A McDonald’s restaurant near Times Square, NYC on July twenty ninth, 2023.
Adam Jeffery | CNBC
Restaurant firms navigating a number of the same challenges within the second quarter fell into two categories: winners and losers.
Some chains said their higher menu prices alienated diners, while others said consumer behavior hasn’t modified at the same time as their food and drinks grow dearer. Promotions drove customers to certain restaurants — or fell flat as diners focused on value. And low-income customers visited some restaurants more steadily, but skipped visits at other eateries.
Broadly, foot traffic to restaurants has fallen. Sales growth has slowed as many eateries hold off on one other round of the value hikes that drove strong revenue a yr ago. Customers have turn out to be more selective about how they spend their money, including where they eat, resulting in a sharpening divide in chains’ performance.
While most restaurant firms crushed earnings expectations, a lot of them fell in need of Wall Street’s estimates for his or her quarterly revenue. McDonald’s and Wingstop each reported second-quarter earnings, revenue and same-store sales growth that topped analysts’ expectations, a rarity this quarter for restaurant firms.
On the opposite end, Papa John’s, Wendy’s, and Chipotle Mexican Grill were among the many flock of firms that dissatisfied investors with weaker-than-expected sales. All three firms’ stocks have not recovered yet.
Listed below are three trends that defined the quarter and determined its winners and losers:
Restaurant traffic
Two metrics shape an organization’s same-store sales growth: how much customers spend on every order, and the way often they visit the restaurant chain.
As eateries delay more price hikes and customers watch their wallets, restaurants must depend on the second benchmark — traffic — to bolster their same-store sales. And Wall Street is watching closely.
“Investors actually want a lot of traffic as an indication of health for the concepts,” TD Cowen analyst Andrew Charles told CNBC.
McDonald’s, Chipotle, Texas Roadhouse and Wingstop were among the many few chains that reported U.S. traffic growth in the newest quarter.
On the opposite end, Restaurant Brands International said U.S. traffic slipped for 3 of its chains: Popeyes, Burger King and Firehouse Subs. Rival Wendy’s reported its domestic transactions fell 1% within the second quarter.
Looking ahead, traffic could fall much more within the second half of the yr.
“And as we move through 2H23, menu pricing will likely fall fast as inflation not justifies the costs, and barring a rapid traffic reversal, the comps should optically fall just as fast,” Barclays analyst Jeffrey Bernstein wrote in a note to clients Aug. 11. “This doesn’t bode well for restaurant stock performance in coming months, in our view.”
Value perception
Inflation is cooling, and more economists are predicting a “soft landing” reasonably than a recession. But consumers are still on the lookout for value.
Broadly, the fast-food sector has benefitted from consumers trading down from fast-casual restaurants into their cheaper burgers and tacos. But consumer perception of value differs across chains.
For instance, McDonald’s CEO Chris Kempczinski said the chain is performing well with consumers who make lower than $100,000, and with those that make under $45,000. Alternatively, Wendy’s CEO Todd Penegor said the burger chain saw diners who make lower than $75,000 pull back on their purchases.
Likewise, Wingstop said its customers’ perception of its value is improving, coinciding with falling chicken wing prices.
“We’re seeing positive trends in value scores with guests, in an environment where many brands are measuring decline,” Wingstop CEO Michael Skipworth told analysts.
Fast-casual rival Chipotle has also benefited from diners’ perception of its burrito bowls’ value. Chipotle has seen low-income consumers return to its restaurants greater than they were a yr ago, CFO Jack Hartung told analysts.
Still, Chipotle’s low-income customers aren’t visiting as steadily as they were before inflation began accelerating. The chain has paused price hikes for now, but will resolve closer to the fourth quarter if it’s going to raise them again.
One fast-casual chain has struggled with consumers’ value perception. Noodles & Company said its traffic cratered by double digits in the primary a part of the quarter as customers pushed back against its higher prices, which rose 13% from the year-ago period. In response, Noodles dropped its prices by 3% and pivoted its marketing to deal with value.
Promotions
As restaurants and customers deal with value, discounts and combo meals have stolen many of the marketing thunder. Limited-time menu items also helped some restaurants’ sales — but weren’t enough to offset weakness for others.
On one end of the spectrum was McDonald’s. The burger chain’s Grimace Birthday Meal fueled buzz on social media and traffic to its restaurants.
“This quarter, the theme was, if I’m being honest, Grimace,” CEO Kempczinski said on the corporate’s conference call.
The promotion featured the limited-time purple Grimace milkshake and core menu items, just like the selection of a 10-piece McNugget or a Big Mac. It leaned on nostalgia for the mascot.
But not all promotions helped restaurants’ top line.
For instance, Papa John’s released Doritos Cool Ranch-flavored Papadias for $7.99 in May. The limited-time menu item also drove social media buzz and traffic to restaurants, in keeping with executives. Nonetheless, the brand new Papadias couldn’t compete with the chain’s pepperoni-stuffed crust pizza it released a yr earlier for $13.99.
“That traffic increase wasn’t enough to offset check decline, and subsequently you had weaker same-store sales,” BTIG analyst Peter Saleh said.
