Fast Food Becomes the Boss With Inflation Weighing Down Restaurant Prices

While fast-casual and casual-dining restaurants have been struggling to attract customers, fast-food chains seem to be the big winners in the fourth quarter.

A pattern is emerging among publically traded restaurant companies whose latest quarterly results have not yet been reported. Retailers and restaurant customers both spent less than expected during the holiday season due to inflation-weariness. Those consumers were attracted to fast-food chains that offered value menus and enticing promotions, attracting customers of all income levels.

Fast-food companies tend to do better during economic downturns and uncertainty than their counterparts in other industries.

Let's take McDonald's as an example. Low-income consumers returned more often than ever before to the fast food giant in the U.S. this quarter, contributing to a 10.3% increase in same-store sales. Moreover, its executives attributed its strong sales growth to its Adult Happy Meal promotion and McRib return. Despite the industry's trend, it saw an increase in U.S. traffic for the second consecutive quarter.

The U.S. demand for Yum Brands was strong as well. A strong morning rush, the return of Mexican Pizza, and value meals helped Taco Bell's domestic same-store sales rise 11%. While restaurants like Pizza Hut and KFC faced tough year-ago comparisons, their same-store sales rose 4% and 1%, respectively.

In the coming weeks, we can expect to see more earnings from fast-food companies. Domino's Pizza will report its fourth-quarter earnings on Feb. 23, while Burger King's owner Restaurant Brands International will announce its results on Tuesday.

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‘We Just Didn’t See That Pop’

For the first time in more than five years, Chipotle Mexican Grill's quarterly earnings and revenue were below Wall Street's expectations, unlike McDonald's and Yum. Customers aren't responding in a meaningful way to the chain's price hikes, according to CEO Brian Niccol.

Rather than denying that its performance was a result of bad weather, it pointed to the underperformance of its Garlic Guajillo Steak launch, tough comparisons to the previous year's brisket launch, and seasonality as reasons for its underperformance.

As we got close to the holidays, we didn't see the pop, momentum, and strength we normally see at this time of year ... Compared to weak retail sales in December, Chipotle Chief Financial Officer Jack Hartung says the decline in December was because of a soft start to the quarter.

In January, Chipotle reported an increase in traffic. In comparison, Chipotle and other chains were forced to close early or temporarily close locations a year earlier because of Omicron outbreaks. In a research note on Wednesday, Sara Senatore of Bank of America noted that the unseasonably warm weather in January has supported the broader industry's demand.

As of yet, no earnings have been reported by rival fast-casual chains for the fourth quarter. The results of Shake Shack will be released on Feb. 16. In early January, however, the company reported preliminary same-store sales growth that was less than Wall Street's expectations. Announcing its results will take place on February 23 for Sweetgreen, and on March 2 for Portillo's.

Casual-Dining Concerns

Despite the casual-dining segment's struggles, fast-casual restaurants face even greater difficulties.

Chipotle, Sweetgreen, and Shake Shack have stolen customers from casual-dining restaurants for more than a decade. Due to this, restaurants such as Applebee's and Red Lobster have been offering deep discounts or spending big money on advertising.

A spike in inflation has made matters worse, especially for restaurants like Chili's Grill and Bar, owned by Brinker International.

Trade Algo reported at the start of this month that Chili's traffic fell 7.6% for the quarter ending Dec. 28. During the company's conference call, Brinker CEO Kevin Hochman said the decline was expected as it seeks to shed less profitable operations. Due to this strategy, Chili's has raised its prices and reduced its coupon usage.

A greater number of full-service restaurants will report their results later this month. An announcement is scheduled for Feb. 16 from Bloomin' Brands, the owner of Outback Steakhouse.