Does anyone remember the throes of the Great Recession when the phrase “success in the restaurant industry” was redefined to read “slump is the new boom.” This advice seems especially relevant now, at the end of the second quarter earnings reports. One of the key takeaways from these reports so far is that they are very reminiscent of the “slump is the new boom” era.
By the way, the use of the word “terrible” is intentional here.
The second quarter should be a safe period for the industry, buoyed by special occasions like Mother’s Day and graduations, but also far enough away from the holiday-related budget cuts that typically dampen the first quarter. But that wasn’t the case this year.
Of course, there are always anomalies. You can’t sum up the second quarter without mentioning the amazing performance of Wingstop, where in-store sales rose nearly 29%, driven almost entirely by transactions. Or the consistently reliable Texas Roadhouse and Chipotle, which rose 9.3% and 11.1%, respectively. Domino’s did well in the second quarter, posting a 4.8% increase in store sales. Sweetgreen, Taco Bell, El Pollo Loco and Dutch Bros also stood out, posting gains of 9%, 5%, 4.5% and 4.1%, respectively.
However, other companies that saw comparable-store sales increase — a key indicator of existing location performance — acknowledged that the increase was due to pricing. For example, comparable-store sales at Cheesecake Factory increased 1.4%, prices increased 4.5%, and pricing at Shake Shack increased sales 4%. Comparable-store sales at Noodles and Company increased 2%, but traffic decreased 1.1%.
Then there are the companies that were somewhat flat, including Potbelly, Firehouse Subs, Popeyes, Burger King, First Watch, Portillo’s, Bloomin’ Brands, Denny’s and Wendy’s. That’s a pretty long list, but in this environment, you could call “flat” a success. That’s because the list of negative comparable-store sales has gotten even longer. Companies that saw comparable-store sales declines of 1% or more included McDonald’s, Starbucks, Fat Brands, Pizza Hut, Habit Burger Grill, KFC, Jack in the Box, Del Taco, Applebee’s, IHOP and Papa John’s.
From this breakdown, we can’t even see a pattern between segments. This industry is certainly not homogenous, but McDonald’s, Applebee’s and Starbucks are all facing similar pressures right now – lower-income consumers are simply not eating out as often. They’ve had enough of said prices and have taken their wallets to the supermarket, where prices have stabilized much faster than menu prices.
Notably, it’s not just large restaurant chains that are being affected by the crisis. Fiserv’s Small Business Index for July, which analyzes transaction data from around 2 million small U.S. businesses, shows that consumer spending has recovered across all segments after a month of slight declines. The exception? Restaurants. On an annual basis, sales at small restaurants fell 1.6%. In addition, average checkout amounts fell 2.4% year-on-year. Restaurant sales (-3.1%) and transactions (-1.4%) also fell month-on-month, marking the second consecutive month of declining restaurant sales and footfall.
In fact, the dam of restaurant spending has been under pressure for some time now, as COVID savings began to dry up, high interest rates persist, personal debt soars and menu prices remain stubbornly high. In recent months, however, that dam appears to be leaking. McDonald’s CEO Chris Kempczinski noted in February that his company was losing low-income customers. In the second quarter, that trend led to negative sales at its stores for the first time since the pandemic.
The question now is whether the dam will break or strengthen. Without a crystal ball, that’s a difficult question to answer, but there’s enough data to make some guesses, and plenty of reasons why many companies have lowered their full-year forecasts. First, consumers’ restaurant budgets have dropped 10% over the past two years, according to research from Popmenu.
Second, consumer sentiment is at rock bottom. Very low. According to the University of Michigan’s consumer sentiment index, sentiment fell to 66.4 in July from 79 in January. The current index fell to 62.7 from 81.9 in January, while the expectations index is at 68.8, down from 77.1 in January.
When consumers are under pressure, they cut back on spending on non-essentials, and that’s exactly what’s happening now. Restaurant spending declined 1.79% year-over-year, while grocery spending rose 0.47% over the same period, according to data from the National Retail Federation Retail Monitor/Affinity Solutions, which analyzes debit and credit card transactions. Zeta Global’s Zeta Economic Index confirms this pattern, showing a sharp decline in restaurant spending relative to other sectors. Spending on non-essentials declined 7.5% month-over-month in July. In a statement, David A. Steinberg, co-founder/chairman/CEO of Zeta Global, said a slight deterioration in labor market sentiment is leading to a “diverging economic forecast.”
This divergence is leading to more “trade-off” consumers, according to a new study from market research and analytics firm Big Chalk. Nearly 28% of U.S. consumers are cutting costs (or skipping out) in the restaurant dining category, the highest percentage on record. Big Chalk’s data suggests so. According to Rick Miller, lead analyst of the “Who is the Trade-Off Consumer?” report, this activity could result in between $44 billion and $88 billion in lost revenue for the restaurant industry over the next 12 months. He expects a decline in restaurant spending by all consumers over the course of this year.
The International Foodservice Manufacturers Association’s forecasts also show sluggish growth for the entire restaurant category, with the exception of mid-range restaurants, which are even expected to decline, reflecting consumer trade-down/off behavior.
It would certainly be nice to know how long this behavior will last or how to change it without constant discounting. At this point, however, there seems to be no end in sight. Patrick Doyle, executive chairman of Restaurant Business International, noted: “We have clearly seen weaker sales than expected… and it is not yet clear when we will see a strengthening of the category.”
Contact Alicia Kelso at (email protected)
