Chipotle is facing a lot of questions coming into this earnings season. | Photo: Shutterstock.
The third-quarter earnings season effectively kicks off next week, and this one, much like the past several such seasons, comes with a long list of question marks surrounding restaurant chains and industry sectors.
What’s more, early reports from pizza chain Domino’s and Canadian brand collector MTY Food Group offered more than hints at downturns and further industry volatility that could hinder a broad-based set of chains.
So as this season kicks off, these are the chains, sectors and situations we’ll be watching closely.
How bad is it, really?
The biggest question by far is just how much an apparent sales and traffic slowdown in September has affected the restaurant industry, and which chains felt it the most. Maybe the bigger question: Is this a temporary blip or a deep-seated problem?
The shutdown, its effect on the federal workforce and the corresponding hit to consumer confidence are the likely culprits behind what’s happening. At least some spending is being propped up by a stock market that has some sectors of the economy feeling good.
But restaurants, and many other businesses for that matter, rely on healthy spending from the population at large. So this is the issue we’re particularly concerned with this quarter.
And what about fast-casual?
The fast-casual sector has seen sales slow precipitously this year, which has led to questions about several chains heretofore considered bulletproof, notably Chipotle Mexican Grill. But also Wingstop and Cava. Or it raised past questions, like with Sweetgreen. Or it created all kinds of issues, as with Portillo’s.
We remain of the belief that the broad-based nature of the fast-casual slowdown is the actual cause. While that doesn’t necessarily mean there aren’t concerns with some of the individual companies, it’s difficult to truly say so when so many of the same type of chain are slowing at the same time.
That, to us, suggests that the economic challenges afflicting much of the restaurant business aren’t just limited to low-income consumers.
Can casual dining keep this up?
Full-service chains, led by Chili’s, have thrived lately. And the group driving much of that has been younger, Gen Z consumers. I got a front-row seat this week as a group of my son’s friends were actively planning a visit to Applebee’s to get cheap appetizers and drinks.
The success this year of casual dining, juxtaposed with the struggles of fast food, is one of the more remarkable stories of 2024. We expect this to continue, though it’s worth noting that a truly struggling economy would not spare such brands.
Will Starbucks show progress?
One of the biggest questions we get is about Starbucks, and we’ll be honest — this one is a head-scratcher. The chain should be doing better by this point. That it isn’t suggests the company is dealing with something more profound than initially expected. (We are pretty sure that it’s rooted in a reputation shift among the aforementioned younger consumers, but honestly, what do we know?)
That said, Starbucks has dealt with an enormous number of challenges over the past few years — the pandemic, supply chain issues, the departure of multiple CEOs, the return of Howard Schultz, multiple fix-it plans, management overhauls, social media backlashes, a unionization effort, legal challenges, layoffs, store closures and mounting competition.
No amount of Magic Brian Niccol Fairy Dust can fix that overnight. It’ll take time. But the company sure could use some sales and traffic progress.
And what about McDonald’s?
The fast-food giant has pulled out all the stops in its bid to lift sales and reverse its traffic slump, with mixed results.
Some of those efforts have been met with considerable fanfare, notably the return of the Snack Wrap and then the return of Extra Value Meals and more recently the dusting off of the old Monopoly promotion.
But its challenges appear to be between those promotions. McDonald’s, like many chains, appears to have difficulty getting customers in on a more everyday, non-promotional basis. The ability for companies to change that will be crucial in the coming months.
