Restaurant spending reheats unevenly
Fast food and fine dining are showing signs of recovery, but casual chains are squeezed by the current economy.
Americans are regaining their appetites for going out to eat, but it won't be a restaurant renaissance unless more eateries get a bite of the profits.
JP Morgan Chase (JPM) recently surveyed its Chase Freedom cardholders and found that their spending on fast food increased 22% in the third quarter from the same time last year, while their restaurant spending was up 19% over the same span. How does that translate to average Americans and the foodservice industry in general?
Roughly, at best.
Market research firm NPD Group keeps track of the foodservice industry and lends some credence to Chase customers' sudden case of the munchies. The firm announced earlier this month that foodservice checks industrywide grew 2% in the second quarter. Though that trails the 2.9% rate of inflation during the same period, a 1% uptick in fast-food visits continued a growth streak stretching back to last fall.
Yum Brands (YUM) can vouch for that growth after its U.S. profits from Taco Bell, KFC and Pizza Hut shops grew 13% in the third quarter and same-store sales jumped 6%. Same-store sales at Taco Bell alone jumped 7%, but provided a warning to competitors: Customers in the current economy want their fast food cheap and they want it now. Fast-casual burrito maker Chipotle (CMG) got that message after missing Wall Street estimates for two consecutive quarters. It's now considering drive-thru menus and breakfast items similar to those offered by its more traditional fast-food foes.
Even latte-pouring, smoothie-swirling McDonald's (MCD) is being dragged back to its low-end roots. Despite a 1.2% jump in U.S. sales in the third quarter, overall revenue dropped 3.5% amid global currency fluctuations, softening demand and increased competition from low-priced competitors. After trying to lure customers to its upselling Extra Value Menu earlier this year, McDonald's is now shifting attention to the lower-priced Dollar Menu.
"In a weaker economy, customers tend to stop getting extras like drinks and desserts and premium items like Angus burgers, which all offer higher profits to McDonald's," chief financial officer Pete Bensen said after the company's third-quarter earnings release.
It's that frugal approach to food that calls into question Chase Freedom users' sudden surge in restaurant outings. That 19% jump doesn't match the reality at casual-dining restaurants, where 34% of respondents to a Harris Interactive poll said the were eating less. NPD Group found that not only did casual dining drop 2% last quarter, but it's fallen every quarter since spring of 2010.
The results vary by restaurant, but it's similarly slow across the casual-dining community. Share prices at Chili's parent company Brinker Restaurants (EAT) are up 50% in the last year and sales are up 2.5%. DineEquity (DIN), the firm that runs Applebee's and IHOP, saw stock values rise nearly 40% in the same span despite a scant 0.7% same-restaurant sales increase at Applebee's and a 1.4% decline at IHOP. Olive Garden and Red Lobster owner Darden International's (DRI) shares are up roughly 20%, but just overhauled the menus and look of its two key brands after same restaurant sales declined 0.3% over the same period. That included a 2.6% drop at Red Lobster.
There's a chance Chase Freedom customers are still visiting restaurants more, but just aren't going for the apps specials. NPD Group says the number of visits to fine-dining establishments increased 4% last quarter and has been on the rise since early 2010. If that's the case, card owners are embracing the far end of the spectrum, but squeezing the tchotchke-laden sit-down establishments in the middle.
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