The evidence is irrefutable: After a decent start to the year, restaurants are having a tough time luring customers and getting them to spend. The latest earning reports have brought a parade of operations posting second-quarter losses (including the parents of Outback, Joe’s Crab Shack, Noodles and Company and Denny’s). Even longtime high-flyers like Burger King, Buffalo Wild Wings and Taco Bell have suffered a meltdown in comps.
There have been a few exceptions (The Habit and Texas Roadhouse, for example), and pizza chains in particular seem to enjoy some immunity. But the majority of big operations are hurting. In June, comparable-store sales for chain restaurants fell by an average of 3.5%, the largest decline ever recorded by TDn2K, says Bob Rycroft, managing partner of the research firm. But why?
A consensus has yet to emerge, leaving observers to choose from a bevy of theories. Rycroft calls it a “stew” of ingredients ranging from politics to meal kits, “all of which seem to make sense.”
Here are six of the leading contentions, as espoused by financial analysts, researchers, economists and restaurant executives.
1. Independents turn the tables
While shocking to industry vets, there are mounting indications of an independent uprising against chains. “The hypothesis is that independents are taking away [market] share,” says Rycroft. “If that’s true, and there are some indications it is, this is the first time this has happened.”
2. Fear of venturing outside
Steve Easterbrook, CEO of McDonald’s (which posted one of the strongest comp gains, with a rise of 1.8% domestically), and others believe uncertainty has been fostered by U.S. politics (especially around the election) and civil unrest. “When people are uncertain, when families are uncertain, caution starts to prevail.”
3. Shrinkage of the middle class
As the buying power of that socio-economic group erodes of late, it should not be a surprise that restaurants are feeling the pinch, many observers theorize. “I can’t help thinking that the decline of the middle class has changed the way the public uses restaurants—the sort of places where they go,” says Rycroft.
4. Competition from new sources
The U.S. Department of Commerce recently revealed that consumer spending accelerated during Q2, weighing against theories that the public may be saving for a rainy day. Technomic President Darren Tristano includes meal kit services like Blue Apron and third-party delivery services on the list of competitors.
Private-equity funds and other investors have poured money into the industry in the last few years, changing both the pace and character of restaurant development. “For many, many years, we saw the expansion flattening out. During that time, we saw some of the big-footprint restaurants close,” says Tristano. “Now we’re seeing bigger restaurants.”
6. The new normal
What may seem like an extraordinary time is just an unfamiliar new reality for the business. Liz Smith, CEO of Outback parent Bloomin’ Brands, noted that visits to casual-dining restaurants have decreased steadily for 11 years, but the pain was deferred by discounting to pull diners. “We’re looking at a more mature industry where it’s harder to grow,” Tristano adds.