Are consumers changing their dining habits because of an apparently looming economic recession?
The answer probably depends on the restaurant. Industry executives on earnings calls and in interviews have given a wide range of answers on the impact of the economy on their consumer. Their answers suggest lower-income diners are pulling back or searching for value, but everybody else is fine.
“It is a weird time,” Tom Stager, CEO of the 290-unit Krystal, said in an interview last week. He said his chain’s volumes are maintaining, though he admits it’s difficult to keep pace with last year’s stimulus-fueled sales. And it often varies from day to day or week to week.
“We do feel a diversity when it comes to customers,” Stager said. “Some days are up, some days are down.”
Several executives have mentioned the state of the low-income consumer, saying they are cutting back.
“In terms of the global consumer, we do think they’re getting more cautious,” David Gibbs, CEO of Yum Brands, told investors last week. His company owns KFC, Taco Bell, Pizza Hut and Habit Burger, making him as much of an authority as anyone on the fast-food consumer.
In the U.S., he said, “the low-income consumer pulling back has become more pronounced. We’ve seen that in our business and we’re reacting accordingly.”
Contrast that with comments from Starbucks Interim CEO Howard Schultz. “We are not currently seeing any measurable reduction in consumer spending or any evidence of customers trading down,” he said.
Quite the contrary. Despite higher prices, consumer traffic rose 1% last quarter. And three-quarters of the chain’s beverage sales are now from cold drinks, which customers are more likely to customize using add-ons.
In other words, while customers at Taco Bell or KFC may be cutting back, Starbucks customers are going more often to buy drinks that are more expensive, and which they make even more expensive with add-ons.
Overall, restaurant spending has continued to increase this spring even through a difficult environment, likely because of higher prices as well as a shift into restaurants from some retailers, where inflation is a bigger concern. Sales at restaurants increased 1% in both May and June, according to federal data. That is less than half the rate of growth in March and April.
Gas prices likely led diners to cut back some of their spending in the second quarter. The good news on that front: Gas prices have been steadily falling ever since. The national average for a gallon of gas is down about $1 from its peak earlier this year, according to AAA.
What’s more, low-income consumers were the beneficiary a year ago of stimulus payments that have since dried up. Domino’s Pizza, which is as in tune with the state of lower-income consumers as any chain in the U.S., suggested that its second-quarter decline in same-store sales was in part due to difficult comparisons related to “stimulus-fueled comps” in recent years.
That said, some companies are pushing lower prices and searching for ways to get reluctant consumers spending.
Denny’s last week said it is embracing value again, sensing a shift in the economy.
At the same time, CEO Kelli Valade noted that consumer spending has been surprisingly resilient to soaring menu price inflation. “The consumer really was, even in this inflationary environment, it’s been pretty resilient,” she said.
But she added that consumers have depleted their savings and other data suggests a consumer pullback. “We’ve seen large retailers talk about increased discounts with excess inventory,” she said. “And in our industry, you just see more value offers.”
Still, broad consumer data would suggest a generally healthy consumer, even if some of them are cutting back on visits because of prices. The economy added another 528,000 jobs in July, fully recovering from the pandemic in the process and sending the unemployment rate to 3.5%. People who are working generally have money to spend and a reason to spend it.
What’s more, many of the people who left jobs during the “Great Resignation” left positions for higher-paying jobs, meaning many of the higher-income consumers are in better shape than they were pre-pandemic.
As such, there are comments like this one from Chipotle CEO Brian Niccol: “The low-income consumer definitely has pulled back their purchase frequency. Fortunately, for Chipotle, that is not the majority of our customers.
“The majority of our customers are a higher-household-income customer. And we’ve actually seen their frequency increase.”
In addition, the “value shift” that some executives talk about may be somewhat overstated. Jose Cil, CEO of Restaurant Brands International, owner of Burger King, Popeyes, Firehouse and Tim Hortons, said that low-income consumers are shifting spending “a little bit.”
“I wouldn’t say it’s a material shift,” he said in an interview. Fast-food restaurants may be getting benefit from trade-down from higher-end concepts. Or they might be getting some spending that would have taken place at grocers.
“We’re seeing customers and specifically lower-income customers trade down to value offerings and fewer combo meals,” McDonald’s CFO Kevin Ozan said late last month. But, he noted, the impact was to a “lesser extent” than other factors in the quarter.
The economy may be slowing restaurant spending, in other words, but not all that much.
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