For months, economists have predicted that consumers would cut back on spending in response to higher prices and interest rates. But it has taken a while for fast-food chains to see their sales actually shrink, despite several quarters of warnings to investors that low-income consumers were weakening and other diners were trading down from pricier options.
Many restaurant companies also offered other reasons for their weak results this quarter. Starbucks said bad weather dragged down same-store sales. Yum Brands, the parent company of Pizza Hut, KFC and Taco Bell, blamed January’s blizzards and tough comparisons for a strong first quarter last year for its brands’ poor performance.
But these excuses don’t fully explain the weak quarterly results. Instead, competition for a smaller pool of customers seems to have intensified as diners who still want to buy a burger or cold brew become more discerning with their money.
The cost of eating out at quick service restaurants has risen faster than eating at home. Prices for limited-service restaurants rose 5% in March compared with the year-ago period, while prices for groceries have risen more slowly, according to the Bureau of Labor Statistics.
“Obviously, everyone is fighting for fewer consumers or consumers who are certainly visiting less often, and we have to make sure we have that street fight mentality to win, regardless of the context around us,” McDonald’s CFO Ian Borden said. the company’s conference call on Tuesday.
Outliers show that customers will still order their favorite dishes, even if they are more expensive than they were a year ago. Wingstop, Wall Street’s favorite restaurant chain, reported same-store sales in the U.S. rose 21.6% in the first quarter. Chipotle Mexican Grill, whose customer base is predominantly higher income, saw a 5.4% increase in traffic in its first quarter. And Restaurant Brands International’s Popeyes reported same-store sales growth of 5.7%.
“What we’ve seen with consumers is that if they feel pressured, they tend to pull back on more high-frequency (quick-service restaurant) occasions,” Wingstop CEO Michael Skipworth told CNBC.
He added that the average Wingstop customer visits only once a month, using the chain’s chicken sandwiches and wings as an opportunity to indulge rather than a routine that could easily be cut due to budget concerns. Skipworth also said Wingstop’s low-income consumers are actually returning more often these days.
Still, many companies in the restaurant sector and beyond have warned that consumer pressure may continue. McDonald’s CEO Chris Kempczinski told analysts that consumer caution is spreading across the globe.
“It’s worth noting that in (the first quarter), industrial traffic was flat to declining in the US, Australia, Canada, Germany, Japan and the UK,” he said.
Two of the chains that struggled in the first quarter cited value as a factor. Starbucks CEO Laxman Narasimhan said occasional customers weren’t buying the chain’s coffee because they wanted more variety and value.
“In this environment, many customers have been more demanding about where and how they choose to spend their money, especially with stimulus savings mostly spent,” Narasimhan said on the company’s Tuesday call.
Yum CEO David Gibbs noted that rivals’ value proposition on chicken menu items hurt KFC’s US sales. But he said the shift to value should benefit Taco Bell, which accounts for three-quarters of Yum’s domestic operating profit.
“We know from industry data that value is more important and others struggle with value and Taco Bell is a value leader. You see some low-income consumers drop out of the industry. We don’t see that at Taco Bell,” he said Wednesday.
It’s unclear how long it will take the fast-food chain’s sales to rebound, though executives provided optimistic timelines and plans to get sales back on track. For example, Yum said its first quarter will be the weakest of the year.
For its part, McDonald’s plans to create a nationwide value menu that will appeal to frugal customers. But the burger giant may face backlash from its franchisees, who have become more outspoken in recent years. While agreements drive sales, they squeeze operators’ profits, especially in markets where it is already expensive to operate.
Still, it may motivate McDonald’s franchisees to lose ground to the competition. This marks the second quarter in a row that Burger King reported stronger US same-store sales growth than McDonald’s. The Restaurant Brands chain has been in turnaround mode over the past two years, spending heavily on advertising.
Starbucks also bets on offers. The coffee chain is preparing to release an upgrade to its app that will allow all customers — not just loyalty members — to order, pay and get discounts. Narasimhan also touted the success of his new lavender beverage line launched in March, although business was still sluggish in April.
