Novo Undercuts Lilly’s Obesity Drug Price for Cash-Pay in US

Summary

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Bloomberg Intelligence Podcast

Episode: Novo Undercuts Lilly’s Obesity Drug Price for Cash-Pay in US

Date: November 17, 2025
Hosts: Scarlet Fu and Paul Sweeney
Guests: Michael Shy (Bloomberg Intelligence Sr. Pharma/Biotech Analyst), Leanna Baker (Managing Editor, Deals Team), Mary Ross Gilbert (Sr. Retail Analyst), Michael Halen (Sr. Restaurant Analyst)

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Episode Overview

This episode focuses on pivotal changes in the U.S. obesity drug market, specifically Novo Nordisk’s move to undercut Eli Lilly’s GLP-1 obesity drug pricing for cash-pay patients. The hosts analyze industry competition, market penetration, and the broader impacts of White House policies on pricing. Additional segments cover M&A news in the packaging sector, trends among apparel retailers during the holiday season, and the current state of the restaurant industry.

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1. Novo Nordisk vs. Eli Lilly: Obesity Drug Price Battle

(01:33–07:39)

Main Points & Insights

• Novo Nordisk Reduces Obesity Drug Prices:

  • Novo is reducing starter doses of its GLP-1 obesity drug to $200/month, with subsequent doses at $350/month, making them about $100 cheaper per dose than Lilly's comparable products.
  • Move is strategic, targeting cash-pay patients to compete for new patient starts.

    “They're undercutting [Lilly] by about, you know, $100 at each dose. And this is basically a ploy to compete for new patient starts.”
    — Michael Shy, 02:42

• White House Deal Context:

  • Both companies have worked with the White House on overall price reduction; Novo’s move is “ahead of the White House deal.”
  • The reduced prices align with government-stated aims but are an immediate market maneuver.

• Competitive Landscape:

  • Despite Novo’s move, Lilly’s product is still considered more effective in weight loss and is executing better on launches.
  • Contrasting Q3 results show Lilly ahead.

• Market Penetration and Sensitivity:

  • The obesity drug market is “highly price sensitive.”
  • Only low single digits of the addressable market are currently using anti-obesity drugs in the US, with lower rates abroad.
  • Government policy (e.g., Medicare PIL program in 2026 and Medicaid state-based changes) could enable millions more patients to access GLP-1 drugs.

    “The deal...can unlock, you know, 7 to 8 million patients. According to a White House statement...10% of Medicare beneficiaries would become eligible.”
    — Michael Shy, 03:45

• Compounded Drug Makers:

  • Lower branded drug prices are negative for companies like Hims & Hers making compounded copycats, as it narrows the cost gap.

    “Lowering down the price...would lessen the delta between copycats and branded treatments. So I guess it's a negative for...these compounded GLP1 drug makers.”
    — Michael Shy, 05:15

• Investment Perspective:

  • Pharma companies with obesity drug exposure are strongly outperforming those without, reflecting significant investor interest.
  • Obesity is seen as a key area for growth and pipeline replenishment due to patent cliffs approaching for other major drugs.

    “Obesity is obviously appealing given the size of the target population, how underpenetrated it currently is… There's high demand for these treatments.”
    — Michael Shy, 06:04

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2. Pharma Sector M&A: Structural Trends

(06:52–07:39)

• Ongoing M&A Trend:
  • Consolidation and acquisitions remain central to big pharma strategy, with several big deals (e.g., Roche, Pfizer in the space).
  • Companies use M&A to diversify beyond core areas and replenish pipelines.
  • Model: Blend of in-house and external (biotech) innovation.

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3. Packaging M&A: Sealed Air’s Takeout by CDR

(09:31–14:18)

Deal Overview

• CDR (Clayton, Dubilier & Rice) agrees to buy Sealed Air for $6.2B, marking one of the largest packaging deals recently.
• No premium: Acquisition is a “take under,” with shares trading below the offer price.

Key Discussion Points

• Private equity take-privates are increasing as IPO and public market exits remain difficult.
• Despite expectations, packaging M&A volume has been down compared to other industrial sectors.
• Fundraising is more challenging now due to higher interest rates and increased competition for investment dollars.
• If rates decline in 2026, leveraged buyout activity may pick up due to cheaper debt; this might revive sponsor returns and fundraising.
• Notable that seller, Sealed Air, used boutique bank Evercore as its sole advisor, reflecting their growing prominence.

