From McDonald’s to Wendy’s, America’s biggest restaurant chains are serving up exactly what Wall Street is hungry for this summer: Robust sales combined with little or no tariff exposure. But peer deeper, and the outlook isn’t so rosy.
That’s because the growth has been rooted in higher prices — not necessarily new customers. Traffic has been flat or falling across the industry as U.S. consumers cut back on eating out in favor of dining on the couch. Unless restaurants can reverse this trend, the recent gains could be fleeting.
“Without positive traffic, I don’t think it’s sustainable,” said Peter Saleh, a restaurant analyst for BTIG. The average check has gone up as some of the deep discounting at fast-foot chains abates, but that doesn’t mean restaurants are getting more people in the doors. “At this point I don’t think anyone is modeling growth in traffic.”
Investors have been less skeptical: the Russell 3000 Restaurants Index has risen 12 percent since May 1 through Wednesday’s close. The biggest restaurant players, such as McDonald’s, Taco Bell-owner Yum Brands, Starbucks and Chipotle Mexican Grill, have led the way, with the Golden Arches this month touching record highs.
To cite one example, Wendy’s shares jumped 8.2 percent Aug. 7, after the fast-food chain reported profit and same-store sales in the second quarter that slightly outpaced expectations. Chief Executive Officer Todd Penegor said that traffic was lower in the period and he expects it be down for the full year, so the company is experimenting with prices to find the right “mix” — which means keeping some prices low to lure diners in, but compensating with higher prices elsewhere in hopes it drives up the average check.
Wendy’s, Burger King and McDonald’s are among the companies that have raised prices on parts of the menu while keeping discounts on some areas, Saleh said.
Getting this right is a delicate balance — especially at a time when customer visits are falling and labor costs are rising. Bloomberg Intelligence analyst Michael Halen said the higher prices have also contributed to the slower traffic trends.
“You’re pricing some people out,” Halen said. “They have to be careful — especially fast food. Your customers are very price sensitive.” The average check for fast food is up 4.1 percent this year, according to data from MillerPulse, a restaurant industry analytics company.
Competition has intensified in the industry as consumers eat out less and buy more prepared foods from grocery stores, Halen said.
To try to get new customers in the door, fast-food chains are increasingly turning to imitation meat from the likes of Impossible Foods Inc. and Beyond Meat Inc.. Burger King now offers the Impossible Whopper and White Castle has an Impossible Slider, while chains such as Dunkin’ and Tim Hortons are offering Beyond Meat breakfast products.
“We’ve learned that we’re reaching a brand new guest, an incremental guest, that we hadn’t touched prior to launching it,” said Owen Klein, vice president of global culinary innovation at CKE Restaurants, which owns Carl’s Jr. and Hardee’s. Carl’s Jr. currently offers Beyond Meat products on its menu and Hardee’s is preparing to test them this fall.
A dearth of diners means companies are making bigger bets on delivery and takeout, while trying to whet appetites with fare such as Unicorn Frappuccinos.
