Photo by Spencer Davis on Unsplash
McDonald’s is the sales standout, and they are in a class by themselves, providing value and upgraded quality to a population hungry for price/value. Taco Bell is also an exception, for similar reasons. Even Domino’s and Wingstop, who have put up great numbers in recent years, are reporting only modest gains at the moment.
RESTAURANT MAIN STREET – WHAT’S HAPPENING ON THE GROUND??
By Roger Lipton
We have long believed that the restaurant industry provides an excellent leading indicator as to consumer sentiment. It is much easier to adjust dining habits, every day, than to plan and spend for large ticket items.
Quite a few restaurant companies have reported their quarterly results, ending 6/30. The sales and traffic trends, collectively, indicate that not much has changed in terms of consumer optimism. The table below provides the reported results for comp sales, including a breakdown, mostly provided by company operated locations, relative to traffic, pricing and menu mix. Also shown on the table are the outlook, when provided, relative to commodity and labor expense.
No Meaningful Improvement
The company operators show, with just a couple of important exceptions (Chipotle and Starbucks) modest comp gains, more than offset by pricing and menu mix, so traffic is negative almost everywhere. The only other outlier is Diversified Restaurant Holdings, franchised operator of the Buffalo Wild Wings system, going against very easy comparisons. Most importantly, In terms of third quarter to date, virtually no one is guiding toward a meaningful improvement. In our view, Chipotle and Starbucks (with the strongest trends) can be viewed as “special situations”. Chipotle is bouncing back from their multi-year troubles and doing a great job with mobile app/delivery, and Starbucks is the premier worldwide brand selling an addictive product by way of an extraordinary employee culture and great technology.
The franchising companies that have reported are showing a similar trend, modest sales gains in almost all cases. The franchising companies steer away from reporting traffic, but it is safe to assume that pricing and sales mix trends are similar, so traffic is no doubt down. McDonald’s is the sales standout, and they are in a class by themselves, providing value and upgraded quality to a population hungry for price/value. Taco Bell is also an exception, for similar reasons. Even Domino’s and Wingstop, who have put up great numbers in recent years, are reporting only modest gains at the moment.
Delivery On The Rise
It’s important to note that, within the sales mix, delivery, curbside and in-store pickup, are rapidly increasing portions of the revenue mix, so dine-in traffic is down materially more than the comps that are reported. We haven’t heard any restaurant company bemoan, though they could, the fact that their physical plants are only fully utilized a few evenings per week.
In addition to the sales and traffic trends, we are equally interested in the commentary relative to cost expectations, namely commodities and labor. Expectations are mostly higher for commodity costs, dramatically so for chicken wing prices. It is clear that the benefit a year or so ago from lower commodity prices is in the rear view mirror, and higher cost of goods is likely. Labor expense, predictably, is expected to move ever higher.
CONCLUSION:
The beat goes on. With prime costs, as well as other expenses such as insurance, common area charges, utilities, etc. also increasing, it takes more than two or three points of comps to improve margins. A handful of the larger premier operators such as Starbucks, McDonald’s, Darden, Domino’s and Wingstop continue to provide better the best results. However, even among these “best of breed” operators, it’s a battle for market share and an increasing challenge to generate a worthwhile return on incremental investment.
Roger Lipton
====================================================================
About Roger Lipton
Roger is an investment professional with over 4 decades of experience specializing in chain restaurants and retailers, as well as macro-economic and monetary developments. After earning a BSME from R.P.I. and MBA from Harvard, and working as an auditor with Price, Waterhouse, he began following the restaurant industry as well as the gold mining industry. While he originally followed companies such as Church’s Fried Chicken, Morrison’s Cafeterias and others, over the years he invested in companies such as Panera Bread and shorted companies such as Boston Chicken (as described in Chain Leader Magazine) .
