Black Box March Sales Trends
The restaurant industry is experiencing diverging trends as the U.S. economy undergoes a K-shaped recovery. The past three years of aggressive price hikes may further widen the gap between low—and high-income consumer spending and the performance of quick-service and full-service restaurant same-store sales (we continue to see MCD, SBUX, and CMG as the most prominent pricing offenders!).
While year-over-year comparisons are expected to ease in the second quarter and boost results through the end of the year, different restaurant chains may be affected to varying degrees. Weaker spending among low- and middle-income consumers, exacerbated by rising gas prices and high credit card balances, could put more pressure on casual dining chains than quick-service restaurants. That said, two names on our Casual Dining long list (BLMN & BJRI) have activists pushing for change; EAT is amid an operational turnaround. That said, DRI looks to be struggling with significant exposure to the lower-end consumer with its Olive Garden Chain. On the other hand, the DRI fine-dining segment may see an uptick in same-store sales in calendar year 2024 as it laps weak 2023 results and benefits from higher spending among high-income consumers, supported by rising stock and home prices.
Black Box March same-store sales data reinforces this trend, with casual dining restaurants experiencing declines while quick-service venues saw growth. According to Black Box data, quick-service restaurants' same-store sales rose +2.9% in March, driven by a +3.5% average check increase partly offset by a -0.5% traffic drop. Since September 2021, same-store sales have been driven almost exclusively by check growth, with traffic falling in 29 of the past 31 months. However, a trade-down from full-service dining might cushion the blow for the quick-service category, and chains that can successfully attract high-income consumers are expected to outperform those that can't.
According to Black Box Intelligence, fast-casual restaurants saw a -1.3% decline in same-store sales in March, with a +2.2% average check increase and a -3.3% footfall decline (the Easter calendar shift likely hurt results.)
Casual dining chains are turning to promotions and increased advertising to mitigate traffic declines. However, achieving same-store sales gains may prove challenging without the substantial price hikes in the past three years. As a reminder, Darden has reported that lower-income and older customers visit less frequently, manage their checks more carefully, and shift visits to lunch. According to Black Box data, casual dining restaurants' same-store sales declined by -1.8% in March, driven by a +2.7% average check increase partly offset by a -4.7% traffic drop.
Is Shake Shack's Future in Question as Controversial CEO Rob Lynch Takes the Reins?
The street is universally optimistic regarding the appointment of Rob Lynch as the new CEO of SHAK. While Lynch brings experience from his tenure at Papa John's (PZZA) and Arby's, some concerns are worth noting. Rob Lynch upended PZZA employees by moving the company to Atlanta, only to leave a few years later after blowing up the company. Several articles have been written about how bad things are at PZZA, and now he is the CEO of SHAK. Should SHAK shareholders be concerned, we will know more in about 6-9 months!
The appointment of Rob Lynch as the new CEO of Shake Shack has raised serious concerns about the fast-casual burger chain's future direction and success. Lynch's turbulent tenure as CEO of Papa John's, marked by strategic missteps, high executive turnover, and poor franchisee relations, casts a shadow over his ability to lead Shake Shack in an increasingly competitive market effectively.
At Papa John's, Lynch oversaw a dramatic shift in marketing strategy, centralizing control and reducing local influence. While this move was intended to drive efficiency, it came at the cost of weakened community connections and franchisee autonomy. Lynch's focus on cost-cutting and aggressive promotions also reportedly led to declining product quality and customer satisfaction.
These troubling patterns from Lynch's past raise red flags about the potential impact of his leadership on Shake Shack's premium brand image and "roadside" burger stand concept. Known for its high-quality ingredients and strong customer loyalty, Shake Shack risks diluting its brand equity if Lynch applies a similar playbook of aggressive discounting and cost reduction at the expense of the customer experience.
Lynch's reported lack of attention to critical areas like operations and technology at Papa John's also bodes poorly for Shake Shack's need for continual innovation and optimization in a fast-moving, fast-casual segment. With SHAK behind the curve on technology and the fast-casual sector becoming increasingly tech-driven, Mr Lynch's lack of experience and failure to prioritize digital customer engagement and back-end efficiencies could put Shake Shack at a competitive disadvantage.
