Restaurant Chains Feel the Squeeze as Customers Pinch Pennies

Sales at “limited service” restaurants were down more than those at full-service establishments in recent weeks, a reflection of greater financial stress among their customers. (Brandon Bell/Getty Images)

Key Points

• The U.S. economy is expected to grow by 2% this year, but lower-income consumers are reducing spending while higher-income consumers maintain it.
• Restaurant sales declined by an average of 2.2% weekly in the four weeks through Oct. 26, with limited-service eateries seeing a 2.5% drop.
• McDonald’s sales were down 15.8% weekly in the four weeks through Oct. 26, with lower-income traffic declining nearly double digits.

The U.S. economy is poised to grow by just under 2% this year on an inflation-adjusted basis, but the headline number obscures a bifurcated picture: Higher-income consumers continue to spend, if a bit less freely than earlier this year, while lower-income households are pulling back.

The disparity is evident in the most recent restaurant-industry trends, which show full-service dining establishments doing better than fast-food eateries. The split is likely to persist, so long as the job market continues to weaken and inflation stays high, pinching the pockets of lower-income consumers disproportionately.

Restaurant sales declined by an average of 2.2% a week in the four weeks through Oct. 26, according to Bloomberg Second Measure alternative-data analytics, which draw on credit- and debit-card transactions. That compares to an average drop of 1.1% a week in the four weeks through Sept. 28.

Sales at full-service restaurants, which typically command higher price points, were down by an average of 1.4% a week in the four weeks through Oct. 26, according to the Bloomberg data. But limited service eateries, which include fast-food restaurants, saw an average weekly drop of 2.5% during the same period.

Stock market gains and real estate equity are helping America’s richer households. A recent YouGov consumer-research survey found that 44% of lower-income respondents reported eating out less frequently now than a year ago, compared with 27% of higher-income respondents.

McDonald’s, for example, has been hurt as customers have scaled back. Sales were down by an average of 15.8% a week in the four weeks through Oct. 26, based on the Bloomberg data. The fast-food giant, with about 13,700 U.S. stores, failed to beat earnings and revenue forecasts in its third quarter, according to the company’s latest quarterly earnings report, released Wednesday. Shares were down 1.7% in midday trading Thursday, and have fallen almost 4% year to date.

CEO Chris Kempczinski said Wednesday that the chain continues to see a “bifurcated consumer base, with…traffic from lower-income consumers declining nearly double digits in the third quarter, a trend that’s persisted for nearly two years.”

But McDonald’s noted an industry-wide increase in higher-income customers by nearly double digits in the quarter, Kempczinski said during the company’s earnings call.

Chipotle Mexican Grill’s interim CEO, Scott Boatwright, similarly cited consumer headwinds, even though the burrito chain’s latest quarterly earnings met expectations. “Earlier this year, as consumer sentiment declined sharply, we saw a broad-based pullback in frequency across all income cohorts,” Boatwright said during an analyst call on Oct. 29. “Since then the gap has widened, with low- to middle-income guests further reducing frequency.”

Consumers making less than $100,000 represent about 40% of Chipotle’s total sales, and are dining out less frequently than in the past, Boatwright says. The negative sales trend seems to have continued into the fourth quarter. Chipotle sales dropped by an average of 2.2% a week in the four weeks through Oct. 26, according to Bloomberg data. That followed a 1.1% dip in the prior four weeks. Chipotle’s stock is down nearly 50%; much of the drop has occurred in the past four months.

Fast-casual chains and quick-serve eateries are struggling to deliver value as costs rise, says Thomas Paulson, head of market insights for Advan Research, which tracks location and transaction data. Additionally**,** companies such as Chipotle and CAVA Group, a Mediterranean restaurant chain, are fighting “premium” perceptions among value-conscious consumers, and competition from well-priced prepared-food options.

Bank of America’s research has found that restaurant chains are faring worse than independent dining establishments. Spending at chains declined by -1.9% year-over-year in September, more than twice the 0.8% drop at independent restaurants, according to the bank’s card data.

“It makes sense that independents would skew more heavily to affluent customers because they are more likely to be full-service restaurants and, potentially, skew to more affluent areas,” says Sara Senatore, BofA’s senior restaurants analyst.

Restaurant chains have taken share from independents over time, with the Covid-19 pandemic accelerating the shift, Senatore notes. The recent resilience of independent eateries has helped them regain some lost market share.

Paulson expects that restaurant margins will be squeezed even more next year, especially among limited-service chains. As hiring slows further and costs remain elevated, lower-end consumers—and the restaurants catering to them—are likely to remain under pressure.

Write to Megan Leonhardt at megan.leonhardt@barrons.com