Anyone else remember the throes of the Great Recession, when restaurant success was redefined to become “flat is the new up?” This reference seems especially relevant now on the tail end of second quarter earnings reports. One of the big takeaways from those reports so far is that they look an awful lot like that “flat is the new up” era.
Use of the word “awful” here is intentional, by the way.
Q2 is supposed to be the industry’s surefire period, bolstered by special occasions like Mother’s Day and graduations, while simultaneously distant enough from the holiday-induced budget drain that tends to dampen Q1. That has not been the case this year.
Of course, there are always anomalies. One cannot recap the second quarter without referencing the staggering performance of Wingstop, for instance, with same-store sales up nearly 29% driven almost entirely by transactions. Or, the consistently reliable Texas Roadhouse and Chipotle, up 9.3% and 11.1%, respectively. Domino’s came in hot in Q2, with same-store sales up 4.8%. Sweetgreen, Taco Bell, El Pollo Loco, and Dutch Bros stood out as well, up 9%, 5%, 4.5%, and 4.1%, respectively.
However, other companies with a plus by their same-store sales – a key metric to determine how well existing locations are performing – acknowledged that those sales came from pricing. Cheesecake Factory’s same-store sales were up 1.4% with prices up 4.5%, for instance. Shake Shack’s pricing drove a 4% bump in same-store sales. Noodles and Company’s same-store sales were up 2%, but traffic was down 1.1%.
Then there are those that were flattish, including Potbelly, Firehouse Subs, Popeyes, Burger King, First Watch, Portillo’s, Bloomin’ Brands, Denny’s, and Wendy’s. That’s quite an extensive list, but in this environment, “flattish” could be considered a win. That’s because the negative same-store sales list has become even longer. Companies that experienced a same-store sales decline 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 Johns.
From this breakdown, we can’t even discern a pattern between segments. This industry is certainly not homogenous, yet McDonald’s, Applebee’s, and Starbucks are all experiencing similar pressures right now – lower-income consumers simply aren’t going out to eat as much. Fed up with said pricing, they’ve taken their wallets to the grocery store, where prices have stabilized far more quickly than menu prices.
Notably, big restaurant chains aren’t the only ones feeling the pinch. Fiserv’s Small Business Index for July, analyzing transaction data at approximately 2 million U.S. small businesses, shows that consumer spending across segments rebounded after a month of modest declines. The exception? Restaurants. On an annual basis, sales at small restaurants declined 1.6%. Further, average ticket sizes are down 2.4% year-over-year. Month-over-month restaurant sales (-3.1%) and transactions (-1.4%) also both decreased, marking a second consecutive month of slowing restaurant sales and foot traffic.
Indeed, the restaurant spending dam has been pressured for quite some time now as COVID savings began drying up, high interest rates continue, personal debt soars, and menu prices remain stubborn. In the past couple of months, however, that dam seems to be springing a leak. McDonald’s CEO Chris Kempczinski noted in February that his company was losing low-income customers. In the second quarter, that trend translated to negative same-store sales for the first time since the pandemic.
The question now is whether the dam will break or fortify. It’s hard to answer that question without a crystal ball, but there is plenty of data available to formulate some conjecture, and plenty of reasons many companies reduced their full-year guidance. For starters, consumers’ restaurant budgets have fallen 10% in the past two years, according to research from Popmenu.
Second, consumer sentiment is down. Way down. According to the University of Michigan’s Consumer Sentiment Index, sentiment in July fell to 66.4, down from 79 in January. The Current Index dropped 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 beaten up, they rein in their discretionary spending and that is exactly what’s happening now. Restaurant spending year-over-year declined by 1.79%, while grocery spending increased 0.47% over the same period, according to National Retail Federation Retail Monitor/Affinity Solutions data analyzing debit and credit card transactions. Zeta Global’s Zeta Economic Index corroborates this pattern, showing a significant slowdown in restaurant spending compared to other sectors. Discretionary spending in July fell 7.5% month-over-month. In a statement, David A. Steinberg, co-founder/chairman/CEO of Zeta Global, said a slight decline in job market sentiment is driving a “divergent economic outlook.”
This divergence is creating more “trade-off” consumers, according to new research from insights and analytics firm Big Chalk. Nearly 28% of the U.S. consumer population has been trading down (or out) in the dining out category, which is the largest percentage registered. Big Chalk’s data suggests. The activity could lead to a revenue loss of between $44 billion and $88 billion throughout the next 12 months in the restaurant industry, according to Rick Miller, lead analyst on the “Who is the Trade-Off Consumer?” report. He expects a slowdown in restaurant spending from all consumers throughout the duration of this year.
The International Foodservice Manufacturers Association’s projections also show sluggish growth for the entire restaurant category with the exception of midscale restaurants, which are actually expected to decline, reflecting consumers’ trade-down/off behavior.
It would certainly be nice to understand how long this behavior will last or even how to change it without continuous discounting. At this point, however, there doesn’t seem to be an end in sight. As Restaurant Business International executive chairman Patrick Doyle noted: “We clearly saw softer sales than expected … and it is not yet clear when we’ll see the category strengthen.”
Contact Alicia Kelso at [email protected]
