The burger business takes a big hit

Chains like McDonald’s and Shake Shack find themselves torn between pricing and traffic, says RB’s The Bottom Line.
Photograph courtesy of Wendy's

The Bottom Line

IHOP picked the wrong quarter to focus on burgers.

The family dining concept, if you recall, “changed its name” to IHOb as a marketing gimmick to highlight burgers.

The result was a 0.7% same-store sales increase for the quarter and, while that campaign was only in place for a few weeks during the period, it had relatively little impact on the chain’s overall performance during the period.

As it turns out, however, other burger chains struggled, too, to the point where we might wonder whether we’ve reached peak burger.

For instance, among the major fast-food burger chains, the best performance came from McDonald’s, where same-store sales rose 2.6% in the second quarter. No other burger-centric chain, regardless of service style, performed as well.

But traffic fell, as customers paid higher prices or bought more items or both.

Wendy’s 1.9% was higher than investors expected and did come with traffic growth. But customers focused on lower cost items from its 4-for-$4 value menu and a 50-cent Frosty deal.

Busted Burgers?

Overall, same-store sales of the five major burger chains, also including Burger King, Sonic and Jack in the Box, averaged 1.3% in the second quarter. That’s not exactly world-beating, and traffic likely declined for the group.

And yet, things appear to be even worse for burger-centric chains outside of that group.

No company struggled nearly as much as Steak ‘n Shake. The hybrid family dining-quick service chain’s same-store sales fell 3.4%, and traffic declined 6.4%. The company doesn’t do earnings calls and its executives don’t talk to the media so we can only guess as to why.

The two fast-casual chains among the publicly traded universe also saw a customer count decline.

Habit Restaurants’ same-store sales rose 1.2%, but transactions declined 3.3%.

Shake Shack, meanwhile, reported 1.1% same-store sales growth. But traffic fell 2.6%.

Then there’s Red Robin, which earlier this month pre-reported an unexpectedly poor 2.6% decline in same-store sales. Traffic fell 0.7% despite lower average check thanks to the chain’s Tavern Double menu.

The problems at the burger chains are illustrative of the challenges facing the broader industry at the moment. Consumers, for whatever reason, are not eating out as much as the economy suggests they should.

That has chains facing a major choice: Do they push lower-cost items in a bid to generate more traffic, or do they raise prices and push higher-end items, sacrificing traffic in the name of profits?

Wendy’s pushed its value menu and performed well. Similarly, Burger King used numerous deals like a 2-for-$6 promotion, a $3.49 meal deal and $1.69 Chicken Fries. Its same-store sales rose 1.8%.

On the other end are companies like McDonald’s and Jack in the Box that are insisting they won’t dive full-on into the value wars.

“We don’t strive to win on value,” McDonald’s CEO Steve Easterbrook said last month, “but we won’t lose, either.” His chain introduced a $1 $2 $3 Dollar Menu earlier this year and has since the earnings call introduced a 2-for-$5 sandwich offer.

Similarly, Jack in the Box CEO Lenny Comma said his chain is “avoiding the potential longer-term consequences of training customers to only come to us when we are offering an aggressive deal.”

McDonald’s, Jack in the Box and the two fast-casual chains appear willing to sacrifice traffic in the name of maintaining sales as well as the brands’ respective reputations. So has Steak ‘n Shake, whose results implied a 3% increase in average check that was apparently enough to send traffic plunging.

The problem with all of these results is that they are not normal, not in a time when the economy continues to expand and unemployment is low. In fact, the difficult balancing act these chains are performing is reminiscent of the one they displayed during the height of the recession.

No wonder IHOP is back focusing on pancakes again.

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