Noodles & Co. had a brutal quarter. Its same-store sales fell 5.5% in the period. Revenues declined. The company reported a net loss. The biggest problem? Traffic fell 9.1% in the period. As my colleague Lisa Jennings wrote, that included an ungodly 14% decline in April.
It’s not the only one. Evidence is mounting that the restaurant consumer is pushing back on price hikes and adjusting their dining habits after two years of heavy inflation. As we wrote about last week, Papa Johns argued that overly-aggressive franchisee price hikes hurt customer order count and, therefore, same-store sales.
Unsurprisingly, executives are shifting more of their attention to traffic. We heard that mentioned several times during earnings calls so far this quarter. “Traffic is a big focus for us” at Burger King U.S., Restaurant Brands International CEO Josh Kobza told investors this week. “It has been and will be into the remainder of this year.”
And there’s clear evidence that chains are planning to hold the line on price increases from now on. Limited-service menu prices were up just 0.2% in July from June, according to new federal data released Thursday, a substantial slowdown from recent months where prices were up consistently in the 4% to 6% range.
“To be clear, for the moment, there’s no additional pricing baked in for the rest of the year,” Wendy’s CFO Gunther Plosch told investors on Wednesday. Wendy’s took a price increase in May.
Most limited-service restaurant chains that have reported thus far have same-store sales numbers that are below the 8% average menu price inflation for limited-service restaurants over the second quarter. Chains’ average same-store sales were 4% below inflation, in fact. Only three of the chains that have reported earnings—McDonald’s, Burger King and the ridiculous Wingstop and its 16.8% same-store sales growth last quarter—were above that figure.
That does not mean all those under, such as Starbucks and its 1% traffic growth, had lower traffic. And Burger King notably had a traffic decline. Shifts in average check also play a substantial role in same-store sales data, as do comparisons. Indeed, at least some of the inflationary shortfall may be due to shifts in consumer behavior back toward more normalized levels of spending and away from the group buying that was indicative of the pandemic era.
Still, the shortfall is an indication that the industry could not keep pace with its own price hikes.
Restaurants raised prices aggressively to maintain some level of margin, and many executives continued to argue that consumer pushback was limited or nonexistent. Restaurant margins took a massive hit last year as labor costs took off and so did food costs.
Many limited-service brands are franchised, meaning they rely on those margins. Many brands and franchisees struggled to emerge out of that period intact. So, the incentive was largely on price hikes.
Executives are wary, however, that consumers may start watching their spending. “Balancing between premium and value is critical to driving transactions,” Jack in the Box CEO Darin Harris told investors and analysts on Wednesday, according to a transcript on the financial services site Sentieo/AlphaSense. “We’re just paying close attention, not that anything has shifted yet. We’re anticipating that small shift.”
There are indications that the economy is leading customers to change their behavior. Chains like McDonald’s and Wendy’s have said they’re getting customers “trading down” from more expensive casual dining and they say that they’re getting a higher share of higher-income consumers that are watching their spending.
Fast-food brands can thrive during difficult periods for the consumer because they have a natural value advantage, generating trade-down business even as some of their core lower-income consumers cut back on dining out. And thanks to their loyalty programs, many of them can avoid large-scale discounts by courting customers through their apps.
That has apparently worked well for McDonald’s. Traditionally a key value player, the chain has almost completely ignored any sort of national value message like it’s historically done. But check its app and you will find all kinds of offers, many of them aggressive—such as a free Quarter Pounder with the purchase of a Big Mac or 10-piece Chicken McNuggets.
More brands are getting in on the act. Dutch Bros, the drive-thru beverage chain, changed its loyalty program in March to enable more such offers. Its same-store sales improved by 580 basis points last quarter.
While executives say they haven’t seen much of a value shift yet, there is wide anticipation that will happen. Consumer credit remains abnormally high, which could portend to a slowdown in spending. We also remain convinced that the return of student loan repayments later this year will lead to a cutback in spending by a large swath of Americans that could hit many brands.
But just fundamentally, with inflation improving, brands now see that it’s time to rebuild traffic they’ve lost. Even brands seemingly thriving, such as Starbucks, have not recovered traffic lost since 2019. Burger King, which is seeing sales recovery following a particularly difficult 2022, is also working to bring customers back. It believes its investments in marketing and operations will help that.
“It’s getting better, but it’s still slightly negative,” Kobza said. “I think our goal for sure in the next couple of quarters is to turn that to flat and then positive over time.”
There is also a lesson to be learned from the Noodles experience. The brand, much like a large swath of the industry, raised prices to maintain margins, with seemingly little pushback. In March, when the company told investors about further price increases in February, there were no questions about the consumer reaction, according to a transcript. Three months later, executives warned that traffic would be worse than expected, even after it shifted to value to get customers back in the door.
On Thursday, the company’s stock was down more than 11%, falling below $3. That was an all-time low.