It’s finally here: the long-predicted fall in consumer prices.
Starbucks announced a surprise drop in same-store sales for its most up-to-date quarter, sending shares down 17% on Wednesday. Pizza Hut and KFC also reported declining same-store sales. And even steadfast MC Donalds said it had adopted a “street fight mentality” to compete for budget-conscious guests.
For months, economists have predicted that buyers would reduce on spending in response to higher prices and rates of interest. But it took some time for fast-food chains’ sales to truly shrink, despite several quarters of warnings to investors that low-income consumers were weakening and other restaurants were rejecting dearer options.
Many restaurant firms also cited other reasons for his or her weak results this quarter. Starbucks said bad weather caused same-store sales to say no. Delicious brandsThe parent company of Pizza Hut, KFC and Taco Bell, blamed its brands’ poor performance on January snowstorms and difficult comparisons with a powerful first quarter last yr.
But these excuses don’t fully explain the weak quarterly results. Instead, competition for a smaller customer base appears to have grow to be fiercer as diners who still wish to buy a burger or cold brew grow to be pickier with their money.
The cost of eating out at fast-food restaurants has risen faster than eating at home. Prices at limited-service restaurants rose 5% in March compared with the identical period last yr, while food prices rose more slowly, it said Bureau of Labor Statistics.
“Obviously everyone is fighting for fewer consumers or consumers who are certainly visiting less often, and we need to make sure we have that street fight mentality to win, regardless of the context around us,” McDonald’s CFO Ian Borden said on the corporate’s earnings call company on Tuesday.
Outliers show that customers proceed to order their favorite foods, even in the event that they are dearer than they were a yr ago. Wing stopWall Street’s hottest restaurant chain, reported that its U.S. same-store sales rose 21.6% in the primary quarter. Chipotle Mexican Grill, whose customer base consists primarily of higher-income customers, saw a 5.4% increase in traffic in the primary quarter. And Restaurant Brands International Popeyes reported same-store sales growth of 5.7%.
“What we’ve seen with consumers is that when they feel pressure, they tend to resort to higher frequencies [quick-service restaurant] Opportunities,” Wingstop CEO Michael Skipworth told CNBC.
He added that the average Wingstop customer visits only once a month and uses the chain’s chicken sandwich and wings as an opportunity to treat themselves, rather than a routine that can be easily cut back for budget reasons. Skipworth also said that Wingstop’s low-income consumers are actually returning more frequently these days.
Still, many companies in the restaurant industry and beyond have warned that consumer pressure could continue. McDonald’s CEO Chris Kempczinski told analysts that purchasing restraint continues around the world.
“That’s worth mentioning [the first quarter]“In the US, Australia, Canada, Germany, Japan and the UK, industry traffic was flat to declining,” he said.
Two of the chains that struggled in the primary quarter cited value as an element. Starbucks CEO Laxman Narasimhan said casual customers do not buy the chain’s coffee because they need more variety and value.
“In this environment, many customers have become more demanding about where and how they spend their money, especially as the savings from the stimulus programs have largely been spent,” Narasimhan said in the corporate’s conference call on Tuesday.
David Gibbs, Yum’s CEO, noted that rivals’ low-cost offers on chicken meals were hurting KFC’s U.S. sales. However, he said the shift to value should profit Taco Bell, which accounts for three-quarters of Yum’s domestic operating profit.
“We know from industry data that value is more important and that others struggle with value, and Taco Bell is a value leader. You can see that some low-income consumers are declining in the industry. “We don’t see that happening at Taco Bell,” he said Wednesday.
It’s unclear how long it’s going to take for fast-food chains’ sales to recuperate, although executives have offered optimistic timelines and plans to get sales back heading in the right direction. Yum, for instance, said its first quarter could be its weakest of the yr.
McDonald’s, in turn, plans to create a nationwide value-for-money menu that may appeal to thrifty customers. But the burger giant may face resistance from its franchisees, which has grow to be more vocal lately. While deals boost sales, additionally they squeeze operators’ profits, especially in markets where operations are already expensive.
Still, lagging behind the competition could motivate McDonald’s franchisees. This is the second consecutive quarter that Burger King reported stronger same-store sales growth than McDonald’s within the United States. The Restaurant Brands chain has been in transition over the past two years, spending heavily on promoting.
Starbucks also relies on deals. The coffee chain is preparing to release an upgrade to its app that may allow all customers – not only loyalty members – to order, pay and receive discounts. Narasimhan also praised the success of his latest lavender drink line, which launched in March, although business was still slow in April.
