Business

Chain restaurants had a tough year And 2019 looks worse

Bloomberg

McDonald’s has been working on its value offering to stay relevant in the price wars and expanding delivery with Uber Eats to boost sales.
Bloomberg McDonald’s has been working on its value offering to stay relevant in the price wars and expanding delivery with Uber Eats to boost sales.

It’s not going to get much easier for the restaurant industry.

After facing stagnant sales and weak customer traffic in 2018, restaurants will encounter more headwinds next year — including rising food and wage costs — that may stall profit and hinder efforts to jump start growth.

Even industry stalwarts are dealing with such issues in a fiercely competitive and increasingly crowded field. Starbucks is shuttering some U.S. locations amid oversaturation worries.

McDonald’s, the world’s largest restaurant company, has been tweaking its value offering to stay popular in the price wars and expanding delivery with Uber Eats to spur sales.

But it wasn’t all doom and gloom this year. Amid a stock market rout, restaurant stocks fared better than the broader market, bolstered by a couple of standouts such as Domino’s Pizza and Chipotle Mexican Grill.

Chipotle, while far from reclaiming its position as a Wall Street darling, is beginning to recover following a string of food-safety issues that damaged the brand.

Delivery and Packaging

Americans are demanding delivery, and it’s forcing big chains to get into the game. That can mean costly technology investments.

Revenue from orders through third parties is often shared, making it more difficult to turn a profit on digital customers. It also means delivery doesn’t necessarily make sense for low-cost items.

Starbucks tried delivery this year in Florida with Uber Eats, and is now expanding it to almost a quarter of its domestic company stores. Delivery is attractive to companies because to-go orders usually mean customers spend more. Applebee’s and IHOP say the average check is “significantly” more.

Customer Data

Delivery, especially from third parties such as Uber Eats and GrubHub, is creating a massive log of diner data. That valuable information has become a source of tension between restaurants and the delivery companies over who owns the information.

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One solution to get around this: Take a stake in the company, as Pizza Hut owner Yum Brands did earlier this year with an investment in GrubHub.

“We are very early in the days of mining the customer data that we’re getting,” Yum CEO Greg Creed said.

More data means chains can carefully curate ads to lure customers back, and the biggest companies, such as McDonald’s, are likely to have the most bargaining power in getting access to it.

Food Inflation

The value wars could start to sting in 2019. After cashing in on cheap ingredients, which have helped eateries advertise steep discounts and a slew of $1 deals, 2019 may see an uptick in food inflation.

Beef, chicken and cheese could be more expensive, according to Bob Derrington, an analyst at Telsey Advisory Group.

Next year, average food costs may be up about 5.4 percent, he estimated.

Labor Inflation

With unemployment low, higher wages will weigh on profit margins, according to Robert W. Baird and Co. analyst David Tarantino, who cited minimum-pay hikes and investments in other employee benefits as contributors to the added pressure.

Those with a big concentration of company-owned locations will be the hardest hit — Darden, Chipotle and Starbucks.

Tax Return Cash

Fast-food customers tend to be price sensitive, going to chains in search of filling meals on the cheap.

Economic forces such as higher gas prices or cheaper groceries can drive traffic away from the industry. And when Americans have more cash in their pockets, they eat out more.

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