Restaurants Struggle to Drive Traffic as Promos Pick Up
Despite the overall positive Retail sales figures last week, January witnessed a downturn in same-store sales and a discernible uptick in promotional efforts and advertising, particularly among full-service dining, amidst a backdrop of decelerating U.S. consumer spending.
The restaurant industry faced a challenging week as most major restaurant stocks declined. Of the 50 stocks we track, 29 saw their share prices decline over the past week. The biggest decliners were Denny's Corporation (DENN, -10.13%), Bowlero Corp (BOWL, -13.81%), and Cracker Barrel Old Country Store (CBRL, -9.28%). On the positive side, the leading gainers were BurgerFi International (BFI, 25.59%), Shake Shack (SHAK, 23.50%), and Toast Inc. (TOST, 16.29%). Both SHAK and TOST posted better-than-expected earnings. Overall, it was predominantly a down week for restaurants. Contributing factors likely include continued inflationary pressures and economic uncertainty weighing consumer discretionary spending. The biggest decreasing stocks were in the casual dining segment (January Traffic down 9%), while quick-service restaurants and some specialty concepts like Wingstop fared comparatively better. The industry will likely remain volatile as the macroeconomic climate evolves.
Black Box January
- Quick-service venues same-store sales were (-2.4%) and a (-6.5%) decline in traffic, while PPA declined (-0.6%) to 4.3%. The quick-service segment marked its inaugural decline in monthly same-store sales since April 2022, halting a consecutive 20-month growth streak.
- Fast Casual venues same-store sales were (-1.8%) and a (-4.2%) decline in traffic, while PPA increased (+1.5%) to 2.7%
- Casual Dining venues same-store sales were (-7.7%) and a (-9.6%) decline in traffic, while PPA declined (-0.9%) to 2.5%
A combination of challenging comparisons with the previous year and the adverse effects of wintry conditions influenced the January slowdown. Looking ahead, sales might see a modest rebound in February (Leap Year) and March (easier comparisons), but the weather is always an unknown. Several Casual Dining Chains have intensified their marketing and promotional activities, targeting consumers squeezed by financial pressures. Their tactics encompass enticing offers such as unlimited wings and two-for-one main course deals. Several entities are contemplating increasing their marketing expenditures to counterbalance the dip in customer visits.
Analyzing the Dip: SBUX Sales Challenges in North America Continue
Reviewing Starbucks's recent earnings call, the company attributed soft sales in the past quarter to several factors, none of which are self-inflicted. The reported headwinds were:
- Unexpected Headwinds include geopolitical tensions affecting their business in the Middle East, leading to decreased traffic. Additionally, misperceptions about the company's stance on specific issues led to a softening of U.S. traffic, particularly among occasional customers who visit in the afternoon.
- Slower Recovery in China: The recovery in China was slower than anticipated, influenced by a more cautious consumer behavior. The overall market weakness led to increased pricing competition, impacting Starbucks' regional sales growth.
- Impact of Geopolitical Events: Events in the Middle East directly affected Starbucks' business in the region and indirectly impacted U.S. sales due to misperceptions about the company's position on these events.
- General Market Conditions and Competition: The overall market conditions, including increased competition and pricing pressures, were implied as underlying challenges that may have contributed to the soft sales in North America. However, specific details on these aspects were not extensively elaborated.
Starbucks has implemented targeted offers to bring occasional customers into its loyalty program. It has leveraged its proprietary data analytics and AI tool, Deep Brew, to identify and incentivize specific Rewards member cohorts. They also focus on brand marketing and engaging audiences on social media to address these challenges. In China, strategies include offering more locally relevant product innovations, enhancing digital and omni-channel capabilities, and expanding into lower-tier markets to address market competition and consumer cautiousness.
In North America, Starbucks introduced its new olive oil-infused product line, the Oleato platform, at the end of January. The Oleato platform, which integrates olive oil into coffee beverages, was highlighted as an innovative move by Starbucks, aiming to attract customers with a unique offering. Still, so far in February, it's not working. The company expressed excitement about launching the Oleato platform across the U.S. and discussed plans to introduce additional products for Valentine's Day, including the Chocolate Covered Strawberry Creme Frappuccino and a Chocolate Hazelnut Cookie Cold Brew. These product innovations are part of Starbucks' strategy to elevate the brand and continuously engage customers with unique experiences. It would appear early in 2Q23 that the resources the company spent on the Oleato platform are not driving the intended gains in traffic.
Suppose Oleato was going to be a big success. Why would the company need to announce plans to introduce three new beverage platforms, targeting their Gen Z and millennial customers over the next few months? These platforms are designed to cover a range of coffee and cold beverages, aiming to appeal primarily to the afternoon daypart and encouraging visits during this time. While specific details of these platforms were not disclosed, they are part of Starbucks' ongoing strategy to innovate and refresh its menu, catering to evolving consumer tastes and preferences and engaging younger demographics with new and exciting options.
My take is that the old CEO forced the company to roll out the Oleato platform before it was adequately tested. Additionally, adding three new platforms will only complicate operations and work to mitigate the simplification strategy the company is trying to implement. Self-inflicted wounds?
In early February, SBUX saw a noticable decline in traffic of (-17.1%) or a 290bps deceleration WoW
Balancing Act: How McDonald's Strategic Pricing and Value Offerings Wil Set the Pace in the Fast-Food Industry
The fast-food industry is navigating a complex landscape characterized by fluctuating economic conditions, evolving consumer expectations, and the ever-present challenge of maintaining affordability. In this context, pricing strategies and value offerings become critical for attracting and retaining customers, particularly those from the low-income segment. Amidst this scenario, McDonald's finds itself at a crossroads. Restaurant Business reports that recent franchisee discussions have revolved around the necessity of discounting strategies in response to perceived pressures on the low-income consumer demographic. The importance of value to McDonald's and the broader fast-food industry cannot be understated, especially given the critical role of the low-income consumer segment, which includes many younger customers crucial for future brand loyalty. The National Owners Association (NOA), representing McDonald's independent franchisees, firmly believes that value is a cornerstone of McDonald's brand identity. This perspective is particularly relevant when considering the low-income consumer segment, which looks for affordability and forms a significant portion of the brand's future loyal customer base. The emphasis on value extends beyond mere pricing strategies; it encompasses the overall customer experience, product quality, and service efficiency that McDonald's is known for. Understanding the importance of this demographic, especially younger consumers, McDonald's is tasked with crafting strategies that reinforce value perception without eroding its brand equity or profitability. This delicate balance is crucial for sustaining long-term growth and loyalty among segments increasingly sensitive to price fluctuations and economic uncertainties.
McDonald's could navigate these challenges by maintaining price stability while offering targeted discounts through its app, which enables customer acquisition and retention without sacrificing profitability. Reintroducing value-engineered products, like the Snack Wrap, offers a promising avenue. By cost-effectively leveraging existing ingredients, McDonald's can cater to budget-conscious consumers without compromising financial performance.
The discussion around McDonald's pricing and value offerings sheds light on the nuanced approach needed to balance the appeal to low-income consumers with the realities of inflation and operational costs. The recent decline in traffic underscores the need for McDonald's to prioritize value while maintaining brand integrity and financial health for franchisees.
In early February, MCD saw a noticeable decline in traffic of (-4.8%) or a 366bps deceleration WoW
