AlphaWise Survey: What Millennials Want...

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1 March 24, 2015 Restaurants AlphaWise Survey: What Millennials Want... Survey results suggest Millennials are picky eaters. They consume fast food but don't recommend it, while CDRs are more relevant to them than we thought. Healthy is fresh, not low-cal. Taste, value, and quality trump organic or local. Read-across is bullish for FC and CD, bearish for QSRs. 1) Millennials more likely to eat out on a weekly basis than Gen X or Boomers. This contradicts a common view that this highly prized young demographic is less inclined to do so. While they prefer fast casual, they also consume more fast food and casual dining brands than Gen X or Boomers. This is a modest plus for MCD's recovery plans and CDRs more broadly, which most investors assume will be left behind by this generation. However, Millennial dissatisfaction with traditional fast food is also higher than other generations, as reflected in weaker 'net promotor' scores for MCD. 2) Taste, value, and quality rule restaurant choice. On those metrics, CMG wins, particularly on value. PNRA wins on food quality but is closer to average on value, though we note an improving trend. Among CDRs, traditional brands like Outback (BLMN), Olive Garden (DRI), and TXRH still score tops in taste and quality, but brands like BWLD and BJRI have a much higher percentage of Millennials in their consumer base. In QSR, Chick-Fil-A, Subway, and WEN led, while DPZ and SONC have a higher Millennial proportion of customers. Attributes such as all natural and organic are much less important to consumers when it comes to selecting a restaurant, though Millennials (esp coastal, affluent ones) do care more about these attributes than other generational cohorts. MORGAN STANLEY & CO. LLC John Glass John.Glass@morganstanley.com Jake Bartlett Jake.Bartlett@morganstanley.com Courtney O'Brien, CFA Courtney.O'Brien@morganstanley.com Restaurants North America IndustryView Watch the video Exhibit 1: Summary Results In-Line 3) A different definition of healthy. For investors, it typically means lower calories, but for consumers it means this (in order): fresh, less processed, and fewer artificial ingredients. Low calorie ranks fifth as a criterion. This is a positive for CMG, as part of our bear case on the name is its high calorie content. 4) Who's got the biggest net promoters? TXRH, CAKE, and - surprisingly - BLMN's Carrabbas' (higher than Outback), while MCD, QSR's BK, and JACK are at the very bottom. 5) Mobility matters. Millennials are the most mobile-engaged group, with an avg of 2.3 restaurant apps downloaded. SBUX and DPZ are most popular, but among users, smaller brands like HABT and BJRI have among the highest percentages of customers downloading the app, while PNRA is surprisingly low given its recent mobile foray. Note: Con cepts w ith small sample sizes (below 50) are exclu ded as w ell as private companies. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. 1

