Unintended Consequences

Friends of Branded!

Happy Saturday and I hope you had a great week.

If I had a nickel for every time a conversation at dinner on a Thursday night became the driver of the H^2’s Top of the Fold, well, I’d have a whole lot of nickels.

This week I found myself in a discussion about unintended consequences (that’s right JB, not every discussion this week in NYC is about the Knicks) and specifically, in the opinion of one of my dinner mates, why he (and so many others), associate this collocation with something negative.

Yes, the word “consequences” linguistically and culturally leans heavily towards the negative, but the literal definition of the word means an outcome, result or effect (meaning its denotatively neutral).

And for those that may have questioned the word “collocation” it means the natural pairing of words (which in full disclosure, I had to look up as I tried to figure out if “unintended consequences” was a phrase, expression or saying. It’s none of those things, it’s a collocation. So now I know).

When states started letting bars and restaurants sell cocktails to-go in March 2020, nobody thought of it as policy. It was triage. Our dining rooms were dark, payroll was due, and a sealed margarita in a to-go cup was the difference between making rent and going dark for good. Legislators wrote in sunset clauses on purpose b/c this was the fire extinguisher that you put back on the wall once the flames died down.

Here's the part I love: the flames died, and nobody put the extinguisher back.

Six years later, cocktails to-go are permanent in 32 states plus D.C., with Nevada and Vermont being the latest to lock it in, and Illinois stripping out its sunset date this past December, with the permanent rule going live July 1.

The National Restaurant Association's Sean Kennedy (I see you Sean and keep up the great work) calls the last few years of alcohol-policy change the most significant since Prohibition ended in 1933. That's one bold statement, but it’s not hyperbole when you see what it’s unlocked and in action.

Let’s start where most “finance guys” start, with the money.

During the pandemic, NYC operators reported booze-to-go lifting cash flow anywhere from 15% to 40% and get this, 78% of New Yorkers wanted it made permanent (JB: you know hard it is to get nearly 80% of New Yorkers to agree on anything!?!).

That's the kind of constituent math politicians don't ignore (and for avoidance of any doubt, this will be the only political comment that appears in this week’s edition). Zoom out and the logic sharpens: off-premises traffic is roughly 75% of all restaurant traffic, and wait for it, at full-service spots, alcohol is about 21% of total sales. For decades that 21% was chained to a barstool. To-go laws cut the chain and let the highest-margin item on the menu travel home with the guest.

Let’s be clear, in the darkest days of the pandemic, restaurants weren't looking for innovation. They were looking for survival. Operators were scrambling to generate cash flow any way they could (case and point, Schatzy was downstairs in one of our restaurants near Branded’s HQ trying to sell groceries out of the unit).

In response, lawmakers threw us a bone and temporarily loosened alcohol regulations (nice, right?), and allowed restaurants to sell beer, wine, and cocktails alongside takeout and delivery orders.

The expectation was simple. This was an emergency measure, a lifeline, and a temporary solution for a temporary crisis. Nobody expected it to last, right?

But then something interesting happened. Consumers loved it.

The family picking up tacos on a Friday night loved adding a margarita kit to the order. The couple ordering dinner delivery appreciated being able to enjoy restaurant-quality cocktails at home. Restaurants discovered that cocktails-to-go weren't just convenient for guests, they were highly profitable for operators.

And perhaps most importantly, legislators discovered that the sky didn't fall (the loudest voices were screaming about an expected spike in drunk-driving and minors gaming the system, although I believe legislators were most concerned about c-stores and package stores lobbies revolting).

The result? 

The compliance data came back clean enough that lawmakers felt safe converting temporary into permanent. An emergency hack meant to keep the lights on for one quarter became a structural, durable revenue channel, and it validated the cautious crowd at the same time, b/c the guardrails actually held.

An unintended consequence (and please note DP, this is an example of a positive one).

But please understand, the story here isn't really about cocktails. It's about consumer behavior.

For decades, the industry largely viewed alcohol as an on-premises experience. If you wanted a cocktail, you sat at the bar, grabbed a table, or ordered a round with friends. The pandemic challenged that assumption and proved to operators that consumers were willing, I’d say even eager, to purchase premium beverages off-premises when given the opportunity. Once that behavior took hold, it didn't disappear when dining rooms reopened.

Does that sound familiar? It should b/c we've seen this movie before with online ordering, curbside pickup, mobile payments, and QR code menus.

Each emerged or accelerated b/c of necessity. Many critics assumed consumers would revert to old habits once normalcy returned, but instead, convenience won.

Last For restaurant operators, that's the lesson and key takeaway (pun intended). Some of the biggest opportunities in our industry aren't born from grand strategic plans. They're discovered when circumstances force us to experiment, adapt, and challenge assumptions we didn't even realize we had.

I don’t remember anyone predicting cocktails-to-go would become one of the more durable policy shifts to emerge from the pandemic, and yet, here we are. Five years later, restaurants continue to benefit from a revenue stream that was never intended to exist permanently and that's the thing about unintended consequences. Yes, sometimes they create headaches (of course they do). Sometimes they create challenges (of course they do). But sometimes they create opportunities hiding in plain sight (and how sweet is that!).

For those of us watching the F&B capital stack, that's the real story. A new off-premises revenue surface is now a permanent feature for any concept, with a liquor license, affording them the opportunity to ride the very consumer behavior wave these laws normalized. Convenience at home isn't a pandemic relic, it's a channel.

Sometimes the best ideas are the ones the market backs into by accident. Respect to the operators who turned a survival tactic into a business line, and I’ve got to give credit where credit is due, to the legislators who let the data, as opposed to the fear, make the call.

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DEAL ROOM: The Coffee Gold Rush — and What Keurig Dr Pepper Just Told Every Investor

Every so often a category stops being a category and becomes a gold rush. Right now, that category is coffee.

And this week, the biggest operator in the room sent a signal you can’t un-see.

Keurig Dr Pepper - the beverage giant behind Keurig, Dr Pepper, 7UP, Snapple & Canada Dry — just did something that, on the surface, sounds backwards. After spending roughly $18B to acquire JDE Peet’s (Peet’s, L’OR, Jacobs) and bolt a worldwide coffee portfolio onto its Keurig system, KDP is splitting itself in two: a North American “Beverage Co.” and a pure play “Global Coffee Co.” spanning 100+ markets, targeted to be ready by the end of 2026.

Read that again. They bought more coffee…so they could spin all of it out on its own. Respect! 

You don’t carve an asset out like that unless you believe it deserves its own balance sheet, its own multiple, and its own investor base. Which is exactly why it belongs in The Deal Room.

Three signals worth your attention:

The takeaway - the smart money isn’t asking “is coffee hot?” (it is). It’s asking which layer of the cup to own: the beans, the brand, the brewing system, or the retail moment. KDP just told you it thinks the coffee layer is valuable enough to stand entirely on its own.

I’ve said it before in this column: coffee is one of the most punishing categories in foodservice. The brands and as Branded’s “Finance Guy” the investors, who win are built on culture, craft, capital discipline, and a clear answer to why us.

The gold rush is on. Bring a thesis, not just a pan.

You think coffee is just getting attention and focus in our H^2 newsletter? You think this is just about our investment in Gregorys’ Coffee? Stay tuned friends, stay tuned. 😊

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