It's finally here: the long-predicted decline in consumption.
starbucks announced a surprise drop in comparable sales in its latest quarter, sending its shares down 17% on Wednesday. Pizza Hut and KFC also reported reduced same-store sales. And even unconditional McDonald's said it has adopted a “street fighting mentality” to compete for value-minded diners.
For months, economists have been predicting that consumers would cut back on spending in response to higher prices and interest rates. But it took a while for fast-food chains to really see their sales decline, even though investors were warned for several quarters that low-income consumers were weakening and other diners were cutting back on more expensive options.
Many restaurant companies also offered other reasons for their weak results this quarter. Starbucks said the bad weather dragged down its same-store sales. Yum brandsThe parent company of Pizza Hut, KFC and Taco Bell blamed January snowstorms and harsh comparisons to a strong first quarter last year for the poor performance of its brands.
But those reasons don't fully explain the weak quarterly results. Instead, it appears that competition for a smaller pool of customers has become fiercer as diners still looking to buy a burger or a cold beer become more demanding with their money.
The cost of eating out at quick-service restaurants has risen faster than that of eating at home. Limited-service restaurant prices rose 5% in March compared to the same period a year earlier, while grocery prices have risen more slowly, according to the Bureau of Labor Statistics.
“Clearly everyone is fighting for fewer consumers or consumers who certainly visit less frequently, and we have to make sure we have that street fighting mentality to win, regardless of the context around us,” said McDonald's CFO Ian Borden. , on the company's conference call on Tuesday.
The outliers show that customers will continue to order their favorite foods, even if they are more expensive than a year ago. wings stopWall Street's favorite restaurant chain reported that its comparable sales in the United States soared 21.6% in the first quarter. Chipotle Mexican Grill, whose customer base is predominantly higher-income, saw traffic increase 5.4% in its first quarter. AND Restaurant International Brands Popeyes reported comparable sales growth of 5.7%.
“What we've seen with the consumer is that if they feel pressure, they have a tendency to pull out more high frequencies. [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 sandwich and wings as an opportunity to indulge rather than a routine that can easily be eliminated due to budget concerns. Skipworth also said Wingstop's low-income consumers are actually returning more frequently these days.
Still, many companies in the restaurant sector and beyond have warned that consumer pressures could persist. McDonald's CEO Chris Kempczinski told analysts that the caution in spending extends to everyone.
“It is worth noting that in [the first quarter]”Industry traffic was stable or declining in the United States, Australia, Canada, Germany, Japan and the United Kingdom,” he said.
Two of the chains that struggled in the first quarter cited value as a factor. Starbucks CEO Laxman Narasimhan said casual customers weren't buying the chain's coffee because they wanted more variety and value.
“In this environment, many clients have been more demanding about where and how they choose to spend their money, particularly with stimulus savings largely spent,” Narasimhan said on the company's call Tuesday.
Yum CEO David Gibbs said rivals' value offerings on chicken menu items hurt KFC's U.S. sales. But he said the shift toward value should benefit Taco Bell, which accounts for three-quarters of Yum's domestic operating profits.
“We know from industry data that value is more important and that others are struggling with value, and Taco Bell is a leader in value. You are seeing some low-income consumers fall in the industry. We are not seeing that right now. Taco Bell,” he said Wednesday.
It's unclear how long it will take for fast-food chains to recover, although executives provided optimistic timelines and plans for sales to return to normal. For example, Yum said its first quarter will be its weakest of the year.
For its part, McDonald's plans to create a nationwide value menu that will appeal to thrifty customers. But the burger giant could face pushback from its franchisees, who have become more outspoken in recent years. While the deals boost sales, they also put pressure on operators' profits, particularly in markets where it is already expensive to operate.
Still, losing ground to the competition could motivate McDonald's franchisees. This marks the second consecutive quarter in which Burger King reported stronger U.S. comparable sales growth than McDonald's. The Restaurant Brands chain has been in recovery mode for the past two years and has invested heavily in advertising.
Starbucks also relies on offers. The coffee chain is preparing to launch an update to its app that will allow all customers, not just loyal members, to order, pay and get discounts. Narasimhan also highlighted the success of its new line of lavender drinks that launched in March, although business was still slow in April.