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4. Retail Trends—Holiday Shopping, Apparel Winners and Losers

(16:10–21:16)

Apparel Sector Highlights

• Winners:

  • Gap/Old Navy: Viral marketing and strong style drive momentum; expected to continue into 2026.
  • Aritzia: Rapid U.S. expansion, strong comp sales gains despite having under 70 stores stateside.
  • Off-price: TJX, Ross, Burlington see strength due to delivering branded products at value.
  • Dillard's: Strong Q3 comps (+3%) and margin performance linked to full-price selling strategy.

• Department Stores:

  • Macy’s shows improvement, particularly in e-commerce. Kohl’s continues to lag in assortments and overall sales.

• Abercrombie & Fitch:

  • The stock has fallen significantly; strength lies in the Hollister brand (Gen Z focus), not the Abercrombie namesake.

    “We're just not seeing the strength in the namesake brand. But in their Hollister brand, we are seeing strength...”
    — Mary Ross Gilbert, 19:31

• Sourcing and Margins:

  • Sourcing is shifting away from higher cost countries; margins expected to improve in H2 2026. Tariff impacts handled differently—Ralph Lauren stands out for maintaining strong margins at premium price points.

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5. Restaurant Industry Update—Fine Dining Rebounds

(23:08–28:43)

State of the Sector

• Segment Performance:

  • Fine dining: Seeing a rebound, driven by high-income consumers’ confidence.
  • Quick Service (e.g., McDonald's): Struggled in H1 due to overshooting on price hikes, especially affecting low-income customers. Improved in H2 by revamping value offerings (e.g., McDonald’s $3 Snap Wraps).

    “Quick Service had a really difficult first half...they kind of lost their way when it came to value. They implemented too big of price increases...”
    — Michael Halen, 24:46

• Inflation & Input Costs:

  • Beef inflation running “mid teens” for Q4, disproportionately impacting burger chains and steakhouses with owner-operators (e.g., Shake Shack, Texas Roadhouse).
  • Franchised models like McDonald's buffer company financials from these cost pressures, as franchisees bear the brunt.

• Business Models—Franchise vs. Ownership:

  • Franchising leads to steadier, more predictable earnings (favored by analysts), but full ownership gives operational control—advantageous for experience-focused brands (e.g., Darden).

    “Franchising eliminates a lot of the operating leverage and thus the risk to your margins… If you are running a full service chain...you want to own and operate.”
    — Michael Halen, 27:41

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6. Notable Quotes & Memorable Moments

• “This is basically a ploy to compete for new patient starts.”
  — Michael Shy, on Novo’s logic behind cutting prices (02:42)

• “Obesity is obviously appealing given the size of the target population, how underpenetrated it currently is.”
  — Michael Shy, on pharma M&A (06:04)

• “Fine dining had a really nice rebound...because they’re catering to higher income consumers who own assets and are feeling pretty good.”
  — Michael Halen, 23:33

• “Quick Service had a really difficult first half...they kind of lost their way when it came to value. They implemented too big of price increases...”
  — Michael Halen, 24:46

• “We're just not seeing the strength in the namesake brand. But in their Hollister brand, we are seeing strength.”
  — Mary Ross Gilbert, on Abercrombie & Fitch (19:31)

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7. Timestamps & Key Segments

• Novo vs. Lilly Drug Pricing & Market Context: 01:33–07:39
• Pharma M&A Model: 06:52–07:39
• Sealed Air/Packaging M&A: 09:31–14:18
• Retail/Apparel State of Play: 16:10–21:16
• Restaurant Industry Trends: 23:08–28:43

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Summary

• Novo’s price undercutting signals intensifying competition that could meaningfully expand the obesity drug market, but also pressure copycat and compounded drug makers.
• M&A activity in both pharma and packaging reflects defensive and opportunistic maneuvering to ensure pipeline growth and respond to macroeconomic uncertainty.
• The holiday retail landscape shows clear winners in value and full-price strategies, with apparel brands’ fates closely tied to marketing, assortment, and sourcing shifts.
• Restaurants show bifurcated fortunes: Fine dining and strategic quick-service pricing are bright spots, while input cost pressure remains a big concern.

For quick insight into evolving trends across healthcare, consumer, and industrial sectors—all through the analytical lens of Bloomberg Intelligence.

