Consumers are slashing restaurant spending, but executives say it won’t affect all chains.
Howard Schultz
David Ryder | Reuters
Some restaurants are reporting lower sales or lower attendance in the second quarter, indicating that diners are cutting back on their out-of-home meals to save money.
But executives disagree about how consumer behavior is changing and whether it affects their companies.
Chris Kempchinski of McDonald’s and Brian Niccol of Chipotle Mexican Grill are among those who told investors that low-income consumers spend less money at their establishments, while higher-income customers visit more frequently. Other executives such as Starbucks’ Howard Schultz and Bloomin Brands’ David Deno have said they haven’t seen their customers back down.
Mixed observations arise from restaurant companies raising menu prices to account for higher ingredient and labor costs. According to the Bureau of Labor Statistics, the price of food eaten out rose 7.7% in the 12 months ending in June. People are also paying much more for basic necessities like gasoline, toilet paper and groceries, raising concerns about the possibility of a recession.
Historically, the more expensive fast food chains and sit-down restaurants usually see their sales drop during recessions as people choose to stay at home or pack their own meals. Fast food tends to be the most lucrative restaurant sector as people trade in cheaper meals when they want to indulge.
More details about how food habits may change will come next week when salad chain Sweetgreen, owner of Applebee Dine Brands and Dutch Bros Coffee report earnings.
Here’s what the restaurant companies are saying.
Hunt for deals
“It shows that people are looking for good value for money,” Seal said in an interview with CNBC.
This week, Yum Brands reported a decline in sales at its KFC and Pizza Hut stores in the US in the second quarter, although sales rose at Taco Bell. CEO David Gibbs told investors that the global consumer appeared to be more cautious and that the US low-income consumer cut spending even more.
But Gibbs also warned that it is difficult to generalize about the state of the consumer. He noted many factors driving behavior, including inflation, the absence of last year’s stimulus checks, people working from home, and people going out again after the pandemic.
“This is truly one of the most challenging environments we have ever seen in our industry,” he said.
Chuy’s Tex-Mex, which has offices in 17 states, said it is seeing a massive slowdown in consumer demand that cannot be disaggregated by income levels. The fast food chain also blamed record high temperatures in Texas for preventing diners from sitting outside, where they tend to drink more alcohol.
Still spending
Starbucks’ Schultz said the company hasn’t seen coffee drinkers cut their spending. He explained this by the network’s pricing policy and high customer loyalty. Starbucks reported a 1% increase in transactions in North America in its fiscal third quarter.
Some restaurant companies have focused on keeping prices relatively low in order to attract consumers and gain market share over competitors. For example, the owner of Outback Steakhouse Bloomin’ Brands said he decided not to raise prices in order to fully offset inflation. Instead, menu prices rose just 5.8% in the second quarter.
As a result, the company said it did not see visitors cutting costs.
“At this point, we don’t see consumers disposing of their checks,” Bloomin’s Deno said Tuesday. “In fact, across some of our brands, we are seeing continued growth in sales.”
To dampen inflation, Bloomin is phasing out discounts and limited-time promotions and is focusing on cutting costs elsewhere. Outback traffic has dropped from 2019 levels.
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