2 What Millennials Want.. Hint: they may not be so different than the rest of us... We recently surveyed 3,000 adult Americans (18+) to determine their restaurant usage patterns and especially to find out: 1) how and how often Millennials use restaurants, 2) what Millennials want in a restaurant and whether it's different from the rest of the population, and 3) what brands they like best? We also wanted to understand better how they think about 'healthy' eating and their usage of mobile technology to find, order, and pay for food at restaurants. Key takeaways from the survey are as follows: 1) Millennials are not so different from you and I... as a group, Millennials (18-34 years old) were actually more likely to eat out at any restaurant than their Gen X or Baby Boomer peers (53% of Millennials report going out to eat at least once a week vs 43% for the broader population). Millennials' dining preferences are also not so different. Like everyone else, Millennials eat fast food, with 96% dining at QSRs at least one in the last 3 months vs. 80% at casual diners and 69% at fast casuals. Similarly, 63% of Millennials reported eating at MCD in the last 3 months vs. 59% for the population as a whole (though - solving for brand ubiquity - only 33% of MCD's customer base are Millennials vs. 39% for QSR's on average). While Millennials eat fast food, they are less likely to recommend QSRs to friends and family, recommending MCD the least (with negative net promotor scores) and Chick-Fil-A by far the most among traditional QSR's and Chipotle leading fast casuals. 2) What do Millennials want - at least in a restaurant? Whether you are 18 or 80, the three most important attributes are taste, value, and quality. Attributes such as all natural, local or otherwise 'socially good' are far less important for all consumer groups, though notably, these attributes are more important to Millennials than others. (Also notable is the fact that these attributes are more important to affluent, coastal Millennials than they are to the overall Millennial population.) In fast casual, PNRA again takes the top slot in great tasting and high quality food (as found in our prior survey - Survey Says...MS Value Perception Survey Results, published October 14, 2013), though ranks 8/19 in value, suggesting that this issue is not entirely behind them (the trend, however, appears to be improving over time.) Perhaps surprisingly, Panera also continues to outrank Chipotle on the taste and food quality metrics, though the latter wins on value (consistent with our '13 survey). Elsewhere in fast casual, ZOES ranks surprisingly low on these metrics, as does HABT (though the sample size is small). In casual dining, Outback (BLMN) trumped all others on taste and quality, while in traditional fast food, Chick-Fil-A, Subway and WEN won on those attributes, though McDonald's still wins on value. 3) What is healthy? The survey validates our theory that the consumer's view of healthy food at restaurants is shifting. Consumers define healthy as 'fresh', 'less processed,' and with 'fewer artificial ingredients', while lower calories rank fifth and organics sixth. Millennials put a slightly higher emphasis on natural and organic but are generally in sync with the overall population. Defining healthy as natural and less processed rather than low calorie is a positive for CMG, where one of the bear bases has been high calorie counts. It also suggests that MCD's upcoming effort to focus on food quality and reduced ingredients is on target and could help at the margin, especially given that most who say they aren't going there as often site making a switch to a 'healthier' diet. 4) Who's got the biggest fans? Net promoter scores reveal how customers really feel about a brand - rather than just using a brand as a convenience. CMG and PNRA have strong net promotor rankings within major fast casual, while Qdoba (JACK) and Noodles are among the lower ranked brands. For casual dining, Texas Roadhouse and The Cheesecake Factory top other major brands, while BWLD is the lowest (surprisingly, given strong comps), and in quick service, Chick-Fil-A tops the major brands. McDonald's, Burger King, Jack in the Box, and Taco Bell have negative net promoter scores. 5) Millennials are the most mobile-engaged consumer group - no surprise - with an average of 2.3 2

3 restaurant apps downloaded on their smartphones. The two most popular restaurant apps are - again no surprise - Starbucks and Dominos. But numbers three and four? Burger King and Applebee's. But if one looks at the portion of user bases that have apps, the story is different. BJRI and HABT have among the highest portion of customers that have downloaded the app (higher than SBUX) while WEN and MCD have among the lowest. Interesting, only 9% of PNRA's customer have downloaded its app despite the increased emphasis - among the lowest of the peer group. suggesting that despite a push into 2.0, its still early on its digital journey. Caveat: As with any consumer survey, results can be mixed and at times contradictory, and therefore open to interpretation. We view these results as positive for all fast casuals, but CMG in particular, not only an unequivocal favorite among Millennials, esp for value, but also this work debunks the notion that consumers link calorie content with healthy, defining healthy instead as natural, where CMG scores high. We view these results as mixed but on the margin positive for PNRA, which remains best in class for food quality, while value scores are more middling, but at least improving. The fact that only 9% of customers have downloaded the app at PNRA - among the lowest in the category - suggest there's still plenty of room for improved digital engagement. Survey is largely negative for traditional QSRs and in particular MCD, but mgmt's recent focus on food quality appears on target. MCD's received the lowest net promotor and intent to visit scores as consumers defect in favor of a healthier diet, as defined by food quality. But it does underscore that recent moves to make its food more wholesome could be effective. The one positive standout among traditional QSRs is SONC, which ranks highly with Millennials and has some of the catgory's better not promotor and intent to revisit scores. In CDR, despite recent strong sales results, we were surprised at the poor net promotor and intent to visit scores for BWLD. Despite not stacking up particularly well with Millennials, legacy casual dining brands Outback (BLMN) and Olive Garden (DRI) still score top of industry in terms of quality and taste. This bolsters the argument in favor of an eventual Olive Garden turn around. Stock implications What we did: In February 2015, in conjuction with Morgan Stanley AlphaWise, we conducted an online survey of 3,000 US consumers age 18+ who had eaten at a restaurant in the last 3 months. This includes 937 Millennials (18-34), 746 Gen Xers (35-49) and 1,317 Baby Boomers (50+). Conclusions based on the entire sample have a margin of error of +/- 1.4% at a 90% confidence level. Where applicable, findings are compared to the 2013 Restaurant Value Perception Survey conducted in August We asked consumers about their general attitudes about restaurants and why they choose certain brands, as well as to rate specific brands on those attributes. A complete list of the brads in the survey and the sample sizes for each (# of respondents that used them in the last 3 months) can be found in Appendix 2. 3