Transcript

[Michael Shy]

What is Actual investing? We believe that it's a real world task to deliver thoughtful capital deployment. It's not about speculating over the short term. It's about understanding the long term opportunities for companies through technological progress or new business models.

[Paul]

So we seek out those exploring big new ideas that will change the world.

[Michael Shy]

Then we back them to give those.

[Paul]

Ideas time to flourish. Bailey Gifford Actual Investors Find out [e-mail] there's no championship league for small business owners, but if there was, you'd be at the top of the standings. Because going pro with Lenovo Pro means you've got the winning formation. One on one Advice IT solutions and customized hardware powered by Intel Core Ultra processors help you stay ahead of the competition. Business goes pro with Lenovo Pro Sign up for [e-mail] Pro Lenovo Lenovo Managing multiple accounts and logins for your marketing needs is like managing multiple announcers for one ad. Confusing, but with mailchimp's new SMS features you can reach all your customers in over 10 countries all from one account, giving you more time, driving more conversions and improving campaign performance. One platform, many audiences, endless possibilities. That's how you MailChimp your marketing with SMS. Tap the banner to learn more.

[Podcast Host]

Bloomberg Audio Studios Podcasts Radio news. You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at 10am Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. I feel like we have to talk about what's going on in biotech. It's M and A Monday, Paul, and there's been this trend of course of the big pharma companies desperate to refill their pipeline.

[Paul]

It's getting competitive now and they're going competing on price. That's what I'm kind of noticing here. One from be like a rare to find it now. It's everywhere.

[Michael Shy]

Yeah.

[Paul]

And now they're competing on price.

[Podcast Host]

So it's a good thing if you are looking to get in on the anti obesity drugs and you're looking for a more affordable price because the companies are doing what they can to appeal to consumers. Michael Shy is Bloomberg Intelligence Senior Farmer C Senior Pharma Biotech Analyst joining us now. And Michael Novo Nordisk is now undercutting Eli Lilly's obesity drug price. Tell us exactly what they're doing here because my understanding is that both these companies recently worked out a deal with the White House to reduce prices overall.

[Michael Shy]

Yeah, thanks. So absolutely this is, I mean this is obviously Ahead of the White House deal. So you're seeing starting doses being reduced $200 per month and then doses thereafter being charged an average of $350 per month compared to $5. So I mean, you know, those prices kind of align to, you know, the pricing in the, in the White House statement coming from Trump Rx. But compared to Lilly, I mean, they're undercutting them by about, you know, $100 at each dose. And this is basically a ploy to basically compete for new patient starts. As we know, Lilly's got the more effective product in terms of weight loss profile and they're also, you know, executing better on the launches. And I think that's clear from 3Q results where we saw contrasting fortunes between those two particular drug makers.

[Paul]

Mikey, give us a sense of this marketplace here. What percentage of the addressable market is actually taking these obesity drugs versus because it seems like as the price comes down, more and more people will be able to get access to them.

[Michael Shy]

Yeah, absolutely. I mean, it's a highly price sensitive market. When we look at penetration rates in the U.S. you know, low single digits, that's obviously going to accelerate as these, as these drugs become cheaper. Looking outside the US penetration rate, you know, rates are even lower. So there's, you know, still significant kind of, you know, patient Runway out there in terms of U.S. penetration. I mean, you know, the deal, the White House pricing deal on GLP1 drugs, you know, supports kind of use of these, these GLP1 drugs in Medicare. You know, there we think that it can unlock, you know, 7 to 8 million patients. According to a White House statement. I think they said 10% of Medicare beneficiaries would become eligible for GLP1 drugs based on the PIL program that's going to be introduced in 26 and I think it's going to become mandatory in 27. And then they've also, you know, lowered the price in Medicaid too. I think the uplift in terms of patients there is a bit harder to deduce or to kind of model given that coverage is going to be on a state by state basis. And there's also kind of different qualifying criteria which again is state dependent.

[Podcast Host]

What does this mean, Michael, for the companies like Hims and hers, the companies that make compounded copycat versions of these anti obesity drugs? They've done very well. And I know the stock for Hims and hers has been kind of all over the place, but it is modestly higher from where it was at the start of the year.

[Michael Shy]

Yeah, I mean I think that whole, you know, the compounding situation, I believe that, you know, 1.2 million patients are on compounding GLP1 at the moment. That's based on kind of comments and Novo made during their 3Q results. Obviously lowering down the price would kind of of the branded treatments would basically. Well, I mean it would lessen the delta between you know, copycats and branded treatments. So I guess it's a negative for, for, for these, you know, compounded GLP1 drug makers.

