Long-predicted consumer pullback finally hits restaurants like Starbucks, KFC and McDonald’s

It’s
finally
here:
the
long-predicted
consumer
pullback.

Starbucks
announced

a
surprise
drop
in
same-store
sales
for
its
latest
quarter,
sending
its
shares
down
17%
on
Wednesday.
Pizza
Hut
and
KFC

also
reported
shrinking
same-store
sales.
And
even
stalwart


McDonald’s
said
it
has

adopted
a “street-fighting
mentality”
to
compete
for
value-minded
diners.

For
months,
economists
have
been
predicting
that
consumers
would
cut
back
on
their
spending
in
response
to
higher
prices
and
interest
rates.
But
it’s
taken
a
while
for
fast-food
chains
to
see
their
sales
actually
shrink,
despite
several
quarters
of
warnings
to
investors
that
low-income
consumers
were
weakening
and
other
diners
were
trading
down
from
pricier
options.

Many
restaurant
companies
also
offered
other
reasons
for
their
weak
results
this
quarter.
Starbucks
said
bad
weather
dragged
its
same-store
sales
lower.


Yum
Brands,
the
parent
company
of
Pizza
Hut,
KFC
and
Taco
Bell,
blamed
January’s
snowstorms
and
tough
comparisons
to
a
strong
first
quarter
last
year
for
its
brands’
poor
performance.

But
those
excuses
don’t
fully
explain
the
weak
quarterly
results.
Instead,
it
looks
like
the
competition
for
a
smaller
pool
of
customers
has
grown
fiercer
as
the
diners
still
looking
to
buy
a
burger
or
cold
brew
become
pickier
with
their
cash.

The
cost
of
eating
out
at
quick-service
restaurants
has
climbed
faster
than
that
of
eating
at
home.
Prices
for
limited-service
restaurants
rose
5%
in
March
compared
with
the
year-ago
period,
while
prices
for
groceries
have
been
increasing
more
slowly,
according
to
the

Bureau
of
Labor
Statistics.

“Clearly everybody’s fighting for fewer consumers or consumers that are certainly visiting less frequently,
and
we’ve
got
to
make
sure
we’ve
got
that
street-fighting
mentality
to
win,
irregardless
of
the
context
around
us,”
McDonald’s
CFO
Ian
Borden
said
on
the
company’s
conference
call
on

Tuesday.

Outliers
show
that
customers
will
still
order
their
favorite
foods,
even
if
they’re
more
expensive
than
they
were
a
year
ago.


Wingstop,
Wall
Street’s
favorite
restaurant
chain,
reported
its
U.S.
same-store
sales
soared
21.6%
in
the
first
quarter.


Chipotle
Mexican
Grill,
whose
customer
base
is
predominantly
higher
income,
saw
traffic
rise
5.4%
in
its

first
quarter.
And


Restaurant
Brands
International’s
Popeyes
reported
same-store
sales
growth
of
5.7%.

“What
we’ve
seen
with
the
consumer
is,
if
they
are
feeling
pressure,
they
have
a
tendency
to
pull
back
on
more
high-frequency
[quick-service
restaurant]
occasions,”
Wingstop
CEO
Michael
Skipworth
told
CNBC.

He
added
that
the
average
Wingstop
customer
visits
just
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
that
Wingstop’s
low-income
consumers
are
actually
returning
more
frequently
these
days.

Even
so,
many
companies
in
the
restaurant
sector
and
beyond
it
have
warned
consumer
pressures
could
persist.
McDonald’s
CEO
Chris
Kempczinski
told
analysts
the
spending
caution
extends
worldwide.

“It’s
worth
noting
that
in
[the
first
quarter],
industry
traffic
was
flat
to
declining
in
the
U.S.,
Australia,
Canada,
Germany,
Japan
and
the
U.K.,”
he
said.

Two
of
the
chains
that
struggled
in
the
first
quarter
cited
value
as
a
factor.
Starbucks
CEO
Laxman
Narasimhan

said
occasional
customers
weren’t
buying
the
chain’s
coffee
because
they
wanted
more
variety
and
value.

“In
this
environment,
many
customers
have
been
more
exacting
about
where
and
how
they
choose
to
spend
their
money,
particularly
with
stimulus
savings
mostly
spent,”
Narasimhan
said
on
the
company’s
Tuesday
call.

Yum
CEO
David
Gibbs
noted
that
rivals’
value
deals
for
chicken
menu
items
hurt

KFC’s
U.S.
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
the
industry
data
that
value
is
more
important
and
that
others
are
struggling
with
value,
and
Taco
Bell
is
a
value
leader.
You’re
seeing
some
low-income
consumers
fall
off
in
the
industry.
We’re
not
seeing
that
at
Taco
Bell,”
he
said
on
Wednesday.

It’s
unclear
how
long
it
will
take
fast-food
chains’
sales
to
bounce
back,
although
executives
provided
optimistic
timelines
and
plans
to
get
sales
back
on
track.
For
example,
Yum
said
its
first
quarter
will
be
the
weakest
of
the
year.

For
its
part,
McDonald’s
plans
to
create
a
nationwide
value
menu
that
will
appeal
to
thrifty
customers.
But
the
burger
giant
could
face
pushback
from
its
franchisees,
who
have
become
more
outspoken
in
recent
years.
While
deals
drive
sales,
they
pressure
operators’
profits,
particularly
in
markets
where
it
is
already
expensive
to
operate.

Still,
losing
ground
to
the
competition
could
motivate
McDonald’s
franchisees.
This
marks
the
second
consecutive
quarter
that
Burger
King
reported
stronger
U.S.
same-store
sales
growth
than
McDonald’s.
The
Restaurant
Brands
chain
has
been
in
turnaround
mode
over
the
last
two
years
and
spending
heavily
on
advertising.

Starbucks
is
also
betting
on
deals.
The
coffee
chain
is
gearing
up
to
release
an
upgrade
of
its
app
that
allows
all
customers
—
not
just
loyalty
members
–
to
order,
pay
and
get
discounts.
Narasimhan
also
touted
the
success
of
its
new
lavender
drink
line
that
launched
in
March,
although
business
was
still
sluggish
in
April.