4 Millennials - Not So Different from the Rest of Us As a group, Millennials are more likely to dine out than either their Gen X or Boomer counterparts, with 53% of Millennials report going out to eat at least once a week vs 43% for the broader population, with a greater % of Millennials reporting dining out at least once in the last 3 months in each of the restaurant sub-segments (all respondents dined out somewhere in the last 3 months as it was a screen in the survey). This counters the view that this newest consuming generation will not over index to eating out, though this makes some intuitive sense insofar as younger consumers tend to have more free time than older consumers to dine out. More interestingly, perhaps, was that a higher percentage of Millennials said they had eaten at a casual dining restaurants in the last three months than baby boomers (80% vs 64%). We have generally had the assumption that casual dining, which was built to serve the baby boom generation two decades ago, is less relevant to Millennials. This appears not to be the case, at least in a wholesale fashion. Exhibit 2: Percent of each generation who said they ate at a restaurant at least once in the last three months...millennials lead in all three categories, but especially in fast casuals. Source: AlphW w ise, Morgan Stanley Research So where do Millennials eat? For all the focus fast casual get regarding Millennial usage, we find it interesting that Millennials frequent most of the same concepts that Gen Xers do - MCD, Subway, Taco Bell, Burger King, etc. For example, over 60% of Millennials have eaten at a McDonald's in the last three months. Ditto with Subway, where 50% of Millennials have eaten. This has to do with the ubiquity (large foot prints) have the brands, but as the charts below show, Millennials over index to most concepts in our survey (ie account for a greater proportion of the customer base than the size of the cohort suggests). At fast casuals, Shake Shack has the highest proportion of Millennial customers (excluding the impact of frequency within the last 3 months) and Panera has the least. and account for the lowest % at Panera. At casual diners, Buffalo Wild Wing's has the highest proportion of Millennial consumers and Outback has the least. And, at QSR's, Domino's has the highest proportion of Millennial consumers and McDonald's has the least. 4

5 Exhibit 3: Millennial usage roughly tracks that of the population, with MCD, Subway and Taco Bell the most used This chart is informative as it shows where each cohort is eating, but it is skewed by the ubiquity (large foot prints) of the brands. To get a better idea of brand exposure to given cohorts, we estimated the composition of each brand's customer base and ranked them. We found that on average, Millennials over index to each subsegment and most concepts in our survey (ie account for a greater proportion of the customer base than the size of the cohort suggests) but more so at fast casuals (51% of the fast casual base despite representing 31% of the survey population). Within fast casuals, Shake Shack has the highest proportion of Millennial customers (excluding the impact of frequency within the last 3 months) and Panera has the least. and account for the lowest % at Panera. At casual diners, Buffalo Wild Wing's has the highest proportion of Millennial consumers and Outback has the least. And, at QSR's, Domino's has the highest proportion of Millennial consumers and McDonald's has the least. 5

6 Exhibit 4: Fast Casual: Millennials account for over 50% of Fast Casual frequent consumers (w/in last three months), vs. 30% of the sample population - Shake Shack (while small sample size) leads, Chipotle is middle of the pack and Panera trails with Millennials. Note: Th e % above is calcu lated by dividin g th e n u mber of respon den ts in a given coh ort w h o h ave din ed at th e con cept at least on ce in th e last 3 months by the total respondents w ho did so. 6

7 Exhibit 5: Casual Dining: Millennials account for roughly 40% of Casual Dining frequent consumers (w/in last three months), vs. 30% of the sample pop. - Buffalo Wild Wings leads and Outback trails. Note: Th e % above is calcu lated by dividin g th e n u mber of respon den ts in a given coh ort w h o h ave din ed at th e con cept at least on ce in th e last 3 months by the total respondents w ho did so. 7

