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John Gordon - May 2024

Restaurants: A Terrible January Ruined the Q1 Earnings Cycle

by John Gordon, Principal and Founder, Pacific Management Consulting Group

January hits every year but this January was a disaster. I heard as early as the ICR Conference in mid-January that the month was bombing.  It grew worse.  Q1 was overly affected by January. We do have to pay attention to the month-by-month cadence. Industry SSS improved each month from January, with April at plus .6%

Q1 Highlights

During the Q1 cycle, the first indicator was a weakness at Darden (DRI) with sales misses, downward forecasts, and weakness at Olive Garden and the upper-end brands. Last week, both McDonalds (MCD) and Starbucks (SBUX) reported and missed on the same day.

MCD CEO Chris K said, “Broad-based consumer pressures exist around the world with flat to declining traffic in several global markets.” SBUX was an unexpected crash with the US and China both weak. It shocked Wall Street and we analysts are still talking about it.  More on SBUX below.

Searching for patterns…

As more brands reported, a familiar trend emerged: the recent and historically very strong standout brands: Chipotle (CMG), Wingstop (WING),  Dutch Bros (BROS),  Shake Shack (SHAK), CAVA, Texas Roadhouse (TXRH) continued with strong SSS and higher margins, generally through positive expense leverage. Many other “non top” brands—KFC, Pizza Hut, the Bloomin Brands portfolio, for example—were negative. Many mentioned the consumer pressure via pricing or peer promotional pressure. Again more MCD Chris K: “ Elevated pricing has put pressure on the QSR industry.” While fine dining was the most negative(-5% in April)[1], Cheesecake Factory (CAKE) mostly had steady traffic in a presumed flight to quality thesis. Domino’s (DPZ)  improved,  likely taking share from Pizza Hut (-6%)[2] and Papa John’s (-1.8%). Chili’s (EAT) is going after QSR trade-down traffic with a new burger item rolled out this week and highlighting the scarce price difference between some of its menu items and some QSRs. To be sure, additional companies will report in the next two weeks, and we will know more. All companies except the standouts have mentioned pressure due to pricing and the contraction of low-income guests. In fact, McDonalds has been warning of this for six months.

What to Do?

First, more study of the standout brands is useful. It seems to me that guest segmentation projects should be devoted to the standout brands. The goal is to determine if their guests are different –we have heard this in the past—or if affinity to the standout brand’s execution or values drives the positive traffic. Copying successful brand standards and practices has long been part of the restaurant industry lore. 

Further, there has been an overreaction of some chains chasing the very guests who are the most stressed—and who are being chased by the other value-intense chains. Most chains have adjusted their menu and advertising mix to chase price-sensitive guests who are stretched right now. Until restaurant brands can target guests uniquely (and correlate guest income profiles to the offer), some kind of barbell or high/low media matrix could be used again. I’ve seen no discussion of the barbell format.  Whether that is an advertising agency thing [3] or an attempt to be simple to digital tie-ins is TBD.  Either way, it is leaving a ton of average check dollars on the table for guests who might not need a discount, plus the difficulty in walking customers back to the checkpoint where you want them to be after this “crisis” is over.

Now, about the Starbucks Earnings “Shock”

On April 30, Starbucks reported, a double miss: a revenue miss of $600 million and an EPS miss of $.12. It slashed current-year guidance well off of its just-published long-term algorithm. Both the US and China (weaker) were well off pace. The 2024 operating margin was revised to flat year over year versus showing a “progressive expansion”. The stock fell of course. Following the results, ex-board Chair and founder Howard Schultz powered out a public LinkedIn note of advice to the company which generated a lot of talk. 

Several interesting things. First, with results like these, I wonder if sales should have been pre-released, to take some of the sting out of what turned out to be a very tense day. Perhaps they considered it.  Throughout the call, CEO Laxman and CFO Rachel did their very best to not answer the question at hand.  Frankly, their performance was a disservice to the investment community.  Analysts Lauren Silberman (DB) and Sharon Zackvia (Blair) both asked dynamite questions but the questions were not answered.

