It’s finally here: the long-predicted consumer retreat.
Starbucks The company announced an unexpected drop in same-store sales in the latest quarter, sending its shares down 17% on Wednesday. Pizza Hut and KFC also reported shrinking same-store sales.Even firm McDonald’s said has adopted a “street fighting mentality” to compete for value-conscious diners.
Economists have been predicting for months that consumers would cut back on spending in response to higher prices and interest rates. But it took the fast-food chain a while to see its sales actually shrink, despite warning investors for several quarters that lower-income consumers were weakening and other diners were abandoning more expensive options.
Many restaurant companies also cited other reasons for weak results this quarter. Starbucks said bad weather dragged down same-store sales. Yum Brands Inc., owner of Pizza Hut, KFC and Taco Bell, blamed the January snowstorm and a stark contrast to last year’s strong first quarter for its brands’ poor performance.
But those excuses don’t fully explain the weak quarterly results. Instead, competition for smaller groups of customers appears to be getting fiercer as diners who still want to buy a burger or cold brew become more picky about cash.
The cost of eating out at fast-food restaurants is rising faster than the cost of eating at home. According to the U.S. Bureau of Labor Statistics, prices at limited-service restaurants rose 5% in March from a year earlier, and grocery prices rose at a slower pace.
McDonald’s chief financial officer Ian Borden said: “Obviously everyone is fighting for fewer consumers or consumers who visit less frequently and we have to make sure we have that street fighting mentality to win, no matter who is around us. What is the environment like.
The outliers show that customers are still ordering their favorite foods, even if they are more expensive than a year ago. wing stopWall Street’s most popular restaurant chain reported a 21.6% jump in U.S. same-store sales in the first quarter. Chipotle Mexican BBQ Traffic grew by 5.4% in the first quarter.and International restaurant brand Popeyes reported same-store sales growth of 5.7%.
Even so, many companies in the restaurant industry and beyond warn that consumer pressure is likely to persist. McDonald’s CEO Chris Kempczinski told analysts that people around the world are spending cautiously.
“It is worth noting that in [the first quarter]Industrial flows in the United States, Australia, Canada, Germany, Japan and the United Kingdom were flat or even declining,” he said.
Two chains that struggled in the first quarter cited value as a factor. Starbucks Chief Executive Laxman Narasimhan said occasional customers don’t buy the chain’s coffee because they want more variety and value.
“In this environment, many customers have become more stringent Narasimhan said during the company’s conference call on Tuesday:
Yum CEO David Gibbs noted that competitors’ sweet deals on chicken menus were hurting KFC’s U.S. sales. But he said the shift toward value should benefit Taco Bell, which accounts for three-quarters of Yum Brands’ domestic operating profits.
“We know from industry data that value matters more, and everyone else is struggling with value, and Taco Bell is the value leader. You’re going to see some lower-income consumers decline in the industry. We’re not Taco Bell sees this happening,” he said Wednesday.
It’s unclear how long it will take for the fast-food chain’s sales to rebound, though executives have offered optimistic timelines and plans to get sales back on track. For example, Yum! said the first quarter will be its weakest quarter of the year.
McDonald’s, for its part, plans to create a national value menu to attract frugal customers. But the burger giant may face resistance from franchisees, who have become more outspoken in recent years. While the deals boost sales, they put pressure on operators’ profits, especially in markets where operating costs are already high.
Still, losing out on the competition could motivate McDonald’s franchisees. This marks the second consecutive quarter that Burger King has posted stronger U.S. same-store sales growth than McDonald’s. The restaurant chain has been on a turnaround over the past two years and has spent heavily on advertising.
Starbucks is also betting on promotions. The coffee chain is preparing to release an upgraded version of its app that will allow all customers, not just loyalty members, to order, pay and receive discounts. Narasimhan also touted the success of a new range of lavender drinks launched in March, although business remained sluggish in April.
