QSR Sector Sales Track Higher for Third Quarter, But Watch the Details

Same-store sales for Q3-19 are generally better than forecasted among major quick-service restaurant (QSR) brands, including Wendy’s, Starbucks, Burger King, and Popeyes. Popeyes is no surprise given the stunning popularity of the chicken sandwich it introduced in Q3 (and reintroduced on November 3 — a Sunday, no doubt as a jab at rival Chick-fil-A), but other mature brands similarly saw improvements in comp sales.

Q3-19 Better Thanks Mostly to Innovation

Wendy’s NASDAQ: WEN reported a 4.4% increase in year-over-year same-store sales for North America and improved its EPS guidance based on Q3 results. Starbucks NASDAQ: SBUX enjoyed a Q3 comp sales increase of 7% for North America, which outpaced global comp store results of +6% and China comp sales of +6% (despite a 16% increase in net store count for China). McDonald’s NYSE: MCD produced a 4.8% increase in domestic comp sales, although revenue was $100 million short of expectations.

Burger King and Popeyes are both owned by Restaurant Brands International NYSE: QSR. Both brands had strong Q3 same-store sales growth at 4.8% for Burger King and 9.7% for Popeyes. These results were driven mostly by noteworthy new products: the Impossible Whopper for Burger King and the chicken sandwich for Popeyes, which it has used as a vehicle to go head-to-head on social media with Chick-fil-A.

Yum! Brands NYSE: YUM, parent of KFC, Taco Bell, and Pizza Hut, saw +3% comp sales for KFC and +4% for Taco Bell, although Pizza Hut was flat over the prior year. KFC, however, was only positive in worldwide sales due to double-digit comp increases in Russia, Central and Eastern Europe, Latin America, Western Europe, and India; U.S. sales were -1.0% over the prior year. Similarly, Pizza Hut U.S. comps were down 3.0%. 

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Sales Up, Traffic Down

There are some important caveats to these generally positive same-store sales numbers, however. The first and most immediate is that higher ticket averages (driven mostly by price increases, as value-based promotions in QSR brands were fairly consistent throughout the year) are masking slowing traffic. Many brands are experiencing negative comp customer counts. McDonald’s reported that roughly a third of its comp sales increase came from price increases, including the ending of the popular 2 for $5 Mix and Match promotion.

Starbucks did report a 3% increase in comp traffic, and Burger King and Popeyes enjoyed higher transaction counts thanks to its product introductions. In fact, analysts studying St. Louis Burger Kings during the consumer testing of the Impossible Whopper counted an 18% traffic increase in those stores while McDonald’s restaurants in the same market remained flat, as did Burger Kings in Kansas City that was not part of the test.

Headwinds in the Forecast

The industry is also facing gradual but steady increases in key costs. Food commodities have been at very favorable price levels for the past couple of years, and while costs are not climbing quickly, they are in many cases rising nonetheless. Naturally, food commodities do not comprise a uniform basket, and some brands will be impacted more than others.

For example, cheese is up 10.9% YTD and up 30.4% in October over the prior year, which impacts pizza brands most significantly (though it is also an issue for burger brands). Chicken, on the other hand, is down 11.1% YTD and expected to increase only 4% to 5% in 2020 — good news for lovers of the Popeyes chicken sandwich. Starbucks is similarly benefiting from a 10.6% YTD decrease in coffee.

However, key commodities for burger brands — ground beef and potatoes — are up 14.0% and 14.6% YTD. Eggs, which are important for the breakfast daypart, are down a whopping 41.5% YTD and are expected to be basically flat in 2020.

The second major cost center for restaurants is labor, and here the news has not been favorable for quite a while. Restaurant wages have consistently ticked up over the past couple of years, and for 2019 YTD are up 3.9% over 2018. Over 20 states have minimum wage increases coming in 2020, and there has also been a growing trend of counties and municipalities imposing increases either greater than state minimums or in the absence of any action by their state, so this number, while it represents over 40% of the country, does not even tell the entire story.

It is likely that anticipated strong holiday sales (about $730 billion forecast by the National Retail Federation) will help drive healthy traffic for the QSR segment and thus favorable results in Q4-19. However, once 2020 arrives, a combination of increases in core costs and economic uncertainty — the recession many have been predicting has a good chance of starting next year — could combine to weigh down QSR earnings. As with the last recession, most brands are likely to focus on value-based promotions in order to attract customers whose pocketbooks have been pinched. All in all, 2019 is likely to finish strong for the QSR segment, but be cautious as 2020 progresses.