Restaurant industry headwinds will continue into 2014 unless middle- and lower-income consumers begin to see some wage improvement, especially as the Affordable Care Act dips into diners’ pockets.
So said Wall Street analysts who gathered to discuss the state of the restaurant industry Friday in a teleconferenced event that preceded the 16th annual ICR XChange, a restaurant and retail investment conference taking place Jan. 13-15 at the Grande Lakes resort in Orlando, Fla.
With industry valuations at peak levels and macroeconomic trends mixed at best, 2014 will be a year when restaurant companies will be expected to perform and show real results, the analysts said.
Restaurant companies are starting the year with certain tailwinds, such as lower commodity costs, but analysts expect frigid weather and a lackluster holiday season to dampen first-quarter reports. Still, many companies will enjoy favorable comparisons to last year, when bad weather was combined with payroll tax changes that cut into consumer spending.
Though cabin fever could boost dining out once the weather warms, it’s not likely to make up for the losses incurred, said Andy Barish, managing director and senior equity research analyst for Jefferies.
“Once you miss a restaurant occasion, you don’t make it up with two,” he said.
While higher-end concepts have been buoyed by the wealthy and business travelers, the casual-dining and quick-service segments will be forced to continue to focus on value until middle- and lower-income families see more purchasing power, said Bryan Elliott, managing director of equity research for Raymond James, who pointed to a disappointing jobs report released on Friday.
The ACA requirements for employee contributions toward health care will also take a toll on consumer discretionary spending, Elliott noted.
“That’s the thing I worry about most for 2014,” he said. “You need to see some acceleration of job and wage growth at the medium and lower-income level.”
The analysts predicted the use of technology will come more into play for restaurants this year: consumer-facing tools like table-top tablets for ordering and paying and those that allow for operational efficiencies, like scheduling and predicting food costs. Higher labor costs that will come with minimum wage increases may be driving that trend, the analysts said.
“I don’t think it’s a coincidence that the minimum wage has gone up this year and we’ve had three restaurant companies announce the use of tablet technology,” Peter Saleh, director and senior restaurant analyst of Telsey Advisory Group, said, referring to Chili’s, Applebee’s and Buffalo Wild Wings. “At some point, you’ll be using your own iPhone to order in restaurants.”
Restaurant companies that make good use of digital and social media will win, the analysts agreed. They called out companies like McDonald’s, BJ’s Restaurants, Darden Restaurants and Ruby Tuesday for being behind the curve in the shift to digital and mobile marketing and praised Starbucks, Dunkin’ Donuts, Krispy Kreme, Red Robin Gourmet Burgers and Buffalo Wild Wings for doing it effectively.
“The biggest challenge is how to transition from TV to mobile and Internet marketing,” said Elliott.
The fast-casual segment will continue to grow and steal market share, the analysts said. Both catering and international expansion offer opportunities within the segment.
Fast-casual pizza is the “category du jour,” said Barish, but real estate accessibility will be key as a growing group of players compete for locations that are 2,500-3,000 square feet.
Within the quick-service segment, the analysts predicted tiered value menus will continue to proliferate. Concepts like Wendy’s will continue to redefine their position to strengthen pricing power, said Nick Setyan, vice president of equity research for Wedbush Securities.
In casual dining, the analysts pointed to differentiated brands that are showing strength, including Chuy’s Holdings Inc., Red Robin and Bloomin’ Brands Inc., parent to Outback Steakhouse.
“It’s all about average check and relative value,” said Setyan.
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