At PZZA, the high executive turnover and strained franchisee relations that characterized Lynch's time at Papa John's point to potential challenges in maintaining a unified leadership team and growth strategy at Shake Shack. Losing key talent and alienating employees and franchisees would be a significant liability as the chain evolves and expands its footprint to grow market share.
Given Lynch's questionable track record, Shake Shack shareholders might have ample reason to be wary. We would look for signs that the negative impacts of Lynch's management approach could become apparent in as little as 6-12 months, manifesting in wavering market performance and brand perception.
As Lynch takes the helm at Shake Shack, the company stands at a critical juncture. If the concerning patterns from his past repeat themselves, Shake Shack could see its premium positioning eroded, its operations stagnate, and its competitive edge dulled. While the brand's loyal following may provide some buffer, Shake Shack's long-term outlook under Lynch's leadership is decidedly cloudy. Scrutiny from stakeholders and customers alike will be essential to hold the new CEO accountable and to safeguard the integrity of this beloved better burger brand.
Starbucks Faces Pivotal Moment as Union Negotiations and Legal Battles Converge
We remain bearish on Starbucks. The battle with unions stems from complications in executing day-to-day in-store operations. The company is making slow progress toward fixing this critical issue, which raises concerns about its ability to improve operational efficiency and maintain a positive workplace environment. We believe the stock may face headwinds and underperform until Starbucks demonstrates meaningful strides in resolving these challenges.
Starbucks is entering a critical phase as it begins labor contract negotiations with the union representing over 10,000 store-level employees. The negotiations, slated to commence this week, mark a significant milestone in the nearly three-year-long organizing drive that has reshaped the company's labor landscape. The talks between Starbucks and Starbucks Workers United (SWU) will initially focus on establishing the framework for the collective bargaining process. Subsequent discussions will explore crucial issues such as wages, scheduling, benefits, and safety measures. However, the path to a mutually agreeable contract will likely be complex and contentious.
One of the primary points of contention is SWU's insistence on treating each unionized store as a distinct collective-bargaining unit. This approach would give individual stores greater autonomy in negotiating their needs and concerns. Conversely, Starbucks has preferred a more centralized bargaining process, which could streamline negotiations but potentially overlook each store's unique challenges. Further complicating matters is the logistical challenge of involving many rank-and-file union members in the negotiation process. SWU plans to include 150 members directly in the negotiations, with an additional 250 baristas serving as a caucus to provide feedback. Starbucks has already resisted this approach, refusing to broadcast the negotiation sessions to the entire SWU membership.
As the negotiations unfold, Starbucks is simultaneously navigating a legal battle with the National Labor Relations Board (NLRB). The company has brought a case before the U.S. Supreme Court, seeking clarification on the criteria federal district courts should use when deciding whether to uphold the Board's orders to employers. This case relates to the NLRB's directives for Starbucks to reinstate employees who claim they were fired for supporting unionization – a charge the company vehemently denies, maintaining that the dismissals were based on performance issues. The outcome of this legal action could have significant implications for Starbucks' bargaining position and the broader labor landscape in the United States. A ruling in favor of the company could limit the NLRB's ability to intervene in labor disputes and potentially encourage other employers to take a harder line against unionization efforts.
According to the latest reports, the NLRB has designated between 413 (according to Starbucks) and 425 (according to SWU) stores across 43 states as collective bargaining units. This represents a substantial portion of Starbucks' U.S. workforce and highlights the growing momentum of the unionization movement within the company. It is worth noting that SWU is an affiliate of Workers United, which is part of the Service Workers International Union (SEIU) – the second-largest labor union in the United States. This affiliation provides SWU with significant resources and expertise to draw upon as it engages in negotiations with Starbucks. Starbucks's stakes could not be higher as it seeks to maintain its brand image, profitability, and employee relations in an increasingly complex and polarized labor environment.