[Paul]

Mikey, when I look at the big cap pharma names, is it as simple as I want to own the ones with exposure to obesity market and not own the ones that don't? Because I'm looking at your, your slate of stocks and you're either up 30% or you're down.

[Michael Shy]

Yeah, I mean I think there's a few large pharma names which have entered the space in the recent years. You've seen deals with Roche and Zealand from Amylin drug. Most recently you've obviously got the Pfizer, Metcera M and A deal. I mean I think obesity is obviously appealing given the size of the target population, how under penetrated it currently is. And if you're looking to offset patent expirations later in the decade, there's an abundance of kind of GLP1 products out there as well as other assets too. So I think that's the appeal of the space. It's a large market, it's underpenetrated and there's high demand for these treatments too.

[Podcast Host]

I mentioned M and A and of course we know that JJ is making a purchase to increase its pipeline to get away from relying on these older drugs that have lost patent protection. Is every pharma company doing the same thing? Is that, you know, they're not only strategy, but is that the way they move forward? Is there anyone who's kind of like in a good position and doesn't need to make a deal?

[Michael Shy]

I mean I think that's always been part of the large pharma model. They supplement kind of in house innovation with external innovation, particularly if they want to get into areas perhaps outside of their core competency. But I mean I think that's just the model in general. Biotech's always been the pipeline for large pharma companies or at least help bulk up their pipeline.

[Paul]

Stay with us. More from Bloomberg Intelligence coming up after this.

[Michael Shy]

What is actual investing? We believe that it's a real world task to deliver thoughtful capital deployment. It's not about speculating over the short term, it's about understanding the long term opportunities for companies through technological progress or new business models.

[Paul]

So we seek out those exploring big new ideas that will change the world.

[Michael Shy]

Then we back them to give those.

[Paul]

Ideas time to flourish.

[Michael Shy]

Bailey Gifford Actual Investors Find out [e-mail].

[Paul]

There'S no championship league for small business owners, but if there was, you'd be at the top of the standings. Because going pro with Lenovo Pro means you've got the winning formation. One on one advice IT solutions and customized hardware powered by Intel Core Ultra processors help you stay ahead of the competition. Business goes pro with Lenovo Pro. Sign up for [e-mail] Pro Lenovo Lenovo.

[Podcast Host]

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[Mary Ross Gilbert]

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[Leanna Baker]

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[Podcast Host]

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[Leanna Baker]

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[Podcast Host]

You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10am Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube.

[Paul]

It is merger Monday and today we've got a financial buyer making some headlines here. Clayton, Dubelier and Rice, now known as cdr. They agreed to buy Sealed Air Corporation in a deal valuing the packaging company and invented the bubble wrap at $6.2 billion. Let's break this deal down. Leanna Baker, managing editor of the deals team, joins us live here in our Bloomberg Interactive broker studio. So CDR sealed air $6.2 billion. Pretty interesting deal. Was this expected in the marketplace?

[Leanna Baker]

Sure. So CDNR we had picked up last week had been in talks to buy Sealed Air and the biggest packaging deal in a long time and today we see it get to the finish line on this merger Monday. And what's interesting here is that while the enterprise value is over 10 billion, which is pretty big, the share price is sort of below where it's trading on the margin. So not a huge premium here. In fact, no premium. It's sort of a take under. And if you see where shares are trading, you know, investors aren't super thrilled, but it is, you know, still a good sign for this to get to the finish line. We are seeing a lot of take Privates in this M and A boom, private equity is putting their dry powder to work. This is the latest example.

[Podcast Host]

Was this an obvious candidate for takeout?

[Leanna Baker]

It's funny that you asked, because packaging has been sort of a predictable area of revenue, and we were sort of expecting a time of economic uncertainty that we would see more packaging deals. But if you look at the data patching, packaging deals have been down compared to last year, where other sectors, even in industrials, had been busy. So it was a little surprising to see a big deal in this space. But, you know, there could be more because it's sort of a predictable area, you know, to. To invest in.

[Paul]

Having been adjacent to the private equity world most of my career, I think I learned a few things, which is it's easy to raise money, it's easy to put money to work. It's really hard to monetize those investments. Where are we in that monetization? Because it's been kind of a fallow market for the last four or five, six years.