8 Exhibit 6: QSR: Millennials account for roughly 39% of QSR frequent consumers (w/in last three months), vs. 30% of the sample population - Domino's and Sonic lead and McDonald's trails. Note: Th e % above is calcu lated by dividin g th e n u mber of respon den ts in a given coh ort w h o h ave din ed at th e con cept at least on ce in th e last 3 months by the total respondents w ho did so. After finding where consumer, and the generational cohorts have been dining the last 3 months, we looked at how that's changed in the last year and than how consumer expect their frequency to change in six month. Observation include 1) all cohorts believe they've been cooking at home more (out inclination is to attribute this to wishful thinking vs. actual sales trends) and 2) Millennials are the only age cohort that report eating out more often than they used to, and specially at fast casual restaurants. This underscores the power and importance of both this generational cohort in the restaurant industry and the increasing relevance of fast casual. 8

9 Exhibit 7: As a whole, consumers believe they eat out less Y/Y and cooked at home more, though that may be wishful thinking; the data does suggest Millennials at least increased visits to fast casuals Most relevant is what consumers expect to do in the future. Our survey suggests some clear winners and losers, with most fast casuals winners (net increase in intent to visite), all casual diners winners (though with an average score of 12% vs. fast casual's 20%) and QSR's the clear loser with a -1% average and almost half negative. Among fast casuals smaller regional concepts lead but each have small sample sizes. Five Guys was the sole negative results. Among casual diners, Chuy's and Ruth's Chris lead but have small sample sizes. Of our coverage universe, The Cheesecake Factory leads and Outback Steakhouse trails (though slightly positive). Among QSR's, a clear winner (and recurring theme) is Chick-Fil-A, with Starbuck's second (though highest among Millennials) and Jack in the Box and McDonald's solidly negative. Exhibit 8: Increased frequency intent is highest (20% on average) at fast casuals (though many with low sample bases), with all positive except Five Guys Note: * indicates low er sample sizes (below 50 responses) making the result less statistically significant. 9

10 Exhibit 9: All casual diners saw increases frequency intent with Gen Xer's scoring the highest. Of our covered companies The Cheesecake Factory lead and Outback trailed Note: * indicates low er sample sizes (below 50 responses) making the result less statistically significant. Exhibit 10: Just over half QSR's say increased frequency intent, Chick-Fil-A leading followed by Starbucks and Subway, and McDonalds and Jack in the Box trailing Note: * indicates low er sample sizes (below 50 responses) making the result less statistically significant. The number one reason given by planning to eat less at a given restaurant was 'spending less on eating out', which was universal across each sub-segment. The second reason was 'making switch to a healthier diet', which helps explain which frequency intent is the weakest at QSR's. Below we list the reasons respondents selected to explain why they intend to eat less often at a given restaurants in the next six months. We note that McDonald's has the top 'score' (not a good thing) most often and in unsurprising catagories - 'making switch to a healthier diet', 'food with too many artificial ingredients', and 'don't trust the quality of the food'. Perhaps most surprising was Chipotle with consumers indicating 'taste has gotten worse'. 10

11 Exhibit 11: Top reasons respondents indicated for eating 'less often' at given restaurants, brands indicated lead the category Finally, while Millennials eat out more often than other age cohorts, they aren't as apt to disproportionally allocate additional income to eating out. When asked how they would spend incremental, Millennials were slightly less likely on average to spend on restaurants (19% said they would vs 20% overall), while they are more likely to so something experiential, like see a show or attend an event. Exhibit 12: Millennials slightly less likely to allocation discretionary income to restaurants, more likely to spend it on clothes and the like and recreational activities 11

12 What do Millennials want in a restaurant? We asked all consumers, regardless of age, what they want in a restaurant. Here's what they said: Turns out that whether you are 18 or 80, the three most important attributes in choosing a restaurant are: taste, value and quality. Attributes such as all natural, local or 'socially good' are far less important for all consumer groups (ranking 13th out of 20 attributes offered) though notably, these attributes are more important to Millennials than others. We explore the notion of how diners define 'healthy' - with some interesting insights - in the following section. Exhibit 13: Taste, value and quality are the most important restaurant attributes with 'natural', locally grown, authentic and socially responsible surprisingly low, though Millennials care more It is notable that, while still ranking well below other attributes, natural, organic or less processed menu items are disproportionately important to Millennial consumers vs. the general population. We attribute this to being part of the 'Whole Foods' generation, which has been raised with a higher level of consciousness about the wholesomeness of food quality. Digging deeper, we found that those who indicated that natural, organic foods was an important factor were younger than average (27 yrs old vs 39 yrs for the survey population), reside in costal states (18% in CA, vs 11% of the overall survey population 11% in NY vs. 8%, and 37% in the West broadly vs. 24% of the survey population) and are employed (68% vs. 56% for the survey population). We also found it notable that brands with 'good social values' - albeit a bit of a generic phrase -ranked dead last on average in choosing a restaurant. This isn't to say that it isn't important or the right values for a company to have, but it is interesting that as of today, the majority of consumers of any age don t think of it as an important deciding factor when choosing where to eat. Again digging deeper and noting a small sample (67 respondents listed 'good social value' as an important factor when selecting a restaurants), we found that those who indicated 'good social values' was an important factor is choosing a restaurants were younger (20 yrs old), lived on the coasts (24% from CA and 18% from NY), had higher incomes (40% with income above $100k vs. 21% for the survey pop) and were educated (75%). 12