To its credit, Laxman noted the operational issues found: slow service times which caused customers to bail, and product outages. They will fix these issues of course. They are rolling out attractive new products, and opening up the loyalty program.

 So what happened to sales and traffic in the US?

Starbucks knows but won't say exactly. They pin it on the softness of the occasional customer. Our friend Jonathan Maze wrote a very nice piece on May 7 comparing the SBUX situation to other restaurant situations in the past.[4]  He pins the problem to November 2023 and says” The sales slowdown is more due to a social media backlash for reasons other than…price”. This would include global political (Israel-Gaza) as well as the US Union efforts. He concludes that recovery historically takes some time.

The Howard Schultz LinkedIn note was good advice. There was nothing snippy or ill will about it. I will mention again my advice from last year: The Starbucks Board should appoint Howard to an ex-officio advisory position. Howard is the founder, in fact, the longest CEO and 5th largest shareholder. His advice is priceless.   


More Meaningful Restaurant Developments   

Red Lobster Massive Closing: On Monday, May 13, Red Lobster executed somewhere between 80-100 unit closings in the US according to best sources. [5]  Red Lobster’s owner, Thai Union has retained Alvarez and Marsal to prepare it for sale or a possible Chapter 11 filing. 

Red Lobster has been in a 20-year decline dating all the way back to its time in the Darden portfolio under then-CEO Clarence Otis in the early 2000s period.  Darden used a mix of LTOs and FSIs/coupons. Its financial visibility was poor. In 2015, Red Lobster was caught in the crossfire between Starboard, which was waging a proxy contest against Darden management. As the board battle raged, Darden sold Red Lobster and its real estate to Golden Gate Capital Group. That enraged the shareholders, and The Starboard group won.

Very quickly, Red Lobster wound up paying rent, which it never had before, as Golden Gate sold the underlying Red Lobster real estate.  Since that time, it lost momentum, especially after the Pandemic.  Red Lobster picked up a new owner in 2000, Thai Union, which invested significantly over $549 million, from Golden Gate. The new investor group did not have significant US casual diner experience. [6]  More problems followed, including a lack of a CEO and a large money-losing promotion in 2023 (All Day All You Can Eat Shrimp for $20).

With the culling of the system, we will now see what kind of offers emerge for Red Lobster. It is always a sorry day (but necessary) to see so many restaurants closed.

McDonald's working LTO Value Platform:  MCD led the way for months indicating that a low price point “value” platform was needed in the US. They are now finally close to an agreement on a burger or chicken sandwich/nuggets/fries/drink for $4.99 LTO.  Franchisee/franchisor trust is low in the McDonalds system for all kinds of reasons and this has taken some time to come together. Every major QSR operator in the universe, from DQ (burger offer at $7.00) down to BK (wraps for $2.99) has offers flying. Other than giving away food or price points, I’m wondering what marketing magic can MCD add to this offer?

Food commodities trending up: Rising food commodity costs have become an issue lately. After moderating for some time, the index I watch closely, the weekly DATUS FS index has trended above last year in the last few weeks. This last week it was 10% above the prior year. Beef (90 trim) is higher, beef loin and rib is below, chicken is way above, pork is way above, as are eggs. Soybeans and oil are lower, and coffee futures are higher. David Maloni drew attention to lower chicken hatchability yields. Another thing to watch carefully in LTO and “value” platform creation.



About the author:

John A. Gordon MAFF is a restaurant industry veteran who specializes in restaurant operations, financial planning and analysis, and brand/organization assessment.  He supports investors, restaurant operators, attorneys, and others who need complex restaurant franchising and financial topical support. He can be reached anytime at 858 874 6626,


[1]   Black Box data in April. Fine dining generally the most negative SSS throughout.

[2]   Earnings Report. 

[3]   The white shoe national advertising agencies are typically “pro discount” with the simplest possible message.

[4]   Restaurant Business, Jonathan Maze, May 7, 2024, Why Social Media Not Price is Behind Starbuck’s Sales Problems.

[5]   Restaurant Business, Joe Guzzkowski, Restaurant Business, May 13, 2024.

[6]   Thai Union Press Room, August 31, 2020

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