Domino’s unofficially kicked off the third-quarter earnings season on Thursday with a report that both suggested it was struggling (-0.6% same-store sales) and indicated things are getting better (everybody is eating Pepperoni Stuffed Cheesy Bread).
As companies start reporting over the next few weeks, however, we have several questions about the state of the industry overall and the state of specific restaurant chains. Here’s what we’re looking for in the next few weeks.
OK what is the consumer like?
Every executive on every earnings call is going to get this question. The economy is facing several headwinds. Consumers are running out of pandemic cash and they have to pay their student loans again. Maybe more to the point: Inflation has taken a big bite out of spending power.
Industry executives have been generally muted thus far on the impact of the consumer. There’s some discounting out there, but not much. Consumers are “demanding” but are not demanding discounts. There is some trade-down but not much.
But industry traffic for the most part has been down, and while some of that could be a normalization of consumer behavior, it’s hard to look at menu prices, two years of inflation and economic data and not wonder whether consumers are cutting back.
Where are prices going?
Along those lines, we are also wondering about prices. Restaurants have consistently raised prices at a rate higher than that of inflation, and higher still than prices at the grocery store. While the industry has slowed its rate of increases, it hasn’t slowed them to the extent other industries have.
That could also be a major factor in industry traffic no matter the direction of the overall economy. But it also influences how consumers view restaurants in the first place. If you’re raising prices aggressively, your offering had better be worth it.
How are higher-end steak chains?
We are particularly interested in the performance of steak concepts. In the aftermath of the pandemic, higher-end steak concepts like STK and Capital Grille were no-brainers. Consumers eager to dine out treated themselves to steak. And they kept going.
But those days ended last quarter, when higher-end steak concepts struggled—though chains like Texas Roadhouse are doing fine. Is this a sign of problems among higher-end consumers, forcing them to cut back? Or is this just a normalization of seasonal behavior now that everybody’s got that I-need-a-$100-steak thing out of their system?
How is Burger King doing?
Our biggest curiosity is Burger King. At the beginning of the year, we were worried about the burger chain, where franchisees were struggling after a difficult pandemic. Two major franchisees filed for bankruptcy. Another closed a bunch of units. Many other franchisees have closed restaurants.
But the company has pumped tens of millions into marketing and remodels and has started showing some real progress and all that bankruptcy talk has quieted. But the company needs a lot more than just a quarter or two to call it a real comeback. So let’s see where things are going.
And what about Ozempic?
I can’t believe I just wrote that.
I don’t pay all that much attention to diet drugs, so the whole Ozempic craze kind of hit me upside the head.
But the impact of the drug on restaurant stocks has been real. As the popularity of the medication took off, questions about the potential impact on restaurants long-term emerged—it’s been shown to suppress the appetite. It hit a fever pitch recently when Walmart’s CEO told Bloomberg they’d seen a “slight pullback” in demand due to the drug.
We are skeptical. But executives should be ready for that question over the next couple of weeks. Or maybe the next couple of years if these drugs increase in popularity and suddenly nobody is in the mood for a double cheeseburger.