13 Exhibit 14: Among fast casuals PNRA scores highest on taste (but middle of the pack on value) and CMG scores highest on value (second on taste) While PNRA takes top billing for food quality and taste, it's closer to average on value scores, a longer standing friction point with consumer (and investors). However, when we compared PNRA's value scores vs 2013, there has been some progress on 'value for money', especially relative to CMG during that same period. This is at least some evidence that the moves toward more transparent pricing, flat bread sandwiches and half sandwiches is impacting value perception. Other scores for both brands have gone backwards, although this could be a by-product of increased brand reach. As brand appeal widens, we have noted a commensurate decline in overall food scores relative to their prior levels (but not necessarily vs peers). Exhibit 15: Since our last perceptions survey, PNRA has gains ground in value perceptions 13

14 Exhibit 16: Among casual diners, Outback scores highest on taste (average on value), Applebee's scores highest on value Exhibit 17: Among QSR's, Chick-Fil-A scores highest on taste (WEN among public companies) and MCD scores highest on value 14

15 Exhibit 18: Looking at restaurants overall, Outback takes the top spot in taste and food qualty (CDR's rank high in general) and MCD leads on value 15

16 What is healthy? One of the key investor debates on restaurant stocks often comes down to whether a given brand is healthy. The assumption is that consumers define healthy by calorie content and that lower calorie food is inherently more healthy. So we asked consumers - how do you define healthy restaurant food? The answer is that consumers are now defining healthy as fresh, less processed and with fewer artificial ingredients. Lower calorie ranks fifth on that same list. Organics ranks sixth. Millennials put a sightly higher emphasis on natural and organic but are generally in sync with the overall population. This survey validates our theory that the consumer's view of healthy food at a restaurants is shifting and as a result consumers are not likely to punish brands like Chipotle, which serve fresh products with natural ingredients, but also high in calories. At the same time, its not more low calorie items that will drive consumers back to the like of McDonald, but rather more items that are seen as fresh, less artificial and perhaps more authentic. Exhibit 19: Consumers define 'healthy' as 'fresh', 'less processed' and with 'fewer artificial ingredients', with 'low calorie' and 'fat free' less relevant 16

17 Net promoters - which concepts have the biggest fans? Who's got the biggest fans? Net promotor scores reveal how customers really feel about a brand. Rather than just using a brand, net promoters are willing to recommend the brand to a friend, family member or colleague. We look at net (recommend less not recommend) to come up with a net promoter score. Exhibit 20: Aggregating all restaurants - Texas Roadhouse and Cheesecake have the strongest fans (and the lowest martketing spend), which McDonald's and Burger King trail Note: w e exclude Zoes Kitchen, Pret-A-Manger, Habit Burger, Potbelly, Ruth 's Chris, Del Frisco's, Chuy's, Taco Cabana, Smashburger, and Shake Shack given the small sample size. Among fast casuals, Chipotle and Panera were the strongest at 37% and 35%, respectively, though Chipolte nets much better support from Millennials (36% net promoters vs. Panera's 27%). NDLS, notably, is lower down on the overall net promoter score, and was weakest with Millennials (17% net promoter). 17

