August 10, 2012 / 5:04 AM / 7 years ago

Analysis: Discounts back after summer restaurant slump

(Reuters) - Restaurant discounts and special offers have returned after a recent sales cool-down at some of the nation’s hottest chains, a trend that threatens to squeeze industry profits at a time when food costs are set to rise.

A couple stands in line at McDonald's in New York's Times Square, July 23, 2012. REUTERS/Brendan McDermid

U.S. consumers ate fewer Big Macs at McDonald’s Corp, skipped some caffeine runs to Starbucks Corp and passed on the occasional burrito at Chipotle Mexican Grill Inc - sending a shiver through the investment community that has grown used to those chains posting strong growth in the face of the nation’s lackluster economic recovery.

McDonald’s on Wednesday vowed to focus more on value after reporting flat sales at established restaurants around the world in July - its worst showing in more than nine years.

Starbucks and Chipotle’s industry-leading same-restaurant sales growth decelerated last quarter, forcing both chains to make adjustments to reinforce their positions.

The world’s biggest coffee chain last week brought back its morning “treat receipts” that give discounts to customers who return in the afternoon and is offering coupons for some products.

Chipotle said it would put the brakes on menu price hikes, even though its food costs are more vulnerable to volatility because its ability to lock in costs is hampered by its use of organic produce and antibiotic-free meats.

An early sign of the shift to keep customers coming back came in June, when Darden Restaurants Inc vowed to step up value-priced promotions aimed at boosting traffic to its Olive Garden and Red Lobster chains.

The measures show that the industry, which generally had been trying to wean diners off discounts, is again finding itself in a tough spot.

“It’s not clear which is a greater risk to profits - slow (comparable sales) or discounting,” Sanford C. Bernstein & Co analyst Sara Senatore said.

However, what is clear is the potential for profit shortfalls driven by efforts from industry leaders like McDonald’s, Starbucks, Chipotle and Darden to bring in more customers with discounts or other deals.

“When that happens, it puts a world of hurt on everyone,” said Bob Goldin, executive vice president at food industry consulting firm Technomic.


Warm weather gave the restaurant industry a nice boost early this year, raising optimism and prompting some chains to shift emphasis away from discounts and deals.

Privately held Subway was the best example of that move. After shaking up the industry during the dark days of the recession by offering its foot-long sandwiches for $5, Subway has limited which sandwiches will be sold for five bucks.

In addition, many restaurants seemed to have found their footing again after emerging from the profit-denting discounting in 2008 and 2009 - the height of the recession.

High-margin coffee drinks popularized by Starbucks are now being offered everywhere from fast-food outlets to convenience stores.

Chains like Burger King Worldwide and Yum Brands Inc’s Taco Bell, recently revived growth by introducing new products and “me-too” menu items. For example, Burger King unveiled a decadent bacon sundae as well as “healthy” salads and fruit smoothies like those sold by McDonald’s. Taco Bell had a big hit with its Doritos Locos Tacos and is now promoting new dishes that are similar to, but less expensive than, Chipotle’s.

Celebrities also helped the chains get their respective grooves back: Sports star David Beckham pitches Burger King smoothies and Chef Lorena Garcia promotes the new Taco Bell “Cantina” menu she created.

The question is whether such improvements could be sustained as the fight for a share of diners’ wallets heats up again.


Experts believe the latest slowdown at restaurants will be short-lived.

The National Restaurant Association expects total restaurant industry sales to be up for the third consecutive year in 2012, boosted by traffic gains and higher prices, Hudson Riehle, the industry group’s senior vice president of research, said.

“Total (U.S.) restaurant spending in the last couple months has been down a little bit. I think for the rest of the summer that’s going to remain to be the case,” Kurt Salmon restaurant strategist Todd Hooper said.

Still, Hooper expects sales to recover this autumn - provided the national economic recovery continues on its slow upward trend and that restaurants are able to pass through fewer price increases than grocery stores.

The United States is in the middle of its worst drought in more than a half-century. Restaurants are able to contract much of their food, which can protect them from the sorts of price spikes that show up in supermarket meat, dairy and produce aisles.

Starbucks, McDonald’s, and to a certain extent Chipotle, remain among analysts’ top picks in the newly uncertain environment. Still, they urged patience as shares in those well-funded and successful companies come off record highs under the weight of less-aggressive growth assumptions.

Meanwhile, Panera Bread Co - which was one of the few chains to report accelerating sales at established restaurants in the latest quarter - has picked up more fans.

“We continue to view Panera as a defensive pick in the restaurant sector,” Miller Tabak & Co analyst Stephen Anderson said in a client note that echoed the sentiment of many of his peers, who say the rapidly expanding bakery-cafe chain has been less sensitive to economic downturns.

Reporting By Lisa Baertlein in Los Angeles

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