Magdalena Wygralak
Restaurants are having to adjust as consumers push back against the surges in prices since the pandemic due to their own higher costs for ingredients, labor, rent, and other operational expenses. While most restaurant operators have not pulled back their menu prices across the board, recent promotions have emphasized creativity, personalization, and digital engagement to stand out in a competitive market and meet evolving customer expectations. The goal is to increase traffic, instead of leaning on higher prices to keep same-store sales buzzing.
McDonald’s Corporation (NYSE:MCD) has a new promotion beginning on June 25, which is expected to include four items for $5. Consumers can pick a McDouble or McChicken, 4 piece Chicken McNuggets, small fries, and a small soft drink. However, the $5 Meal Deal is only running for a month, which has attracted attention on social media. Separately, the fast-food giant is also still trying to convince restaurant owners that the $5 meal will bolster profits by increasing traffic to their restaurants. Bank of America said the $5 menu promotion addresses the lack of a national value menu, but the firm warned that broader menu pricing may still need to be adjusted lower. Notably, MCD’s 20% cumulative price increase since 2020 is higher than the price increases at Wendy’s (WEN) and Burger King (QSR) over the same period. The $5 Meal Deal is also being matched by Burger King (QSR), which is offering its own value pack of one of three sandwiches, nuggets, fries, and a drink for $5.
BofA also highlighted that real-time spending data suggests sluggish trends have persisted for McDonald’s (MCD) into Q2, which it thinks is partially a function of moderating price increases that may not be going far enough. Given the clear advantages McDonald’s (MCD) has with its scale, BofA believes the underperformance suggests a combination of difficult comparisons and missed execution by management.
Meanwhile, UBS believes McDonald’s (MCD) is positioned to improve its value offering and sales trajectory in 2H24 and into 2025. The firm has a view that multiple value-focused initiatives, plus marketing and new product launches over the coming quarters, should drive a positive inflection in U.S. sales trends. “We believe MCD is positioned to improve pressured value perceptions based on: a renewed value focus, the brand’s scale & marketing advantages, still strong underlying core value equity attributes, and solid performance in previous periods of elevated discounting activity,” noted analyst Dennis Geiger.
Elsewhere in the restaurant sector, Starbucks (NASDAQ:SBUX) has been increasingly selling its drinks at heavy discounts as part of pop-up promotions over the past month. The coffee chain’s efforts have led to some notable traffic improvements, although workers have also been complaining that the extra traffic is leading to long lines when stores are already busy, according to The Wall Street Journal. Starbucks (SBUX) Chief Financial Officer Rachel Ruggeri said the company has been adding staff to meet demand and speeding up service through new equipment and work routine flows.
For its part, Chipotle (NYSE:CMG) has been battling social media complaints about the size of its portions. “We have reinforced proper portioning with our employees,” noted Chipotle (CMG) executive Laurie Schalow. CEO Brian Niccol also took to TikTok to teach customers how to signal to employees when they want bigger portions. However, the social media flareup about the size of Chipotle’s (CMG) portions appear to be having little impact on traffic. While the topic trended for a brief time after food critic Keith Lee posted a viral video, Evercore ISI said portion size remains a brand strength at Chipotle (CMG), with little evidence of a new traffic issue. Notably, data from Restaurant Insight Monitor indicated that “stated visitation intent” from consumers has been moving higher for Chipotle (CMG), not lower as was feared. Looking ahead, shares of Chipotle (CMG) have been volatile ahead of the company’s 50-for-1 stock split.
On Wall Street, Goldman Sachs recently started coverage of the restaurant sector with a selectively constructive view. Analyst Christine Cho said the firm is less worried about a pullback in the restaurant spending due to a still-healthy spending outlook and more lasting behavior shifts post-COVID. However, Cho also warned that strong pricing tailwinds are beginning to fade and value competition is stepping up as the inflation surge cools off. “This means that traffic and unit growth will become an increasingly important part of the restaurants’ growth equation, driving a bigger divergence across the peer set,” updated Cho. After taking a selective approach to the restaurant sector, Goldman Sachs identified Chipotle (CMG), Domino’s Pizza (DPZ), Restaurant Brands International (QSR), Starbucks (SBUX), Sweetgreen (SG), and Shake Shack (SHAK) as top picks. The firm initiated all six with a Buy rating. Meanwhile, the setup is seen as challenging for Wendy’s Companies (WEN) and Jack in the Box (JACK), which were both tagged with a Sell rating.
Tale of the tape: The five restaurant stocks with the best year-to-date performance are Sweetgreen (SG) +157%, CAVA Group (CAVA) +115%, Brinker International (EAT) +65%, Wingstop (WING) +63%, and Chipotle (CMG) +55%.
Looking for a sleeper restaurant pick? El Pollo Loco (LOCO) has the third highest quant score in the sector and has beat profit expectations in 15 out of the last 16 quarters.