18 Exhibit 21: Among Fast Casual, Chipolte narrowly leads in likelihood to recommend, just behind Panera, and Qdoba trails Note: w e exclude Zoes Kitchen, Pret-A-Manger, Habit Burger, Potbelly, Taco Cabana, Smashburger, and Shake Shack given the small sample size. Among casual diners, Texas Roadhouse has the highest score, though is middle of the pack with Millennials, followed by The Cheesecake Factory (both of which interestingly have relatively low advertising spend vs. peers). Surprisingly, top of the list for Millennials is TGI Fridays, followed closely by Outback. Applebee's ranked worst in casual dining among Millennials, with just 8% net promoters and Buffalo Wild Wings ranked last (customers must want those wings for themselves). Exhibit 22: Within Casual Dining, Texas Roadhouse leads overall in likelihood to recommend, though is average among Millennials, and Buffalo Wild Wings trails Finally, QSR as a group had the fewest net promoters in any brand and across any age cohort. The clear winner from this standpoint was Chick-Fil-A, followed by Starbucks, bur relative to the fast casual group, there was generally less enthusiasm for net promotion in QSR. Four QSR brands - Taco Bell, Jack in the Box, Burger King, and McDonald's, had negative net promotor scores. Burger King and McDonald's in particularly scored poorly with Millennials, with -20% and -27% net promotor scores, respectively. Neither casual dining nor fast casual had any brands with negative net promotor scores. 18

19 Exhibit 23: Within QSR, Chick-Fil-A takes its place at the top. Starbuck's is second but is weaker than the fast casual and casual dining averages, which Burger King and McDonald's are solidly negative 19

20 Mobile - Millennials most engaged Millennials are the most mobile engaged consumer group - no surprise there - with an average of 2.3 restaurant apps downloaded. While mobile is an often discussed topic in restaurants, it is still in its early adoption phase with most consumers. We found that consumers have an average of 1.7 restaurant mobile apps downloaded with Millennials having the most (2.3), Gen Xer's with 1.9 and Baby Boomer's with 1.1 on average. Exhibit 24: Source: AlphW w ise, Morgan Stanley Research The two most popular restaurant apps are - no surprise - Starbucks and Dominos, who are both leaders in mobile payment and commerce. But numbers three and four? Burger King and Applebee's. Chipotle is 11th on the list, and, perhaps more surprisingly, Panera is 16th, with only 2% of the restaurant population having downloaded it. This may be a function of PNRA's older demographic but also underscores how early we are in this digital migration (PNRA launched its app in 2014). Exhibit 25: Starbucks and Domino's lead in mobile app installs, but surprisingly Burger King and Applebee's follow, partly a function of brand ubiquity The install rates above favor national chains because more respondents have exposure to the brands. Solving for this by just looking at mobile app install rates by customers or a given brand, we find download rates ranging from 33% to 6%. Regional players (notably in CA) have high app install rates. Among fast casuals, Baja Fresh and Habit lead, but Starbuck's is strong (25%) as expected. Chipotle is middle of the pack (14%) and Panera is below average (9%). Among casual diners, California Pizza Kitchen is the highest (33%), followed by BJRI (29%) and, interestingly, Carrabba's (26%) with Olive Garden last (6%). Among QSR's, Domino's leads (27%), as expected, and Wendy's trails (6%). 20

21 Exhibit 26: Looking install rates by active customers of a brand, California Kitchen leads casual diners, Baja Fresh leads fast casuals and Domino's leads QSR's How do consumers use restaurant apps? On average mobile apps are still used the most to look for menu items, discounts and locations. But the highest uses at the brand level are ordering (Domino's at 73%), payments and loyalty (Starbuck's at 61% and 57% respectively). Both Starbuck's and Domino's score high on ease of use, while Applebee's takes the top score (83%) and Chili's (46%) and Chipotle (46%). Dunkin's app is now predominantly used to find discounts (52%), but is less frequently used for ordering (34%). Exhibit 27: The clear winner in broad uses (utility) of its app is Domino's as expected, with Starbuck's leading in payments and loyalty related uses 21

22 Appendix 1 Exhibit 28: Restaurants visited over the past three months (regardless of generational cohort) 22

23 Exhibit 29: Daypart usage by generational cohort - % of cohort that used restaurant sub-segments at given dayparts 23

24 Appendix 2 24

25 Exhibit 30: Our survey included 3,000 US adults who ate out at restaurants in the last three months. The chart below shows the number of respondents (and their age demographic) who ate at specific restaurants 25

