It’s finally here: the long-predicted consumer retreat.
Starbucks reported a surprise drop in same-store sales for the latest quarter, sending its shares down 17% on Wednesday. Pizza Hut and KFC also reported shrinking same-store sales. And even stable McDonalds said it has adopted a “battlefield mentality” to compete for customers with values.
For months, economists have been predicting that consumers will cut back on spending in response to higher prices and interest rates. But it took a while for fast-food chains to see their sales shrink, despite several quarters of warnings to investors that low-income consumers were weakening and other restaurants were pulling away from pricier options.
Several restaurant companies also offered other reasons for their weak results this quarter. Starbucks said bad weather dragged same-store sales lower. Yum Brandsthe parent company of Pizza Hut, KFC and Taco Bell blamed the January blizzards and harsh comparisons to last year’s strong first quarter for the poor performance of its brands.
But these reasons do not fully explain the weak quarterly results. Instead, it appears that competition for a smaller pool of customers has gotten tougher as customers still looking to buy a burger or a frozen brew become pickier with their cash.
The cost of eating out at quick service restaurants has risen faster than eating at home. Prices for limited-service restaurants rose 5% in March from a year ago, while prices for groceries are rising more slowly, according to Bureau of Labor Statistics.
“Clearly everyone is fighting for fewer consumers or consumers who are certainly visiting less often, and we have to make sure we have that street mentality to win, regardless of the context around us,” said McDonald’s CFO Ian Borden. company conference call on Tuesday.
Extreme prices show that customers will still order their favorite foods, even if they are more expensive than a year ago. WingstopWall Street’s favorite restaurant chain, reported that same-store sales in the U.S. rose 21.6% in the first quarter. Chipotle Mexican Grill, whose customer base is primarily higher income, saw a 5.4% increase in traffic in the first quarter. And Restaurant Brands International’s Popeyes reported same-store sales growth of 5.7%.
“What we’ve seen with the consumer is that if they feel pressured, they tend to pull away from the higher frequencies [quick-service restaurant] cases,” Wingstop CEO Michael Skipworth told CNBC.
He added that the average Wingstop customer visits only once a month, using the chain’s chicken sandwich and wings as an opportunity to treat themselves rather than a routine that can easily be cut due to budget concerns. Skipworth also said Wingstop’s lower-income consumers are returning more often these days.
Even so, many companies in the restaurant sector and beyond have warned that consumer pressures may continue. McDonald’s chief executive Chris Kempczinski told analysts that attention to spending is expanding globally.
“It is worth noting that in [the first quarter]industry movement was flat to down in the US, Australia, Canada, Germany, Japan and the UK,” he said.
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 were more demanding about where and how they choose to spend their money, particularly with incentive savings being mostly spent,” Narasimhan said on the company’s call Tuesday.
Yum CEO David Gibbs noted that competitors’ value offerings for chicken menu items hurt KFC’s US sales. But he said the shift to value will benefit Taco Bell, which accounts for three-quarters of Yum’s domestic operating profit.
“We know from industry data that value is more important and that others struggle with value and Taco Bell is a value leader. You see some low-income consumers falling into the industry. We don’t see that at Taco Bell,” he said Wednesday. .
It’s unclear how long it will take for the fast-food chain’s sales to recover, though executives gave optimistic timelines and plans to get sales back on track. For example, Yum said its first quarter will be its weakest of the year.
For its part, McDonald’s plans to create a national value menu that will appeal to budget customers. But the burger giant could face pushback from its franchisees, who have become more outspoken in recent years. While the deals drive sales, they squeeze operators’ profits, particularly in markets where it’s already expensive to operate.
However, losing ground to competition could motivate McDonald’s franchisees. This marks the second quarter in a row that Burger King reported stronger US same-store sales growth than McDonald’s. The Restaurant Brands chain has been on a turnaround for the past two years and is spending heavily on advertising.
Starbucks is also betting on promotions. The coffee chain is preparing to release an upgrade to its app that allows all customers — not just loyalty members — to order, pay and receive discounts. Narasimhan also said the success of the new range of lavender drinks launched in March, although business was still sluggish in April.