Restaurant Stocks Are in Trouble. How They’re Losing the Competition for Diners’ Dollars.

A customer pays for their food at a Chipotle Mexican Grill restaurant in Austin, Texas. (Brandon Bell/Getty Images)

The pandemic ushered in a dangerous new era for the restaurant industry, and not all players are positioned to prosper, according to a Monday report from Melius Research.

As a result of the pandemic, costs for labor, packaging, and ingredients have taken off, and restaurants have raised menu prices faster than grocery stores have increased what they charge. “This widened the inflation gap between food away from home and food at home, eroding the relative value perception of dining out,” the analysts wrote.

With higher restaurant prices, grocery and convenience stores could be more credible alternatives for consumers, the analysts say. Prepared meals and affordable, grab-and-go packaged items have become increasingly popular.

Food away from home accounted for almost 60% of spending in 2024, compared with nearly 43% for food at home.

“Consumers aren’t deciding between grocery and restaurant, they’re solving for what fits their needs in the moment,” the analysts wrote. “Whether it’s a quick pickup, a delivered meal, or a dine-in experience, the decision is driven by affordability, taste, and convenience, not by the preparation channel.”

The types of restaurants that will continue to entice customers are ones prioritizing menu innovation, operational efficiency, and perceived value, which goes beyond prices. “Restaurants that have let their value perception erode must evolve, whether through pricing, innovation, or experience, or risk losing frequency and relevance in a more fragmented, choice-driven market,” the analysts wrote.

Different types of restaurants appear to be performing differently, even as restaurant visits have remained more or less steady. Barron’s reported early this month that in June, visits climbed by an average of 0.1% year over year, according to data from Placer.ai. At full-service, sit-down restaurants, visits remained flat while fast-casual spots increased 2.7% in June from a year ago.

According to the analysts, Starbucks and McDonald’s are the ones in trouble. In their report, which began Melius’ coverage of the sector with a look at 11 restaurant chains, they gave both companies Sell ratings, citing concerns over weaker foot traffic and both companies’ efforts to revitalize their brands. They set a price target of $250 for McDonald’s and $80 for Starbucks.

Neither company immediately responded to requests for comment.

Starbucks stock dropped 1.6% to $93.42—its lowest closing price since June 30—while McDonald’s shares climbed 0.7% to $301.88, which was the stock’s highest close since June 13.

A lack of menu innovation, plus rising prices, remain issues for both chains, analysts say. Over the past five years, menu prices at McDonald’s have increased 40%, according to the corporate website.

Companies that consumers see as continuing to offer value, as a result of “disciplined pricing and operational agility,” are in better position to maintain foot traffic, increase system sales and sustain long-term shareholder value as the market stabilizes, the analysts say.

Yum! Brands, which owns KFC and Taco Bell, was the analysts’ top pick, with a price target of $200. The company’s growth model has focused on global expansion, improving the economics of its franchises, and integrating more technology to enhance the customer experience.

The stock slid 1.8% to $147.17, its largest percent decrease since April 21. It was up nearly 10% so far this year.

Write to editors@barrons.com