The long-awaited consumer recession has finally arrived.
Starbucks announced a surprise drop in same-store sales in the latest quarter, sending its stock down 17% on Wednesday. Pizza Hut and KFC also saw declines in same-store sales. Even firm McDonald’s said he adopted a “street fight mentality” to compete for value-minded guests.
Economists have predicted for months that consumers would cut their spending in response to higher prices and interest rates. However, it took a while for quick food chains to see an actual decline in sales, despite warnings to investors for several quarters that low-income consumers were weakening and other diners were giving up on more high-priced options.
Many restaurant companies also cited other reasons for their penniless performance this quarter. Starbucks said bad weather caused same-store sales to decline. Yum Brands, the parent company of Pizza Hut, KFC and Taco Bell, blamed January snowstorms and complex comparisons with last year’s powerful first quarter for the penniless performance of its brands.
However, these excuses do not fully explain the tender quarterly results. Instead, it appears that competition for a smaller group of customers has intensified as diners still eager to buy a burger or icy brew become more picky with their cash.
The cost of eating out at quick food restaurants was rising faster than at home. Prices in limited-service restaurants increased by 5% in March compared to the year-ago period, while grocery prices grew more slowly, according to data from the Central Statistical Office. Bureau of Labor Statistics.
“There’s no doubt that everyone is fighting for fewer consumers or consumers who are certainly visiting us less often, so we have to make sure that we have a street fight mentality to win, regardless of the context around us,” McDonald’s CFO Ian Borden said on the company’s conference call Tuesday. .
Outliers show that customers will still order their favorite foods, even if they are more high-priced than they were a year ago. Wing stopWall Street’s favorite restaurant chain reported that U.S. same-store sales rose 21.6% in the first quarter. Chipotle Mexican Grill saw traffic growth of 5.4% in the first quarter. AND Brands International Restaurant Popeye’s saw same-store sales escalate 5.7%.
Still, many companies in the restaurant sector and beyond warn that consumer pressure may persist. McDonald’s CEO Chris Kempczinski told analysts that spending caution applies around the world.
“It is worth noting that in [the first quarter]industry traffic in the U.S., Australia, Canada, Germany, Japan and the U.K. was flat or withering,” he said.
Two of the chains that struggled in the first quarter cited value as a factor. Starbucks CEO Laxman Narasimhan said casual customers aren’t buying the chain’s coffee because they want more variety and value.
“In this environment, many customers were more demanding about where and how they choose to spend their money, especially since most of it is being spent on stimulus savings,” Narasimhan said in a company earnings call Tuesday.
Yum CEO David Gibbs noted that competitors’ price offers on chicken menu items were hurting KFC’s U.S. sales. But he said the shift to value should benefit Taco Bell, which generates three-quarters of Yum’s domestic operating profit.
“We know from industry data that value is more crucial and that others struggle with it, and Taco Bell is the value leader. We see some low-income consumers dropping out of the industry. We don’t see that at Taco Bell,” he said Wednesday.
It’s unclear how long it will take for the quick food chain’s sales to rebound, although executives have laid out hopeful timelines and plans to get sales back on track. Yum, for example, said the first quarter would be its weakest of the year.
For its part, McDonald’s plans to create a nationwide nutritious menu that will appeal to thrifty customers. But the burger giant may face resistance from franchisees who have become more brazen in recent years. While the deals drive sales, they put pressure on operators’ profits, especially in markets where it is already high-priced to do business.
Still, losing ground to competitors could motivate McDonald’s franchisees. This marks the second quarter in a row in which Burger King posted greater U.S. same-store sales growth than McDonald’s. The Restaurant Brands chain has been in the recovery phase for two years and has been spending a lot of money on advertising.
Starbucks is also betting on deals. The coffee chain is preparing to release an update to its app that will enable all customers – not just loyalty program members – to place orders, pay and receive discounts. Narasimhan also touted the success of his modern line of lavender drinks, which launched in March, although business was still tardy in April.