‘Suddenly’ Economic Downturn! Starbucks, KFC, And McDonald’s Experience Decreased Sales

DEBARYLIFE – A number of chains reported declining same-store sales this quarter, including KFC, Pizza Hut, and Starbucks.

In an attempt to attract customers, McDonald’s claimed to be embracing a “street-fighting mentality” through value creation.

A year later, customers are still willing to spend more on their favorite cuisine, as evidenced by outliers like Wingstop and Chipotle Mexican Grill.

The long-awaited consumer retreat has now materialized.

On Wednesday, Starbucks’ stock fell 17% after the company revealed an unexpected decline in same-store sales for the most recent quarter. Also reporting declining same-store sales were Pizza Hut and KFC.

Moreover, the venerable McDonald’s declared that it had changed to a “street-fighting mentality” to attract value-conscious customers.

Yet, a lot of businesses in the restaurant industry and elsewhere have issued warnings about the possibility of ongoing consumer pressure. Worldwide caution in expenditure is a message from the CEO of McDonald’s Chris Kempczinski to analysts.

“It’s worth noting that in [the first quarter], industry traffic was flat-to-declining in the U.S., Australia, Canada, Germany, Japan and the U.K.,” he explained.

Value was mentioned as a contributing issue by two of the struggling chains in the first quarter. Laxman Narasimhan, the CEO of Starbucks, stated that the company’s coffee was losing some of its regular customers because they desired greater value and diversity.

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During the company’s Tuesday call, Narasimhan stated, “[W]e have become more picky about where and how they choose to spend their money in this environment, especially with stimulus savings mostly spent.”

Chicken menu options at competitive prices are hurting KFC’s sales in the United States, according to Yum CEO David Gibbs. Although Taco Bell is responsible for three-quarters of Yum’s domestic operating earnings, he said the company could benefit from the shift to value.

“Value is more significant than other factors, and Taco Bell leads the industry in this regard. Others are having difficulty achieving value. Low-income customers are leaving the market in increasing numbers. On Wednesday, he stated, “We’re not seeing that at Taco Bell.

Executives at fast-food restaurants offered upbeat dates and plans to get sales back on track, but it’s unclear how long it will take for sales to recover. As an illustration, Yum predicted that its first quarter would be its worst of the year.

To cater to customers on a budget, McDonald’s intends to launch a value menu nationally. Franchisees, who have gotten more vocal in recent years, may oppose the fast-food giant. While partnerships increase sales, they also put pressure on operators’ earnings, especially in regions where operating costs are high.

But, McDonald’s franchisees can be inspired by falling behind the competition. Burger King recorded higher same-store sales growth in the United States than McDonald’s for the second straight quarter. In an attempt to turn things around, the Restaurant Brands company has been substantially investing on advertising for the past two years.

Also placing bets on deals is Starbucks. The coffee chain is getting ready to launch an app update that will enable orders, payment, and discounts for all users, not just loyalty members. In addition, Narasimhan highlighted the popularity of its recently introduced line of lavender drinks, which debuted in March even though April sales were still weak.

In reaction to rising costs and interest rates, economists have been forecasting for months that consumers would reduce their spending. Although investors had been warned for several quarters that low-income consumers were declining and other diners were trading down from more expensive options, it has taken some time for fast-food restaurants to really notice a decline in sales.

Additional explanations for their poor performance this quarter were provided by numerous restaurant companies. Poor weather, according to Starbucks, decreased same-store sales.

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Yum Brands, the parent firm of Taco Bell, KFC, and Pizza Hut, reported its brands’ weak performance in January, blaming it on the harsh comparisons to a robust first quarter of last year.

These defenses, however, fall short of explaining the lackluster quarterly performance. Rather, it appears that customers are becoming more selective with their money, making competition for a smaller pool of patrons more intense.

Eating at home has become less affordable than dining out at quick-service restaurants. According to the Bureau of Labor Statistics, while grocery prices have been rising more slowly, those for limited-service restaurants saw a 5% increase in March compared to the same month last year.

On Tuesday, McDonald’s CFO Ian Borden stated on the company’s conference call, “Clearly everybody’s fighting for fewer consumers or consumers that are certainly visiting less frequently, and we’ve got to make sure we’ve got that street-fighting mentality to win, regardless of the context around us.”

Even if the goods are more expensive than they were a year before, outliers demonstrate that people will still order their favorite dishes. Wall Street’s preferred restaurant chain, Wingstop, said that its same-store sales in the United States increased by 21.6% during the first quarter of 2013.

The first quarter reported a 5.4% increase in traffic for Chipotle Mexican Grill, a restaurant with a preponderance of higher-income customers. Also, Popeyes, a restaurant brand owned by Restaurant Brands International, reported a 5.7% gain in same-store sales.

Michael Skipworth, CEO of Wingstop, told CNBC that his company’s observations with customers indicate that when they are under pressure, they tend to hold back more frequently at [quick-service] restaurants.

He also said that the typical Wingstop customer only comes in once a month and treats themselves to the chain’s chicken sandwich and wings, not something they can easily take out of their routine because of financial constraints.

Not only that, but Skipworth added that low-income Wingstop customers are really coming back more often now.