For months, economists have been predicting that consumers will cut their spending in response to higher prices and interest rates. Despite several quarterly warnings to investors that lower-income consumers are weakening and other restaurants are trading away from pricier options, it will be a while before fast-food chains see their sales actually shrink.
Several restaurant companies also gave other reasons for their weak results this quarter. Starbucks said bad weather dragged down its same-store sales. Yum Brands, the parent company of Pizza Hut, KFC and Taco Bell, blamed January's blizzards and tough comparisons 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 small-scale customers seems to have grown fiercer, as diners opting for a burger or a cold drink instead choose to fork over their cash.
The cost of eating at quick-service restaurants has risen faster than eating at home. Prices for limited-service restaurants rose 5% in March, while grocery prices rose more slowly. Bureau of Labor Statistics.
« Of course everyone is fighting for a small number of consumers or consumers, and regardless of the environment around us, we have to make sure that street-fighting spirit wins, » said McDonald's CFO Ian Borden. The company's conference call on Tuesday.
Outliers show that customers will order their favorite foods even if they are more expensive than they were a year ago. Wall Street favorite restaurant chain Wingstop saw its US same-store sales jump 21.6% in the first quarter. Chipotle Mexican Grill saw traffic increase 5.4% in its first quarter. And Restaurant Brands International's Popeyes posted same-store sales growth of 5.7%.
Even so, many companies in the restaurant industry and beyond have warned that consumer pressures may persist. McDonald's CEO Chris Kempczynski told analysts that the cost warning extended worldwide.
« It's noticeable [the first quarter] »In the US, Australia, Canada, Germany, Japan and the UK, industrial traffic is flat and declining, » he said.
Two chains that struggled in the first quarter cited value as a factor. Starbucks CEO Laxman Narasimhan says occasional customers don't buy chain coffee because they want more variety and value.
“In this environment, many customers are very precise « They are choosing where and how to spend their money, particularly incentive savings, » Narasimhan said on the company's Tuesday call.
Yum CEO David Gibbs noted that competitors' value deals for chicken menu items hurt KFC's US sales. But he said the shift to value should benefit Taco Bell, which accounts for three-quarters of Yum's domestic operating profit.
« We know from industry data that value is very important and others struggle with value, and Taco Bell is a value leader. You see some lower-income consumers falling in the industry. We don't see that. Taco Bell, » he said Wednesday.
It's unclear how long it will take for the fast-food chains' sales to rebound, though executives offered optimistic timelines and plans to get 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 roll out a nationwide value menu that will appeal to frugal customers. But the burger giant may face pushback from its owners, who have become more outspoken in recent years. While the contracts boost sales, they squeeze operators' profits, especially in markets that are already expensive to operate.
However, stepping up to the competition will motivate McDonald's franchisees. This marks the second consecutive quarter that Burger King posted stronger US same-store sales growth than McDonald's. The Restaurant Brands chain has been in turnaround mode for the past two years and has been spending heavily on advertising.
Starbucks is also betting on deals. The coffee chain is preparing to roll out an update to its app that will allow all customers — not just loyalty members — to order, pay and receive discounts. Although business was still sluggish in April, Narasimhan also spoke of the success of its new lavender beverage line, launched in March.
