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3 Distinct Trends Segregating Restaurant Companies into Victors And Underperformers

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(CTN NEWS) – Amidst the complex web of challenges encountered during the second quarter, restaurant enterprises can be classified into two distinct groups: the triumphant and the less fortunate.

Several establishments revealed that their elevated menu prices had an adverse impact on patronage, whereas others maintained that consumer behavior exhibited steadfast constancy despite the escalating costs of victuals and libations.

The implementation of promotional strategies either enticed patrons towards particular eateries or failed to leave an impression, as discerning diners prioritized value.

Additionally, while some less affluent clientele displayed heightened patronage towards specific dining establishments, they chose to abstain from visiting other gastronomic venues.

Shifting Trends: Decline in Foot Traffic and Divergent Trajectories of Restaurant Chains

In a broader context, there has been a palpable decline in foot traffic to dining establishments. The momentum of sales growth has slackened, attributed to a deliberate postponement of further escalations in pricing, which was a driving force behind robust revenue figures witnessed a year ago.

Customers have adopted a discerning approach to their monetary expenditures, a meticulous scrutiny extending to their dining preferences, thereby accentuating the divergent trajectories charted by various restaurant chains.

Although the majority of restaurant enterprises exceeded earnings projections, a subset of them fell short of Wall Street’s expectations concerning their quarterly revenue figures.

The second quarter bore witness to exceptional financial performance from McDonald’s and Wingstop, as both corporations reported earnings, revenue, and same-store sales growth that outpaced analysts’ projections, an anomaly within this quarter’s context for restaurant establishments.

On the flip side, Papa John’s, Wendy’s, and Chipotle Mexican Grill stood amidst the cohort of companies that failed to satisfy investors with their sales figures, falling below anticipations. As of yet, the stock valuations of these three entities have not recuperated.

The ensuing are three distinct trends that fundamentally shaped the quarter’s dynamics, consequently delineating the chasm between those who emerged triumphant and those who found themselves in the less auspicious camp:

Restaurant Traffic

The trajectory of a company’s same-store sales growth is shaped by two pivotal metrics: the magnitude of each customer’s expenditure per order and the frequency of their visits to the restaurant chain.

In a climate where dining establishments defer further increases in pricing and patrons exercise cautious financial restraint, restaurants find themselves reliant on the latter metric—foot traffic—to fortify their same-store sales figures.

This dynamic is under intense scrutiny from the financial sector.

“As a gauge of a concept’s vitality, investors undoubtedly yearn for robust foot traffic,” remarked TD Cowen analyst Andrew Charles in conversation with CNBC.

Noteworthy among the limited few are McDonald’s, Chipotle, Texas Roadhouse, and Wingstop, which reported a surge in U.S. foot traffic during the latest quarter.

Conversely, Restaurant Brands International disclosed a decline in U.S. foot traffic for three of its banners: Popeyes, Burger King, and Firehouse Subs. Wendy’s, a rival contender, noted a 1% contraction in its domestic transactions during the second quarter.

Prospecting forward, the second half of the year could potentially witness an even steeper drop in foot traffic.

“Looking ahead to the latter part of 2023, the acceleration of menu price reduction is likely to outpace inflation’s influence on prices.

Unless an abrupt reversal in foot traffic materializes, the comparative figures are poised to exhibit a conspicuous decline,” articulated Barclays analyst Jeffrey Bernstein in an advisory message to clients on August 11.

“In our perspective, this projection does not augur well for the forthcoming performance of restaurant stocks in the subsequent months.”

Value Perception

While inflation’s intensity is waning and an increasing number of economists are prognosticating a “gentle descent” rather than a recession, consumers are persistently in search of value.

On a broad scale, the realm of fast-food has reaped the rewards of consumers transitioning from fast-casual eateries to more economical options such as burgers and tacos. However, the perception of value varies perceptibly among different restaurant chains.

Illustratively, Chris Kempczinski, CEO of McDonald’s, noted the chain’s commendable performance among consumers earning less than $100,000 annually, as well as those with incomes below $45,000.

In stark contrast, Wendy’s CEO Todd Penegor observed a reticence in diners earning less than $75,000, resulting in decreased patronage at the burger establishment.

Conversely, Wingstop reported an amelioration in its patrons’ perception of value, which coincided with a dip in chicken wing prices.

“In an environment where numerous brands are encountering a decline in value scores among guests, we are witnessing encouraging trends,” affirmed Michael Skipworth, CEO of Wingstop, during an analyst briefing.

Competing fast-casual contender Chipotle has also reaped benefits from the favorable perception of value associated with its burrito bowls.

CFO Jack Hartung conveyed that the establishment has observed an increase in the return of low-income consumers to its premises compared to the previous year.

Nonetheless, the frequency of visits by Chipotle’s low-income clientele has diminished in the wake of the acceleration of inflation. The chain has temporarily ceased implementing price hikes, deferring a decision on potential future increases until closer to the fourth quarter.

In contrast, one fast-casual chain has grappled with consumers’ assessment of its value proposition.

Noodles & Company experienced a drastic decline in foot traffic by double digits during the initial phase of the quarter, as patrons responded unfavorably to the elevated prices—a 13% increase from the corresponding period the prior year.

As a responsive measure, Noodles instated a 3% reduction in prices and realigned its marketing efforts towards an emphasis on value.

Promotions

In the ongoing pursuit of value, both dining establishments and patrons have placed significant emphasis on discounts and combo meals, capturing the spotlight in marketing endeavors.

Concurrently, the introduction of limited-time menu offerings played a pivotal role in augmenting sales for certain eateries, although it fell short in mitigating vulnerabilities for others.

At one end of the spectrum, McDonald’s orchestrated a notable feat. The launch of the Grimace Birthday Meal catalyzed fervent discussions across social media platforms, translating into heightened foot traffic at their establishments.

“In essence, the theme for this quarter was, to be candid, Grimace,” elucidated CEO Kempczinski during the company’s conference call.

The promotional campaign showcased the ephemeral purple Grimace milkshake alongside foundational menu selections, such as the choice between a 10-piece McNugget or a Big Mac. The campaign effectively harnessed nostalgia linked to the mascot’s legacy.

However, not all promotional ventures contributed positively to the financial performance of dining establishments.

For instance, Papa John’s introduced the Doritos Cool Ranch-flavored Papadias in May, priced at $7.99. The limited-time menu addition similarly generated significant traction on social media platforms and led to an upswing in foot traffic.

Nonetheless, the newfound Papadias contender proved insufficient in competing with the allure of the chain’s previously released pepperoni-stuffed crust pizza, unveiled a year prior at a price point of $13.99.

“The augmentation in foot traffic failed to counterbalance the reduction in average transaction value, thereby culminating in a decrement in same-store sales,” analyzed Peter Saleh, BTIG analyst, underscoring the nuanced dynamics at play.

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