Restaurant Topline is Flat, Margin Outlook Unfavorable

Looking over the last 52 weeks, major restaurant brand sales is remarkably flat. Through mid-October, we had only 1 down week. The problem is the positive trend deteriorated sequentially for weeks. In late October, the trend turned very low, single digits lower until Christmas. In 2026, the highest sales gain of the year in mid-January. Then bad weather hit, with late January and early February lower to upper single digits down. More bad weather is coming in this week.

20 brands were positive trend and 27 were negative[1]. El Polo Loco (LOCO) has leapt into the most positive group in the last quarter and last 3 weeks. Burger King US (RBI) also has notably run positively.  Casual dining continues to lead.

We continue to caution that reading SSS on a one year basis is bound to be shortsighted. A 2 year basis SSS or a comparison to 2022 or 2019 will be more productive.   

Overall,  price is running positive and traffic negative. This has several consequences: (1) business momentum of course, and (2) ability to cover food, labor and OPEX inflation, all of which are running higher than sales. This is a margin unfavorable setup.

$100 per barrel gasoline—Oy vet ! We have not even talked about that yet !

But Restaurants are Reacting

In the vastly overdeveloped (my opinion) US QSR space, units are closing in several brands. Closing units with heavy take out business seems to be less of a risk due to the breadth of delivery. Less stores are required. I’m now hearing that positive reverse cannibalization is running above plus 30%, the traditional industry expectation [2]  Several brands have implemented the age old “barbell approach” featuring high and low priced features.[3] Hat tip: Sara Senatore,  B of A.[4].

The international burger majors have been busy (except Wendys—crickets). McDonalds in effect executed a barbell strategy with both Big Arch, a half-pound two patty flagship sandwich, and the $3 menu and more. I hope very much the Big Arch succeeds. However, Burger King won the day, with retirement of the King in favor of “You Are The King.” The two CEOs got into it, with Chris K flubbing his Big Arch bite on a commercial. I just love guerilla media marking like this—anything more unique --other than endless discounting !       

Comparing Leading Brands

We were asked recently by a client what was so special about LongHorn (and its associated brands) and why successful. Briefly, it was founded in lower retail rent states (Midwest origins), more moderate unit growth patterns, relatively simple menu—steaks; no lower volume/lower ticket M-F lunch; no expensive media to speak-- only .2% of sales-- and marketing savings effectively rolled into portions and lower pricing.

The estimated per ticket is $28. That is at the low end of steakhouse brand average tickets assembled by Piper Jaffray in its semiannual cookbook. Entrees run from $12 to $50, but there are strong entry platforms—the 6 oz. sirloin and the Renegade Sirloin ($18.99). Jerry Morgan, the CEO noted to Heather Haddon at the Wall Street Journal recently that the free peanuts and great bread are also big draws.

There is one other matter. Texas is buying out their small group of existing franchisees and have always been company store focused. There are many reasons why a company, or franchised approach might work abstractly, but the cost of CAPEX and remodeling are often problems for franchisees who have costly ramp up periods and lower availability to capital IMO.

The gasoline oil shock began to hit us last week. While we get submerged into running the business, what about those who we rely upon every day and are part of our team?

I asked Organization Development consultant (and author) Mac Brand what could be done. The operant example is what Darden restaurants did upon the COVID recession supporting their employees. 

If gasoline prices stay high, conventional wisdom is that consumers will adjust their behavior, or will they? We’ll let the experts address that issue. For restaurant operators and investors, another issue looms even larger. What impact might these increased costs have on our hourly and tipped employees?

Among the most vulnerable to unplanned living cost increases are the restaurant industry servers, bartenders, valet parkers, and all the others whose income is driven primarily by tips. Consumers will adjust, and this can mean fewer dollars in tips, at least for a while. As a restaurant operator, how do you react? Do you react at all?

Ignoring the issue or shrugging your shoulders is a defensible position. After all, restaurant operators and other employers have no control over gas prices. Management is paying higher prices just like everyone else. That approach also sends a truly clear message about your values and priorities.

One simple approach is to offer a $100 monthly gas incentive to service employees for perfect attendance and/or making/exceeding a revenue goal. In fairness, this will cost operators 2-3 months, one that will end after 90 days or sooner once gas hits a pre-determined lower price. The primary benefit is keeping the solid performers on the team.

One enterprising leader, who runs a food manufacturing facility in Central California, offered $150 gas debit cards every month during the COVID-19 spike to any full-time hourly employee who maintained perfect attendance for that month. It was made clear in the beginning that the incentive would expire when gas prices declined. Absenteeism plummeted. Not one shift (they run twelve shifts weekly) ran with less than a full staff. Team members worked shifts for their peers who couldn’t get to work, when necessary, because everyone wanted those gas cards. This incentive created a new sense of the value of collaboration.
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[1]  Hat Tip and a big thank you to Gordon Haskett and Jeff Farmer.

[2]  Per several franchisees comments in declining brands 

[3]   Oh, what a surprise !  Several analysts (me included) and operational observers call for this 2 years ago.  

[4]   Sara Senatore and Isiah Austin, Bank of America Restaurant Research