As fast-casual and casual-dining restaurants struggle to draw in patrons, fast-food chains appear to be the big winners in the fourth quarter and beyond.
Although many publicly traded restaurant businesses have yet to release their most recent quarterly results, for those that have, a pattern is beginning to emerge. Consumers cut back on their holiday restaurant spending due to their weariness from inflation, just as they did the same with their shopping. Smart fast-food chains drew in customers from all income levels by appealing to those customers with value menus and alluring promotions.
During recessions and periods of economic uncertainty, the fast-food industry typically performs better than the rest of the industry.
Take McDonald’s as an illustration. The fast food behemoth reported that same-store sales in the United States increased by 10.3%, helped in part by lower-income customers coming back more frequently than they had in the previous two quarters. Executives also attributed its strong sales growth to the success of its Adult Happy Meal promotion and the yearly return of the McRib. Contrary to industry trends, its U.S. traffic increased for the second consecutive quarter.
Similarly, Yum Brands, a direct competitor, reported strong U.S. demand. Domestic same-store sales at Taco Bell increased by 11% thanks to rising breakfast demand, the return of Mexican Pizza, and its value meals. While KFC’s sales inched up 1% despite facing challenging year-ago comparisons, Pizza Hut’s same-store sales in the US increased by 4%.
In the upcoming weeks, more fast-food earnings are anticipated. Restaurant Brands International, which owns Burger King, is scheduled to release its fourth-quarter results on Tuesday, while Domino’s Pizza will do so on February 23.
Chipotle Mexican Grill on Tuesday reported quarterly earnings and revenue that fell short of Wall Street expectations for the first time in more than five years, in contrast to McDonald’s and Yum’s strong results. Customer “meaningful resistance” to the price increases at the burrito chain, according to CEO Brian Niccol, has not materialized.
Instead, Chipotle executives listed a long list of factors that contributed to its disappointing performance, including the ineffective launch of the Garlic Guajillo Steak, comparisons to the brisket launch from the year before, and seasonality.
“As we got around the holidays, we just didn’t see that pop, that momentum, that we normally see … frankly, we started the quarter soft, and we ended the quarter soft,” Chipotle Chief Financial Officer Jack Hartung said on the company’s conference call, comparing the decline in December to weaker retail sales at that time.
According to Chipotle, traffic started to increase in January. The chain, however, is quickly being compared to a year ago, when Omicron outbreaks forced Chipotle and other chains to close early or for a limited time. Additionally, the unseasonably warm weather in January has boosted demand for the overall industry, according to Bank of America analyst Sara Senatore in a research note published on Wednesday.
Fast-casual chains that compete with us haven’t yet released their fourth-quarter earnings. On February 16, Shake Shack will announce its findings. However, it revealed initial same-store sales growth in early January that was below Wall Street forecasts. Portillo’s results are expected on March 2, while Sweetgreen’s results are expected on February 23.
The difficulties faced by fast-casual restaurants are a particularly bad omen for the casual dining market.
Since Chipotle, Sweetgreen, and Shake Shack began stealing customers from casual dining establishments more than ten years ago, these establishments have had difficulty gaining new customers. As a result, restaurants like Red Lobster and Applebee’s have started to give out steep discounts or spend a lot of money on advertising.
In particular for restaurant businesses like Brinker International, which is attempting to turn around Chili’s Grill and Bar, the issue has been made worse by the rising rate of inflation.
Brinker announced at the beginning of the month that Chili’s traffic dropped 7.6% for the three months that ended on December 28.
On the company’s conference call, Brinker CEO Kevin Hochman, a former executive in charge of KFC’s U.S. business, told analysts that the decline was anticipated as it tries to shed less profitable transactions. As part of the plan, Chili’s raised its prices and reduced the number of coupons available.
Later this month, results from more full-service restaurants are anticipated. On February 16, Outback Steakhouse’s proprietor Bloomin’ Brands is expected to make a statement.
(Adapted from CNBC.com)
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