As if a string of weaker-than-expected sales results on earnings calls laced with pulled guidance and proposals for new value offers weren’t enough of an indication, a key credit ratings agency has lowered its outlook for the U.S. restaurant industry to “deteriorating.”
Fitch Ratings on Friday lowered its outlook for the restaurant sector from “neutral,” citing many of the same factors that industry executives have been repeating ad nauseum in recent weeks: weakening consumer sentiment amid mounting inflationary pressures.
Fitch expects that spending at restaurants and bars this year, or “food-away-from-home” spending, could experience a “low-single-digit decline,” compared with previous expectations of flat to slightly positive growth.
That decline is expected to be driven by traffic, as average ticket is expected to remain flat.
All this could happen as restaurant costs increase. Fitch expects that U.S. immigration policies, including mass deportations and immigration restrictions, could tighten the domestic labor supply and drive up wages.
Tariffs, meanwhile, could result in higher costs for food and equipment.
Food and labor each account for about a third of restaurants’ costs, so the dual inflationary pressures would put considerable pressure on industry profitability at a time when demand is weak as it is.
Fitch expects full-service restaurants, which are generally more expensive, are the most at risk as consumers trade down to cheaper alternatives. Pricing power could be limited, too, as consumers are already fatigued by rising menu prices.
The bigger risk is for smaller and midsized chains. Larger, publicly traded companies have the advantage of scale and supply chain management that should help them withstand many of these cost increases, Fitch said.
Restaurant chains have reported a string of weak earnings in recent weeks, and concerns appear to be broad-based and not limited to any one sector. McDonald’s, whose same-store sales declined 3.6% in the first quarter, largely blamed uncertainty. Executives said lower and middle-income consumers were cutting back the most.
“Geopolitical tensions dampened consumer sentiment more than we expected,” CEO Chris Kempczinski said.
“Consumer sentiment has been shaken,” Denny’s CFO Robert Verostek told analysts earlier this week. Denny’s kicked off a buy-one, get-one promotion in April after its weakest performance in four years.
“They’re eating at home more frequently than eating out,” Chipotle CEO Scott Boatwright said after his chain’s first post-pandemic same-store sales decline.
Members help make our journalism possible. Become a Restaurant Business member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.