[Leanna Baker]

So I'm surprised you said it's easy to raise money because I've seen my colleagues who focus on private equity have been writing about some issues in the fundraising market that it's not as easy as it used to be. But definitely there's fewer and fewer public publicly traded companies for you guys to report on because there's just so many of these take privates and the IPO market, which is one way that these firm sponsors could get some monetization that's been like, shut the past few years. I know things are coming back a little bit, but these sponsors love to trade assets to each other. And there are some other private equity deals today. Bain bought a golf company from Clear Lake for like a billion or so dollars. So we do see, like the steady drumbeat of private equity firms just trading assets to each other and then the occasional big tape private like this morning.

[Podcast Host]

So you mentioned that it's a little harder to fundraise now than it was a few years ago. Presumably that's because of where interest rates are. If interest rates do decline in 2026, what does that mean for fundraising efforts by P. So I would say that.

[Leanna Baker]

It'S going to be easier for firms to borrow for leverage buyouts, so we could see more deal making and that could lead to monetization, which could then lead to saying to investors, hey, we have these great returns from these sales. Maybe now's the time to raise money. I do think that there's also so many newer private equity firms emerging and then with private credit, like there's just a lot of things competing for investors attention. But yeah, this is, this is one for cdnr, you know, probably their largest deal in a while but there's probably more take privates in the market for some of their competitors.

[Paul]

Ma go on this deal, you see where the advisors are, who's getting paid, which one of my buddies are getting paid.

[Leanna Baker]

So it's funny, I don't have enough time to mention how many banks are on the financing. So everyone is on the financing. And it's funny, we reported late last night that this deal was going to happen and we were trying to get the share price and we were kind of kicking ourselves because we didn't get that in time. When everyone clears a poorly kept secret. A lot of people knew we just, they were, you know, mom, mom's the word on the price.

[Paul]

Well there are 10 investment banks getting.

[Podcast Host]

Paid not part of it for the.

[Paul]

Private because I mean these investment banks, they have departments that their only job is to call on private equity. That's it. They don't call on, they don't care about industries. They just. So you got to pay these people because they've been calling on you all year and when you finally do a deal you got to pay all of them. Whereas the advisor, the, the seller was represented by Evercore One bank which used.

[Leanna Baker]

To be sort of a boutique name but now, you know, they're pretty big and public and they're you know, trying to eat the bulge brackets lunch for example. So yeah, not many people left off that deal.

[Paul]

Stay with us. More from Bloomberg Intelligence coming up after this. There's no championship league for small business owners, but if there was, you'd be at the top of the standings. Because going pro with Lenovo Pro means you've got the winning formation. One on one advice, IT solutions and customized hardware powered by Intel Core Ultra processors help you stay ahead of the competition. Business goes pro with Lenovo Lenovo Pro Sign up for [e-mail] Pro. Managing multiple accounts and logins for your marketing needs is like managing multiple announcers for one ad. Confusing, but with mailchimp's new SMS features, you can reach all your customers in over 10 countries, all from one account. Giving you more time, driving more conversions and improving campaign performance. One platform, many audiences, endless possibilities. That's how you MailChimp your marketing with SMS. Tap the banner to learn more.

[Michael Shy]

So you're telling me that the AI that's meant to make everyone's job easier to manage just adds more to manage on top of the thousands of apps the IT department already manages. Funny how that works. Any business can add AI. IBM helps you scale and manage AI to change how you do business. Let's create Smile to Business IBM.

[Podcast Host]

You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at 10am Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand, wherever you get your podcasts or watch us live on YouTube.

[Paul]

It is holiday shopping season. I think it's really hard to be a retail analyst. You got to be right on the stock and valuation and earnings and all that kind of stuff like every other analyst. But then you also have to kind of be right on fashion. What's.

[Podcast Host]

I know.

[Paul]

How do you do that? How do you do that? I have no idea. Married Ross Gilbert. That's her job. Bloomberg Intelligence senior equity analyst, covering the retailers. Mary, talk to us about apparel. And where are we in the world of apparel these days? What's selling? What's not selling? Are some companies getting it right? Because we're right smack in the middle of the holiday shopping season.

