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Are consumers trading their burgers for steak?

The diverging performances of chains such as Outback Steakhouse and Steak ‘n Shake show an economy heading in two directions, says RB’s The Bottom Line.
Photograph: Shutterstock

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In today’s story about Technomic's Top 500 Chain Restaurant Advance Report, there is this little nugget: Steak chains killed it last year.

Full-service steak chains’ annual sales rose 5.6% in 2018. That is far above the 1.6% total average for full-service restaurants. It’s also more than double the next strongest-performing category, family-style restaurants, where sales rose 2.5% on a much, much smaller base of restaurants.

That is probably as clear a sign as any that the strong economy is providing a nice tailwind for at least one segment of the restaurant industry.

“People are feeling good about the economy,” Technomic Managing Principal Joe Pawlak said. “They have money in the pocket. And so they go for upscale steak. That’s where people are treating themselves.”

We’ve also been writing about the relatively weak performance of fast-food burger chains. Overall, sales at burger chains in the Top 500 rose just 2.3% last year, well below the overall 4.3% increase for limited-service concepts.

One of those burger chains, Steak ‘n Shake, reported a 5.1% annual decline in same-store sales and a 7% decline in customer traffic.

So are consumers trading their burgers for steak? Maybe some of them are, but it suggests a deeper issue, one in which the two sectors’ respective customers are on divergent economic tracks.

It’s important to note that the increase in steak chains’ sales would register barely a blip at burger chains. McDonald’s U.S. system sales were more than three times the sales for the entire full-service steak sector.

But there are other signs of a strong economy besides the steak business. Chick-fil-A, which has a higher check average than any of the major burger players, did well again. So did No. 39 Culver’s, where sales rose 10.5%.

Meanwhile, the high end is performing just fine. Fine-dining chains’ sales rose 4.2%, better than the 3.4% growth the previous year. The only segment that performed better? Fast casual, where sales slowed to 7.3% from 8.5%. But those chains are quickly maturing and have been targeting higher-end consumers for years.

Steak might be the strongest-performing sector in the restaurant business. Same-store sales at Texas Roadhouse rose 5.6% in the fourth quarter ended Dec. 25, for instance. And Outback Steakhouse flourished in 2018, with a 4% same-store sales improvement that was its best performance in six years.

“We see the industry environment as being a comfortable environment for the consumer,” Liz Smith, CEO of Outback parent company Bloomin’ Brands, said on the company’s earnings call this month, according to a transcript from document service Sentieo. “So low unemployment, there’s a high disposable income, so we think there will be a positive macro environment.”

Executives of fast-food burger chains have a different view of the economy.

“As you look at that income growth, it skewed significantly to higher-income households,” Wendy’s CEO Todd Penegor said in November, according to a transcript of the call from Sentieo. “You do have workforce participation remaining well below prerecession levels, and real wage growth is still not accelerating to the extent that we had all hoped for.”

As such, the booming economy might provide more of a benefit for some than for others. Lower-end consumers that frequent burger chains such as Wendy’s and McDonald’s and Steak ‘n Shake aren’t doing as well, and so they don’t dine out as often.

But for customers of Texas Roadhouse and Outback Steakhouse? The economy is booming.

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