Fast-food chains feel bite in the US

Howard Schultz, Starbucks’ chairman and chief executive, did not hold back this week when he said that political and social unrest were partly to blame for his company’s third-quarter earnings miss.

He said that there was a “profound weakening in consumer confidence” in the quarter — US comparable sales growth slowed to 4 per cent from 8 per cent last year. Specifically in its home market, uncertainty surrounding the presidential election, civil unrest and heightened racial tensions, as well as worries about terrorism, had raised anxiety he said.

“No one should misinterpret or in any way look at the challenges that we and many, many other companies are facing as something that has been done before. This is quite unusual. It’s unsettling,” he added.

Mr Schultz, who has been expanding Starbucks’ food offerings, said that the timing of the relaunch of its loyalty programme had also contributed to the earnings miss. But other companies in the sector have also blamed weakening consumer sentiment on slower sales growth, though none have been as specific as Mr Schultz.

Dunkin’ Brands, which alongside the doughnut chain also owns Baskin Robbins, on Thursday unveiled weaker than expected earnings and said that consumers had gone into a “bit of a funk” during the quarter. Yum Brands, owner of KFC, Pizza Hut and Taco Bell, said this month that the US was in “a malaise” and that its sales for the quarter had been soft.

Greg Creed, Yum chief executive, added that in a June survey by GenForward of 18- to 30-year-olds three-quarters of them said they believed the US was in decline, a finding he described as “not particularly good news from what people are thinking”.

This weak sentiment is reflected in figures from the industry association’s monthly restaurant performance index, which measures a combination of current trends and expectations over the next six months. In May, the index fell 0.9 per cent to 100.6, which at more than 100 still pointed to an expansion but at a slower pace, a trend that has been evident for a number of months.

The National Restaurant Association said that the dip was due to a net decline in comparative stores sales for the first time in five months, with expectations for future business conditions reaching their lowest in three and a half years. Retail sales at specialist coffee shops are estimated to rise 4.4 per cent this year, the slowest pace since 2013, according to Euromonitor.

Brett Levy, an analyst Deutsche Bank, said that slower jobs growth appeared to be weighing on restaurant sales, which he said had an 80 per cent correlation with comparable revenue growth at restaurants.

But broader consumer confidence data are not all gloomy. Figures from the Conference Board, a think-tank, showed a slight improvement in June from May. And while the University of Michigan’s June consumer sentiment index showed that wealthier participants were citing worries about losses from equity investments in the wake of the UK vote to leave the EU, its author expected a rebound in July and August.

This suggests there are industry- and company-specific issues at stake for casual dining.

Deutsche Bank’s Mr Levy said in a report that the recent dip in sales was “the result of a combination of a springtime traffic slowdown, mixed weather conditions and the ongoing intense promotional cadence … leaving few unscathed”.

Those promotions include a recently ended offer of two items for $ 5 at McDonald’s, which its website says will return, while Wendys, the burger chain, has a four for $ 4 deal and Pizza Hut a $ 5 value meal.

As Starbucks increasingly moves into food it opens itself up to such challenges, while the continuing popularity of independent coffee shops is pushing the company to expand its own high-end roasteries.

Competition is not limited to eating out. Supermarkets from Walmart to Kroger have, alongside Wholefoods, been expanding their deli counter ranges and offering in-store freshly cooked pizzas and other meals for customers to eat-in or take home. The more sophisticated supermarket offerings get the bigger threat they pose to cafés and fast-food chains.

In the near term, it is eating in that may be causing what analysts at KeyBanc Capital Markets have estimated is a 3-5 per cent decline in consumer traffic to casual dining restaurants in recent weeks.

Chris O’Cull said: “Several disruptions, ie watching primary debates, watching news coverage of recent events, political conventions, presidential debates, etc have resulted, or may result in, more people staying home and ordering pizza.”

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