It is finally here: the long-awaited decline of consumers.
Starbucks reported a surprise drop in same-store sales in its latest quarter, sending its shares down 17% on Wednesday. Pizza Hut and KFC also reported lower same-store sales. And even faithful McDonalds has adopted a “street fight mentality” to compete for value-conscious diners.
For months, economists have predicted that consumers would reduce their spending in response to rising prices and interest rates. But it took a while for fast-food chains to see their sales decline, despite several quarters of warnings to investors that lower-income consumers were weakening and other customers were abandoning more expensive options.
Many restaurant companies also cited other reasons for their weak results this quarter. Starbucks said the bad weather led to a decline in its same-store sales. Yum Brands, the parent company of Pizza Hut, KFC and Taco Bell, blamed its brands’ poor performance on January snowstorms and difficult comparisons to a strong first quarter last year.
But these excuses don’t fully explain the weak quarterly results. Instead, it seems that competition for a smaller pool of customers has become fiercer as diners who are always looking to buy a burger or a cold beer become pickier with their money.
The cost of fast food restaurant meals has increased faster than the cost of eating at home. Prices at limited-service restaurants rose 5% in March compared to the same period last year, while grocery prices rose more slowly, according to the Bureau of Labor Statistics.
“It’s clear that everyone is fighting to have fewer consumers or for consumers who are certainly coming less often, and we have to make sure that we have that street fight mentality to win, regardless of the context around us ” said McDonald’s CFO Ian Borden. the company’s conference call Tuesday.
The outliers show that customers will still order their favorite foods, even if they are more expensive than a year ago. Wing stopWall Street’s favorite restaurant chain, announced that its U.S. same-store sales soared 21.6% in the first quarter. Chipotle Mexican Grill saw its traffic increase by 5.4% in the first quarter. And Restaurant Brands International’s Popeyes reported same-store sales growth of 5.7%.
Still, many companies in the restaurant industry and beyond have warned that consumer pressures could persist. McDonald’s CEO Chris Kempczinski told analysts that spending caution extends across the globe.
“It should be noted that during the first quarter, industrial traffic remained stable or even declined in the United States, Australia, Canada, Germany, Japan and the United Kingdom,” he said. he declares.
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 customers have been more demanding about where and how they choose to spend their money, especially with stimulus savings mostly spent,” Narasimhan said on the company’s call Tuesday.
Yum CEO David Gibbs noted that competitors’ value offers on chicken menu items were hurting KFC’s sales in the United States. But he added that the shift to value should benefit Taco Bell, which accounts for three-quarters of Yum’s domestic operating income.
“We know from industry data that value is more important and others struggle with value, and Taco Bell is a leader in value. You see some low-income consumers falling in industry right now,” he said Wednesday.
It’s unclear how long it will take sales at fast-food chains to rebound, although executives have provided optimistic timelines and plans for getting sales back on track. For example, Yum said its first quarter would be its weakest of the year.
For its part, McDonald’s plans to create a national value menu that will appeal to thrifty customers. But the burger giant could face resistance from its franchisees, who have become more outspoken in recent years. Although transactions boost sales, they weigh on operators’ profits, particularly in markets where transactions are already costly.
Still, losing ground to the competition could motivate McDonald’s franchisees. This is the second consecutive quarter in which Burger King has reported stronger U.S. same-store sales growth than McDonald’s. The Restaurant Brands chain has seen a turnaround over the past two years and has spent heavily on advertising.
Starbucks is also betting on deals. The coffee chain is preparing to release an upgrade to its app that will allow all customers – not just loyal members – to order, pay and get discounts. Narasimhan also touted the success of his new line of lavender drinks launched in March, although business was still slow in April.
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