty in our category,” Bazner says. “And I think that’s true across the industry. That’s no secret. All of the stuff about off-premises and delivery and online ordering— all of that is good. But the ones that are doing best there have no choice. They have no drive thru.”

This reality shows a bit differently at A&W than some category peers. The brand plants roots in rural, smaller markets. For perspective, a third of the company’s core business is located in communities not serviced by a national delivery provider. Uber Eats, DoorDash, Postmates, etc.—they can’t even travel to 33 percent of A&W’s stronghold.

And in those trade areas, even when a local aggregator is available, chances are it’s not a customer group seeking delivery anyway, Bazner says. At the least, they’re not a segment willing to pay a steep convenience trade-off in fees

“Those customers are coming to the restaurant,” Bazner says.

A&W is just fine with this. Its food, by and large, wasn’t meant to travel. The same reason ghost kitchens concern Bazner—the experience casualty—is true of trying to ship root beer to somebody.

“What do we do when we go through a drive thru?” he says. “Reach in the bag. We grab hot French fries. I can’t deliver that experience.”

Delivery has a place, however. It’s simply location specific for A&W on a large scale. It’s market-by-market more than it can ever be a blanket brand initiative.

That’s reserved for drive thru and drive-ins.

Before COVID, drive-thru mixed in the 45–55 percent range of sales for A&W. The drive-in concepts were a different beast, welcoming basically all of their business outside the literal four walls. It jumped into the 90s during the crisis.

“It’s full circle for us,” Bazner says, referencing drive-in. “That’s where we started. We started as a drive-in and bringing food to peoples’ cars. That’s the genesis of this brand.”

There were drive-in locations that stood up multiple stalls with menus on them. Eight, 10, 15 of them.

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A&W currently has 18 stores in the development pipeline.

Going forward, Bazner says, the main question facing A&W (and countless other chains) is how much dine-in will return. Typical A&W models offer 54 seats. The recent new prototype is 2,180 square feet. Should the brand consider shrinking, which has become a popular notion for quick-serves?

Bazner doesn’t think so. “Our customer still wants—and they tell us this—when can they get their mug back in their local location?”

It’s a geographical reality, too. In smaller towns, when dining rooms open, people flock back, Bazner says. “I’m telling you, they’re coming,” he says.

But the critical thing, as he noted, is A&W understanding what’s essential to the concept. Knowing what it has to do to guard and preserve that, and deliver an experience that’s differentiated the brand through recessions and depressions, and yes, pandemics (two of them actually) since 1919.

“Can you find some lemonade in the lemons? We feel very confident in the results, and results speak to it—that what we’ve been doing is continuing to pay off,” Bazner says. “This isn’t our first year. This is our ninth straight year of positive comps. Just happens to be our best one.”

“You’d think the low-hanging fruit is gone. We don’t think so.”

A&W currently has 18 stores in the development pipeline. There are 12 deals signed without an outlet open as of December 31.

No projected opens are on deck for this coming fiscal year, but that should change soon, Bazner says. “We’re getting a lot of people, at the least, talking to us that weren’t, I can tell you—they weren’t talking to us 10 years ago. That’s for sure,” Bazner says.

A&W ended 2020 with 309 co-branded venues, down 16 from the prior year. That side of the chain’s business (tied to KFC and Long John Silver’s), retracted by 53 the previous two years, with 40 net closures coming in 2019. Bazner says co-branded venues are nearing a comfortable density, and could eventually settle closer to 250.

“It’s a nice business for us,” he says. “But it’s not growth in terms of new locations.”

A&W had 231 total single-branded stores by 2020’s exit, including 228 franchised. The brand dropped back by 12 locations last year after retracting by one and six restaurants in 2019 and 2018, respectively.

Bazner says the growth sweet spot for A&W today and headed into the future will be markets just outside of major urban areas and particularly in the upper Midwest. He pointed out Ohio, Indiana, Michigan, Minnesota, Iowa, Wisconsin, and the Pacific Northwest, as well as Oregon, Norther California, up into Utah, and Washington State. Additionally, in and around greater Denver and St. Louis. The C&G model also helps A&W look to markets without as much saturation and brand recognition.

The chain recently beefed up its development team with two new hires, including a senior director, as it fields more inquiries.

“We feel that really it’s not just we responded to COVID and that was it,” Bazner says. “Our operators did a remarkable job, but I think the foundation we built with our quality initiatives the previous eight years just continues to pay dividends.”