Higher prices are hurting restaurant traffic

Companies such as McDonald’s and Starbucks are still losing customers, and inflation is one reason, says RB’s the Bottom Line.
Photograph courtesy of Starbucks

The Bottom Line

Restaurants still have a traffic problem, and the third quarter proved that.

Just yesterday, for instance, Starbucks said that its U.S. same-store sales rose 4%. But its transaction count declined 1%. That means customers paid higher prices and bought more expensive drinks but ordered less often.

Also, Shake Shack said its traffic declined 4% “as the company continues to execute on its long-term growth strategy through increasing market share.”

Other burger chains have had traffic challenges, too. Habit Restaurants earlier in the week reported a 3.6% increase in same-store sales that masked a 3.4% decrease in transactions. McDonald’s and Burger King both reported traffic declines in the U.S.

Likewise, Dunkin’ lost customers last quarter. So did Chipotle Mexican Grill.

None of this should have been a surprise. Industry traffic fell throughout the quarter, according to the Technomic Chain Restaurant Index and Black Box Intelligence. Readers of this space know that restaurant supply is outpacing consumer demand despite a strong economy and rising wages.

The simple fact is that traffic remains a challenge so far in 2018 as consumers spread out their dining or just stay home. We’ve covered the reasons ad nauseam, blaming everything from lower food-at-home prices to too many restaurants and competition from independents and small chains. All of which remain perfectly plausible.

Here’s another potential problem, however: inflation.

As the Wall Street Journal noted earlier this week, many U.S. companies are raising prices, betting that consumers with more money to spend are OK with paying more for the products and services they use.

Coca-Cola, Clorox, Kellogg and others have all been raising prices, the Journal said, warning that “at some point, higher prices could damp the economy’s growth.” The WSJ included McDonald’s in its piece, but could just as well have said anybody—chains such as Wingstop and Chipotle, in particular, raised prices aggressively last year.

Consumers have only so much money to spend, and though wages are finally starting to increase as low unemployment intensifies competition for workers, higher prices could limit budgets and, therefore, dining occasions.

The Consumer Price Index rose 2.3% in September year over year, according to federal data.

The bigger problem for restaurants, however, is that their prices are rising far higher than grocery prices.

Food-at-home prices are up just 0.4% annually, while restaurant prices are up 2.6%, a gap of 2.2 percentage points. The inflation gap has been there for three years now and partially explains why consumers have been eating out less.

It’s easy to cut out restaurants when budgets get tight. And if consumers are paying more for things like transportation or housing or plane tickets or bleach, they will likely cut extra spending, and many consumers could simply reduce a dining occasion or two every week. 

Investors are blowing it all off: The good news for many of these restaurants is that investors appear to be giving them a break.

Starbucks stock, for instance, is up 10% through midmorning on Friday despite those traffic challenges. Stock in McDonald’s and in Dunkin’ both spiked following their earnings reports.

To be sure, some companies did get punished. Shake Shack, for instance, is down 11%, even though at least one analyst said the company had a “solid earnings report.”

Then there’s the weird reaction at Habit, which skyrocketed 11% in off-hours trading Thursday after market and Wednesday before market. It then proceeded to plunge 19% Wednesday.

Habit has almost entirely regained that day’s losses since then, however. After all the dust has cleared, it is up 4% since market close Tuesday.

Stock movements are all about expectations and outlooks. In the case of Starbucks, the company beat reduced expectations and the stock surged as a result. The same was true with McDonald’s as well as Chipotle.

But if inflation remains a problem, these traffic challenges could continue into the future.

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