26 26

27 Disclosure Section The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. LLC, and/or Morgan Stanley C.T.V.M. S.A., and/or Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V., and/or Morgan Stanley Canada Limited. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. LLC, Morgan Stanley C.T.V.M. S.A., Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V., Morgan Stanley Canada Limited and their affiliates as necessary. For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, USA. For valuation methodology and risks associated with any price targets referenced in this research report, please contact the Client Support Team as follows: US/Canada ; Hong Kong ; Latin America (U.S.); London +44 (0) ; Singapore ; Sydney +61 (0) ; Tokyo +81 (0) Alternatively you may contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY USA. Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: John Glass. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at Important US Regulatory Disclosures on Subject Companies As of February 27, 2015, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: BJ's Restaurants, Inc., Chipotle Mexican Grill, Inc., Darden Restaurants Inc., Dunkin Brands Group Inc, El Pollo Loco Holdings, Jack in the Box Inc., McDonald's Corporation, Panera Bread Company, Restaurant Brands International, Inc., Shake Shack Inc, Starbucks Corp., Yum! Brands, Inc.. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Dunkin Brands Group Inc, El Pollo Loco Holdings, McDonald's Corporation, Restaurant Brands International, Inc., Shake Shack Inc. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Darden Restaurants Inc., Dunkin Brands Group Inc, El Pollo Loco Holdings, Jack in the Box Inc., McDonald's Corporation, Noodles & Co, Restaurant Brands International, Inc., Shake Shack Inc. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Bloomin' Brands Inc, Brinker International Inc., Chipotle Mexican Grill, Inc., Darden Restaurants Inc., Dunkin Brands Group Inc, El Pollo Loco Holdings, Jack in the Box Inc., McDonald's Corporation, Noodles & Co, Restaurant Brands International, Inc., Shake Shack Inc, Starbucks Corp., The Cheesecake Factory, Inc., Yum! Brands, Inc.. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Chipotle Mexican Grill, Inc., Dunkin Brands Group Inc, El Pollo Loco Holdings, Jack in the Box Inc., McDonald's Corporation, Restaurant Brands International, Inc., Sonic Corp., Starbucks Corp., The Wendy's Company, Yum! Brands, Inc.. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Bloomin' Brands Inc, Brinker International Inc., Chipotle Mexican Grill, Inc., Darden Restaurants Inc., Dunkin Brands Group Inc, El Pollo Loco Holdings, Jack in the Box Inc., McDonald's Corporation, Noodles & Co, Restaurant Brands International, Inc., Shake Shack Inc, Starbucks Corp., The Cheesecake Factory, Inc., Yum! Brands, Inc.. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Chipotle Mexican Grill, Inc., Darden Restaurants Inc., Dunkin Brands Group Inc, El Pollo Loco Holdings, Jack in the Box Inc., McDonald's Corporation, Restaurant Brands International, Inc., Sonic Corp., Starbucks Corp., The Wendy's Company, Yum! Brands, Inc.. Morgan Stanley & Co. LLC makes a market in the securities of BJ's Restaurants, Inc., Bloomin' Brands Inc, Brinker International Inc., Buffalo Wild Wings, Inc., Chipotle Mexican Grill, Inc., Darden Restaurants Inc., Dominos Pizza Inc., Dunkin Brands Group Inc, El Pollo Loco Holdings, Jack in the Box Inc., McDonald's Corporation, Noodles & Co, Panera Bread Company, Red Robin Gourmet Burgers, Inc., Sonic Corp., Starbucks Corp., Texas Roadhouse, Inc., The Cheesecake Factory, Inc., The Wendy's Company, Yum! Brands, Inc.. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-us jurisdictions. STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution (as of February 28, 2015) For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively. 27

28 COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC) STOCK RATING CATEGORY COUNT % OF TOTAL COUNT % OF TOTAL IBC % OF RATING CATEGORY Overweight/Buy % % 28% Equal-weight/Hold % % 25% Not-Rated/Hold 101 3% 10 1% 10% Underweight/Sell % 88 11% 14% TOTAL 3, Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index. Important Disclosures for Morgan Stanley Smith Barney LLC Customers Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC or Morgan Stanley or any of their affiliates, are available on the Morgan Stanley Wealth Management disclosure website at For Morgan Stanley specific disclosures, you may refer to Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest. Other Important Disclosures Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of Darden Restaurants Inc., Jack in the Box Inc., McDonald's Corporation, Starbucks Corp., The Wendy's Company, Yum! Brands, Inc.. Morgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. 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The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. 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