We just mostly completed a compressed earnings season, with a couple dozen earnings reports over a two-week period. We would generally not recommend anyone listen to that many corporate buzzwords that quickly.
In any event, it’s a weird industry right now, with some mixed results. Average same-store sales are up less than 0.4%, continuing what’s been, overall, a generally weak period. But huge gaps persist, both for the entire group and among competitors, and it can be difficult to draw conclusions.
Nevertheless, here are some crucial takeaways, some of which we gathered using help from the financial services site AlphaSense.
Full-service chains are winning, but not by much
Average same-store sales at full-service brands were up 0.7% among those companies that reported so far. And some chains are absolutely thriving right now, including Chili’s, again, where same-store sales rose 21.4%, and First Watch (7.1%). By comparison, same-store sales at limited-service restaurants were basically flat. And some brands were really struggling, notably Sweetgreen, where same-store sales declined 9.5%.
But there were some intriguing gaps among competitors. Pizza Inn (8.1%) and Domino’s (5.2%) easily outperformed Pizza Hut (-6%) and Papa Johns (-3%). Wendy’s (-4.7%) is well behind top competitors Burger King (3.2%) and McDonald’s (2.4%). So there’s some share shifts.
When consumers are cutting back, they get choosy, and that leads to gaps in performance that may not be so obvious during other periods.
The consumer is bifurcated
A lot of executives talked about consumer pressure. McDonald’s noted that same-store sales among higher-income consumers were up nearly double digits, while sales among lower-income consumers were down as much. “We continue to see a bifurcated consumer base, with QSR traffic from lower-income consumers declining nearly double digits in the third quarter, a trend that’s persisted for nearly two years,” McDonald’s CEO Chris Kempczinski said.
The weakness appears to be particularly acute with younger consumers, as several brands mentioned struggles among that group. Chipotle famously noted that consumers 25 to 35 “face unemployment, increased student loan repayment and slower real wage growth.” The same could be influencing Cava and Sweetgreen, at least in theory.
That bifurcated consumer is clearly influencing the wide range of performance among different chains.
Operational excellence is big
With sales weak and consumers apparently choosy, then it makes some sense that more restaurant chains would focus on service.
The most notable such focus is at Starbucks, which over the summer launched its “Green Apron” service model, with more workers inside its stores at busier times, which speeds service and has led to better sales.
Wingstop is implementing its “Smart Kitchen,” which has also had an apparent impact on customer service scores. Restaurant Brands International chains Burger King and Popeyes are also focused on improving service, arguing that it ultimately leads to better sales.
Rethinking unit count
Restaurant sales challenges also tend to lead executives to rethink the number of locations in the system. That’s been common over the past couple of years and hasn’t stopped this year.
Wendy’s, facing a suddenly steep drop in same-store sales this year, could close 200 to 300 locations, its second straight year of “portfolio optimization.” It joined Jack in the Box and Noodles & Company in closing locations. Noodles credited its closures for its 4% same-store sales growth in part on sales shift from recently closed restaurants.
Value remains crucial
With some 3 in 10 visits to restaurants on a deal, it makes sense that brands are pushing more value.
McDonald’s unleashed its Extra Value Meals last quarter and argued that the effort will build sales and traffic over time. Chili’s and Applebee’s have won over consumers with their own deals in recent quarters. Many brands, notably Papa Johns, complained of the impact the value push is having on their own businesses.
But brands also said they plan to be more disciplined going forward on pricing. Texas Roadhouse plans to maintain conservative pricing even as beef prices have soared. Chipotle, which may be facing serious value concerns, said it does not plan to offset inflation next year with price hikes.