Restaurant Conditions: What is Going On?
We restaurant types tend to focus on what is right in front of us now from our operations days [ “what, so and so called in sick! “ Or, “oh the walk in cooler is running 10 degrees too warm?” ]. To be sure, there are some good things underway. Versus either a 2019 base (the correct base) or a 2020 base (a terrible base) sales and traffic have improved, mostly sales, not traffic. More on this shortly. This can be seen in every restaurant numbers tracker. But remember we are in the heart of the summer seasonality peak right now; both casual diners and QRS have done well and performed at par. The $1400 Biden stimulus effect is gone, now we are watching for the Child Care credit effect starting next week. The May retail sales month-to-month gain was weaker than hoped. Average real earnings have been very slightly negative since January.
Step back to look out more broadly to see what is going on
We have to step back to see what is going on. It is harder than ever to figure it out with so much data and noise everywhere.
One thing that is happening is that the financial markets believe “restaurants are back”. Restaurant stock valuations are way up.  While SPAC fever has cooled greatly now that there are so many SPACS chasing potential opportunities and that there are troublesome SEC rules, a lot of restaurant companies are on deck to IPO status—Sweetgreen and Dutch Bros for sure and Krispy Kreme went public again last week. Torchy’s and Portillo’s are on the on-deck list. It looks like the restaurant cycle is repeating itself. But the foundations underpinning this recovery aren’t really that strong yet.
One matter that brings uncertainty to all is that the primary intakes of restaurants—food and labor—are both limited now and in inflationary mode. It is relatively rare that both food and labor are a problem at the same time. It will take extraordinary planning throughout the restaurant operator’s system’s to not get swamped. Unnecessary forms of waste have to be removed from the business cycle. Unfortunately, this operating inflation is occurring at the same time many brands must make IT CAPEX investments and more remodeling must occur at both company and franchisee units. The point here is that the Pandemic Year has passed but not the aftermath.
Confusion About QSR Average Ticket
There is confusion among some analysts and investors about the increase in the average ticket at QSR brands in 2020 and continuing to date in 2021. Once the Pandemic hit in March, it was widely reported that drive-thru sales spiked and the average ticket per drive-thru transaction also spiked. This was due to the larger party size and more food and drink items sold per transaction. As we all know, this effect is called mix. Along the way, the restaurant brands took price increases. The two effects, price, and mix are summed together in the average ticket effect, which is sometimes reported by restaurant brands in their 10Qs, 10Ks, and earnings calls.
In 2020, virtually all QSR restaurant brands stopped reporting price/mix and ticket statistics. I would reasonably speculate if they did not want to field questions from analysts why traffic was negative and the ticket was positive. Starbucks (SBUX) continued to break out the sales components as earlier. It showed traffic was way down—20% and ticket way up—20%.
For a client, I worked a review showing that QSR restaurant brands increased menu prices about 5-6% in 2020—higher than the US historical norm. They were betting that guests would buy into the price increases.
Given the Starbucks example, if price was 6%, then mix was 14% of the ticket increase. The question for the future remains whether guest’s habits have changed enough to adopt the higher drive-thru mix going forward. After all, it was 65%, to begin with. The analysts are concerned that drive-thru guests will suddenly revert to lower average lower ticket patterns to save money. I think that it is a stretch and requires a return to pre-pandemic social patterns which will take years.
Important to Watch Upcoming: US McDonald’s Loyalty launch July 2021; late July: traditional week for IPOs before Summer break.
John A. Gordon is a long-time restaurant industry veteran, with 45 plus years in operations, corporate staff (finance/financial planning and analysis), and the last twenty years as a management consultant, including 20 years with his founded firm, Pacific Management Consulting Group. He works complex operations, financial analysis, and strategy engagements for clients who need a detailed restaurant perspective. He can be reached at 858 874-6626, and email@example.com.
 See Yahoo Finance and Restaurant Business Online, June 25, 2021.