Dining Dilemma: How Consumer Confidence Shifts Are Impacting Restaurants
In the US right now, consumer facing business, when factoring in seasonality, the sales and traffic numbers “wiggle” around the prevailing norm, by moving slightly above the trend or prior year. The wiggling up and down is expected. However, when the wigging becomes a “zoom” up or down, that should be the time of greatest interest and focus.
After getting off to a fair start in mid-December to mid-January , restaurant sales and traffic results began to weaken by the week of January 26. Since that period, we have had six weeks of decline, currently in negative territory below the zero trend line. There were many factors involved of course; weather, calendar shifts, promotional ebb, and flow. What is different about February is that there were numerous other more macro, red blinking lights seen.
The University of Michigan Consumer Index has been falling, including a large decline noted in February on March 14[1]. The index fell 10.5% month to month, and a whopping 27.1% from March 2024. It was a change in expectations rather than actual economic conditions. Reasons cited were, inflation resuming, the high level of uncertainty due to conditions in Washington including fear (and now, actually) of tariffs and other frequent gyrations in economic policy. Declines were seen across the political spectrum; Republicans, Democrats, and Independents[2]. Other indices and surveys pointed it down also. For example, last week four major US airlines decreased 2025 guidance, citing a fall off of demand.
The Problem with First Half and Stronger Second Half 2025
Comments from many public restaurant earnings calls have now reemphasized the “second half will be stronger” logic.
That first half weak/second half stronger narrative, while might be correct visually, is not much of an answer. Since sales and comps generally fell later in 2024; this answer implies Q2 conditions will be “better” due to the lower second half of 2024 comps in the comparison. We restauranteurs want companies on our purchase list that don’t have to make that argument.
Earnings calls notes and surprises
Q4 results did not contain the mid-January-March negative results, so the company tones were more positive. The historically strong brands remained in positive territory but with a lessened trend line through the quarter. CAVA, Dutch Bros (BROS), Chili’s (EAT) and Shake Shack (SHAK) were strong. Two more casual dining brands have popped stronger, Cheesecake Factory and associated brands (CAKE) and finally, BJ’s (BJRI).
Chili’s sales, traffic and profit improvement trends remain quite an accomplishment that had been building. Cheesecake Factory must now be looked at as a holding company, with all three brands positive, and Noth Italia and Flower Child growing units. The same is true with Texas Roadhouse (TXRH), with 49 Bubba’s 33 and 9 Jagger’s units open at year end. The Texas Roadhouse company units picked up an amazing $260,000 in margin dollars per unit, or 23.6%, to $1,375,000 in 2024.[3]
Fast Food Lagging
When viewed at the 20,000 foot level, casual dining is doing better(excluding the fine dining brands), while US fast food, especially the burger segment is flat to lower. Wendy’s (WEN) outperformed McDonalds (MCD) in SSS in Q4. Burger King was next lower and Q4 McDonalds US at minus 1.4%.[4]
It's very difficult to get SSS momentum when all your peers are discounting at the same time. It is encouraging to see McDonald’s new focus to speed in implementing new products along the beef/chicken/beverages platforms.
It should be noted that LTOs (McDonalds at times) and new menu items, beverages (Taco Bell) are working better than a pure price discounting play. For all its price discounting in 2024, the burger needle barely moved. Potential guests might be aware that McDonald’s has lower priced items on the menu; but in my view that really isn’t the most important question. It is whether that new awareness is adding profitable sales and traffic.
What to do?
Restaurants survived the believable but not pre-planned for event by anyone of the COVID crisis five years ago this week. We had concepts that depend on traffic with virtually no traffic, other than drive thrus which even then were down. So, restaurants are durable. Assuming we are entering a material consumer tightening, there are plenty of things to do. Running a good restaurant brand during good times is not materially different than in bad times. Here is a list of issues that keep coming up that cannot be wrong to work in a time like this, preparing for the conditions to moderate and pass:
· Learn about your guests, core users, aspirational users, and lapsed users. Judging by 2024 actuals and 2025 to date color, it is amazing the about of debate within brand headquarters and field operations components about what to do when. Change occurs when a new CEO comes in, which is NOT the way it should be. In this day and era, when professional management systems and approaches entered in industry about 60 years ago, there should be less waves of dramatic change now.
· Think very carefully about menu board price increases, especially given where we are right now with the consumer. There are more ways to raise ticket other than price. Ticket increases via marketing mix and practices is one. This does put the onus on marketing/product development, and staff taking orders.
· Cost containment in the middle of the P&L. I first think about energy and utilities practices, which vary in a million ways in the million restaurants and food service venues in the US.
· Easing the load on franchisees in difficult times. At times when sales and margins are difficult, and then when cost of debt and loan covenants tighten, consider whether both franchisee remodeling and SDA new openings action at the same time are possible. For example, all of these factors were present with the large Burger King and Popeyes’s franchisee Carrols, which was publicly traded until 2024.
Hat Tip: To just a few of my friends and analysts that make it fun to cover the industry: John Hamburger, Restaurant Finance Monitor; Restaurant Finance and Development Conference and Franchise Times, year after year; ICR Middle Market Conference, year after year; Alicia Kelso and all at Nation’s Restaurant News, Lisa Jennings and many others at Restaurant Business; Victor Fernandez and others at Black Box, Roger Lipton at Lipton Financial Services and seven major restaurant securities firm sell side principals, as well as franchises investors, operators and franchisees everywhere.
[2] University of Michigan, Id.
[3] TXRK, SEC 10K, simple average.
[4] Fully year US same to stores was .2% and global same store sales was down.1% year over year. McDonalds 2024 year end news release.
