Everything you thought about the restaurant business was turned on its head last quarter, at least if you look at the relatively limited group of publicly traded companies.
Some of the strongest chains in that group are concepts you wouldn’t think to be strong performers, such as Applebee’s and BJ’s Restaurant & Brewhouse. And some of the worst are growth chains such as Bartaco and Zoes Kitchen.
Yet it’s no longer so simple to say that customers are abandoning casual dining or flocking to fast casual or vice versa. Even within those sectors, in fact, there are big winners and big losers and massive performance gaps between them, proving that customer choice is winning the day.
Median 3Q SSS by Sector
Winner: Casual dining
Broad-scale sales indexes don’t do the casual-dining sector many favors. Casual-dining sales and traffic have been weak all year, according to the Technomic Chain Restaurant Index. That includes a 5% sales decline in September.
But among the publicly traded universe, casual dining performed relatively well, as chains such as Applebee’s (7.7% same-store sales growth) and BJ’s (6.9% growth) offset weaker performers such as Cheddar’s Scratch Kitchen (down 4%) and Bartaco (down 7%).
Median same-store sales growth was 1.8% for the group, and 20 of the 29 publicly traded casual-dining chains reported at least flat same-store sales for the quarter.
It’s a start. And it might be an indication that store closures at numerous chains such as Logan’s Roadhouse and Ruby Tuesday, along with slowing growth within the sector, could be helping those chains’ unit economics.
Loser: Fast casual
If you look at the below graphic, you will see that median fast-casual same-store sales rose 3.6% in the third quarter. But remove two chains that got strong, weather-aided results in Taco Cabana (up 12.2%) and Pollo Tropical (up 6.5%) and the group’s performance was actually down slightly.
Zoes Kitchen same-store sales declined 7.6%, while chains such as Pie Five, Shake Shack and Potbelly all saw decreases. Even a chain like Chipotle, which reported 4.4% same-store sales growth, is still losing traffic.
To be sure, broader indexes that include private chains have reflected more brightly on the sector—it’s been the strongest performing sector all year, according to Technomic. But growing competition, particularly in many urban and suburban markets, might be flooding the sector with supply and hurting same-store sales.
Winner: Price increases
A lot of chains were the beneficiary of strong price increases. Many of Wingstop’s operators raised prices late last year to combat high wing prices, helping that chain’s 6.3% same-store sales growth along. Chipotle’s same-store sales were driven by a 5% price hike.
McDonald’s 2.4% same-store sales rise featured a price increase and higher average check. Same with Starbucks. Habit Burger Grill likewise generated its 3.6% growth because its customers paid more when they dined there.
Loser: Frequency
The price hikes and larger-sized orders at many of these chains masked traffic challenges. While Wingstop generated traffic growth, Chipotle, McDonald’s, Starbucks, Habit and many others saw declines in customer count.
The inability of chains to convince customers to come in more often, even with historically low unemployment, remains one of the industry’s big head-scratchers at the moment.
Winner: Mother Nature
Weather played a big role in many chains’ sales results last quarter. Bartaco’s decline was due at least in part to weather, according to parent company Del Frisco’s. On the other end, Taco Cabana’s 12.2% same-store sales were the result of easy comparisons. A year ago, the chain’s same-store sales plunged due to Hurricane Harvey.
The same thing was true at Pollo Tropical, where same-store sales rose 6.5%—they had fallen 10.9% in the same quarter a year ago.
Loser: Burgers
The one conclusion you can legitimately draw from the third quarter is that it was tough to be a burger chain.
Sure, McDonald’s same-store sales rose 2.4%, Fatburger’s rose 8.3% and Sonic Drive-In’s 2.6%, but for the most part it was tough to be a chain that featured ground beef. Steak ‘n Shake’s same-store sales fell 4%. Fuddrucker’s was down 3.6%. Red Robin declined 3.4%. Burger King and Wendy’s both fell. And Habit saw a traffic decline despite its own growth. So did McDonald’s.
Winner: Customers?
As mentioned above, customers are not necessarily gravitating toward one sector so much as they are picking winners within those sectors.
For instance, Applebee’s same-store sales rose 7.7%, while another bar and grill chain, Cheddar’s, saw a 4% decline—a gap of 1,130 basis points.
Fatburger’s same-store sales rose 1,230 basis points more than Steak ‘n Shake’s. Domino’s same-store sales rose 6.3% while rival Papa John’s same-store sales plunged 9.8%—a gap of 1,610 basis points.
It’s difficult, and frankly inadvisable, to draw too many conclusions from one quarter. Many of those situations had their own explanation. And things change quickly in this business. A year ago, Applebee’s operators were in a panic. Many are now celebrating strong sales.
But in the current environment, where customers are flush with choices thanks to years of supply growth, they are avoiding chains that don’t perform the way they want. And they are gravitating toward concepts with good food or good marketing or good locations or good offerings.
And that’s a trend we’ve seen for several quarters now.
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