Retailers appear to be bracing for a tough few months. Maybe restaurants should pay attention.
Best Buy, the Minneapolis-based electronics retailer, on Tuesday said its same-store sales declined 6.9%, below its already low expectations. CEO Corie Sue Barry, the company’s CEO, said that consumer demand softened throughout the quarter, according to a transcript on the financial services site AlphaSense.
The company also lowered its revenue outlook for November. “Consumers are looking for deals, and they’re looking for value,” CFO Matthew Bilunas said.
Other retailers echoed similar commentary. “Sales have been somewhat uneven, an this gives us reason to think slightly more cautiously about the consumer versus 90 days ago,” Walmart CFO John Rainey said, according to AlphaSense.
“Consumers continue to rebalance their spending between goods and experiences to make tough choices in the face of persistent inflation,” Target CEO Brian Cornell said. “Consumers are still spending. But pressures like higher interest rates, the resumption of student loan repayments, increased credit card debt and reduced savings rates have left them with less discretionary income, forcing them to make trade-offs in their family budgets.”
Restaurants, by contrast, have taken a more optimistic approach to the state of the economy.
This isn’t to say that they’re not worried about that. But operators are more optimistic about the state of their businesses and their prospects for traffic growth than it would seem given the state of the consumer. And restaurant executives were far from united in their views on the consumer and the economy.
“We’re not putting in here that we’re thinking we’re going to go into a recession,” BJ’s Restaurants CEO Greg Levin told analysts, according to AlphaSense. “I don’t think you can necessarily build the business for the future going, ‘There’s going to be a recession.’”
Burger King said it saw traffic growth among consumers making less than $100,000. But those consumers are flocking toward value options, such as the chain’s Royal Crispy Wraps and the Whopper Junior Duo for $5.
“These categories are the same as pizza,” Patrick Doyle, CEO of Burger King parent Restaurant Brands International, told investors earlier this month. “They’re not recession proof. They’re recession resistant.”
And, he said, the economy continues to add jobs. “They’re driven by employment,” Doyle said. “As long as employment levels stay solid, I think the category is going to do absolutely fine.” This was a generally common line from major fast-food executives.
Restaurants cater to specific groups of customers, while the giant retailers tend to have broader swaths of consumers. And economic downturns, whether they result in a recession or not, tend to have a bigger impact on some groups than on others. And that might be key to some of the differences in views between the different industries and even the different companies within the restaurant business.
At the same time, there is a lot of evidence that inflation in the restaurant business, and particularly at fast-food chains, is giving consumers fits. Prices at limited-service restaurants have risen nearly 30% since 2019 and continue rising at a rate faster than inflation.
Consumers do appear to appreciate companies that hold the line on pricing, at least based on quarterly earnings.
“We have watched as many brands have increased menu prices,” said Rob Lynch, CEO of Papa Johns, one of the only chains to generate traffic growth last quarter. “We have found other ways to drive restaurant profitability and have executed a thoughtful approach to manage price and promotions. As a result, we believe that our products offer an attractive value proposition to consumers compared to other QSRs.”
Cava reported some of the industry’s strongest traffic growth last quarter, and credited its conservative pricing for the improvement. “We have been leaning into our value proposition,” CEO Brett Schulman said, according to AlphaSense. He noted the company has taken less price than competitors, which has “translated to the results this quarter and what we’re leaning into next year.”
The economy is in an uncertain place. Consumers do have jobs, which does drive a lot of restaurant sales.
But the challenges that Cornell mentioned are real, and limit consumers’ spending power.
Restaurants have raised prices aggressively in this environment. Yet consumers are telling us that this inflation has been too much, and they question how much it’s worth it, which could make traffic even more of a challenge in the coming year. Indeed, more consumers are already going to grocery stores to get their prepared meals.
Maybe more operators should heed the warnings coming from retailers.