[Mary Ross Gilbert]

Yes. So Paul, you're absolutely right. Here we are in the holiday season and yes, there are some companies that are getting it right. One of those companies includes Gap, which they'll be reporting their earnings on on Thursday. And we see a lot of strength with their two largest brands being Old Navy. So we're seeing tremendous strength in style, their viral campaigns that they have there and also with their namesake brand Gap, which is their second largest brand for that company. So that's like 70% of sales right there for those two brands. And we're seeing a lot of strength and momentum. And we think that continues into 2026 for Gap. Aritzia, which is expanding in the US and is entering new markets, you know, opening new stores and then they're gaining on a comp sales basis. So we're seeing a lot of strength with that brand really taking off in the US So it's still very small here. You know, they have under 70 stores in the US and most apparel brands have over 200. So that's one that's, that's faring well. And then of course in the value segment and obviously Old Navy touches that. But off price, we see strength in off price because here you have the brands that consumers want and it's pretty prevalent across all the companies. Tjx, Ross stores and Burlington stores. Now on the department store side, we just had Dillard's numbers out for the third quarter last week and their third quarter comp sales rose 3%. That's a really nice figure there. And their margins came in better than expected. And that's because they execute a four full price model. They're not promotional like Macy's or Kohl's at all. They do have clearance sales and they're typically two, two times a year, but they're showing their models working. But we think that Macy's is showing some signs of improvement that we could see. Their comp sales also come in higher when they go to report in early December. But Kohl's, they're still struggling. They, you know, they still need to get assortments right. We did notice their online traffic was better than in store. And then of course, when they reported their second quarter, they were still seeing lower sales for their credit card customers. And those are supposed to be their most loyal, absolute customers.

[Podcast Host]

So, Mary, I got to ask you about Abercrombie Fitch because you did not mention that stock, that company at all. And that was like the star retail performer in 2023 when its stock jumped almost 300%. In 2024, it gained about 70%. So far this year, it's down about 54%. What is Abercrombie not getting right? Or did it just peak already? And you know, now everyone else is playing catch up.

[Mary Ross Gilbert]

We're just not seeing the strength in the namesake brand. But in their Hollister brand, we are seeing strength. So really their Gen Z focus with Hollister, we're seeing strength and we're thinking they're going to report some strong numbers for the third quarter. But the namesake brand, maybe it's become a lot more competitive. You know, that customer that shops at Abercrombie also shops at Aritzia. So they could be getting more competition. And with some of the department stores like a Macy's bringing in more relevant brands that might also be taking share. So we are, we're just not seeing the strength that we had been seeing on a comp sales basis. And then also we'll have to see how they're faring with margins because they did have a fair amount of exposure with India and India is now at 50%. But we think they'll be able to shift sourcing into those lower cost Asian countries. Most of Asia is kind of near that 20% range now, including China. So we think most of these brands are doing a good job, you know, shifting sourcing and we think that tariffs can be overcome and we think in the second half you will see margins improve across the board. But there are certain retailers that are not really experiencing the erosion such as Ralph Lauren. They're really doing a great job generating strong sales at higher price points and then so they're getting the benefit of the sales leverage and then also the full price selling and at higher price points and those are offsetting tariffs. So you're just not seeing a negative effect. Right? It's just you're not seeing the margin expansion you would typically see with with Ralph Lauren.

[Paul]

Stay with us. More from Bloomberg Intelligence coming up after this. Pro drivers live for race day. But for small business owners, every day is race day. That's why going pro with Lenovo Pro matters. One on one advice, IT solutions and customized hardware powered by Intel Core Ultra processors. Keep your business on the right track. Business goes pro with Lenovo Pro. Sign up for [e-mail] Pro Lenovo Lenovo Managing multiple accounts and logins for your marketing needs is like managing multiple announcers for one ad. Confusing, but with mailchimp's new SMS features, you can reach all your customers in over 10 countries all from one account, giving you more time, driving more conversions and improving campaign performance. One platform, many audiences, endless possibilities. That's how you MailChimp your marketing with SMS. Tap the banner to learn more.

[Michael Shy]

So you're telling me that the AI that's meant to make everyone's job easier to manage just adds more to manage? On top of the thousands of apps the IT department already manages? Funny how that works. Any business can add AI. IBM helps you scale and manage AI to change how you do business. Let's create Smile to business. IBM.

[Podcast Host]

You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at 10am Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube.

[Paul]

Take some folks out. The Fiorino's, my favorite Italian restaurant. Place is going to be packed. I mean, it just seems like the restaurant business remains pretty darn strong. But what do I know? Michael Halen, senior restaurant and food service analyst from Bloomberg Intelligence. He joins us here. Hey Mike, give us a sense here. I know you kind of, you track this stuff really closely. How are the restaurants doing out there? Does it depend upon what segment of the market they're targeting?

[Michael Halen]

Yeah, that, that's definitely part of it. We saw that in last month's data. Fine dining had a really nice rebound and I think part of it is because they're catering to higher income consumers who own assets and are feeling pretty good about things moving forward. You know, right now you know, November is going to be a tough month. There's no doubt about it. The government shutdown has definitely impacted sales and traffic for the chains we cover, especially in the DMV area as well as in the south where there's a lot of government workers. Also last November, restaurant sales had a nice boost from the election and so we're going to be lapping tough, tough comp. So November is not looking great, but things should bounce back a little bit here in December. And we're not crazy bullish, but we're more bullish about the first half of next year.

[Paul]

So how about quick. Let's start with quick, Quick Service Dining. Talk to us about that marketplace. I think back to McDonald's of the world and so on. How's that faring?

[Michael Halen]

Yeah, so Quick Service had a really difficult first half of the year. They were lapping strong comps and they, and they kind of lost their way when it came to value. Right. They just had implemented too big of price increases over the last few years and customers started to push back, especially low income consumers who have been, you know, who are really impacted by inflation to a much greater degree than middle and higher income consumers. So the first half was, was difficult. But here in the second half of the year, things have gotten better largely because they've reestablished their value propositions. You know, McDonald's has revamped its dollar menu this year. They also reintroduced Snap wraps at a $3 price point, which have boosted checks by, you know, people adding them on to their orders as well as bringing in some low income consumer traffic. But you know, low income consumers are pulling back at a pretty big rate. You know, we think part of that is the snap benefit pullback.

[Paul]

Right.

[Michael Halen]

And so quick. But they've been able to bring in some higher income consumers and middle income consumers. So things are starting to look better. All right, McDonald's, McDonald's especially, I mean, McDonald's is going to be lapping the E Coli or right now is lapping the E Coli Alphabet from last year. And so, you know, they're the 800 pound gorilla. And I think good results out of McDonald's over the next few quarters should boost the entire category.

[Paul]

How about the cost of beef, which, you know, consumers complain about across the board? I know companies are dealing with it. And what I understand is we're not going to see a material improvement in the cattle herd till maybe 2028. So how does that factor into the profit margins of all these restaurants?

[Michael Halen]

Yeah, so the restaurants that are impacted the most are you know, burger chains like Shake Shack or steakhouses like Texas Roadhouse that own and operate all of their stores. You know, to your point, beef inflation for these chains is going to be in the mid teens in the fourth quarter. So yeah, yeah, very high. So definitely a lot of margin pressure for those chains. If, you know, luckily those two chains, you know, have, have driven traffic as of late into the stores, which, you know, and driven higher sales and been able to pass along price increases. And that has kind of helped their operating leverage, which has helped offset the higher costs for the burger chains. They, there's less impact for the chains that we cover for McDonald's, Wendy's, Jack in the Box because they're largely franchised. So then the franchisees are the ones footing the bill for the higher beef costs.

[Paul]

Why like, why do not all chains do like the McDonald's franchisee model? What's the benefits of franchising or what's the benefit of owning versus a franchise? I think I thought I would. I saw the movie. I think I understand the economics of franchising. It seems pretty good.

[Michael Halen]

Listen, the franchise business, that's a great business, you know, and from where I sit as an analyst, you know, we love it. It's easier to predict the earnings and the free cash flow. It's, it's a much more steady business model. Franchising eliminates a lot of the operating leverage and thus the risk to your margins out of the, out of the business. Right. But if you are running a full service restaurant chain where operations is very core to your business, think Darden, think Texas Roadhouse. You want to own and operate your stores because you want to have control over those operations. You want to make sure people are getting a good experience and they're just much harder to run than a McDonald's or Wendy's. And then I'd say on the, on the last case would be somebody like Shake Shack or Wingstop or Cava. You know, when your cash on cash returns are 40, 50, 60%, we don't think it's a bad thing to be greedy. And you want to open up as many stores as possible.

[Podcast Host]

This is the Bloomberg Intelligence podcast, available on Apple, Spotify and anywhere else you get your podcast. Listen live each weekday 10am to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn and the Bloomberg Business app. You can also watch us live Every weekday on YouTube and always on the Bloomberg Terminal.

[Paul]

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[Paul]

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