5 QSR CEOs talk inflation

0

Inflation in labor and food costs has squeezed the restaurant industry over the past 18 months, but some executives believe their chains can weather the ongoing economic volatility. While inflation appears to be moderating, sustained rate hikes could trigger a recession. However, there are still no significant signs that a recession has started, experts say.

“Restaurant sales often tend to slow before the overall economy slows [and] We’re not seeing a slowdown in restaurant consumers,” said Paul Westra, managing director of restaurant investment research at Capital One.

Over the next few months, restaurants are likely to continue raising prices to regain lost margin and profitability. But that strategy could jeopardize gains if consumer sentiment deteriorates and the economy officially slips into recession, Westra said. So far, however, restaurant sales have yet to take a major slump.

Same-store restaurant sales are at their highest since the early pandemic, up 6% over the past four to eight weeks, Westra said.

“The consumer is relatively stable right now, despite all the warnings we’re seeing in the news,” he said.

To get a better understanding of how inflation is affecting the QSR sector, Restaurant Dive reviewed comments from CEOs of Chipotle, McDonald’s, Restaurant Brands International, Papa Johns and Wendy’s during their recent earnings calls. Here’s what they said.

Courtesy of Chipotle

Chipotle CEO Brian Niccol

To combat rising costs related to labor inflation, Chipotle has raised menu prices, including a 4% increase in August and another 2% to 3% increase in October at about 700 restaurants where wages have risen the most are.

“Unfortunately, you have seen that in all this inflationary environment, everyone takes the prize. So our costs are up, I think, over 20% over the last two years,” Brian Niccol said during the company’s October conference call.

Comparing restaurant prices to food alternatives like grocery stores is important, Niccol said, adding that Chipotle’s value proposition towards these alternatives remains strong.

Although Chipotle has seen a drop in visits from low-income customers, high-income customers — who make up a bulk of the guest base — have not reduced their visits. Those guests still ask for add-ons like guacamole, which come with an extra fee.

“We are in a position of strength but I think we can get much stronger and better going forward and I think that will be manifested in some additional transactions in a difficult environment,” Niccol said. “That’s why you hear us say, hey, look, we gotta appreciate every guest because we[‘ve] gotta do it right … There will be a tougher environment for consumers in the future. So, without a doubt, this is a great opportunity.”

An image of a man sitting at a table in a McDonald's

Courtesy of McDonald’s

McDonald’s CEO Chris Kempczinski

McDonald’s is bracing for a mild to moderate recession in the U.S. and possibly a longer and deeper one in Europe, Chris Kempczinski said during the company’s third-quarter 2022 earnings call.

“In 2022, the gap between eating out and eating at home will widen [is] the biggest gap ever,” said Kempczinski. “So there’s still an edge that the industry is getting compared to at-home groceries that I think is making everyone want to be smart about pricing.”

Kempczinski said while all restaurants experience inflation in food, paper and labor costs, McDonald’s franchisees are in a better position than their competitors.

Some of that strength comes from the company doubling down on digital and delivery, creating relevant marketing campaigns around the world, he said. Digital now accounts for a third of McDonald’s systemwide revenue, and its app has over 43 million active customers. In the US, McDonald’s Rewards has reached 25 million active customers.

“Our size, scope and financial results put us in an advantageous position as we head into more volatile times, and we will capitalize on the strengths of the system,” said Kempczinski.

An image of a man in a suit against a blue background

Wendy’s CEO Todd Penegor

Retrieved from Wendy’s on November 10, 2022

Wendy’s CEO Todd Penegor and CFO Gunther Plosch

Wendy’s expects inflation to ease in the fourth quarter as the company already experienced favorable economic changes in the third quarter, CFO Gunther Plosch said during the company’s November conference call. In the second quarter, Wendy’s experienced commodity inflation of 19%, but that improved to 15% in the third quarter, he said.

“Wage rates have risen … but inflation is still strong. So if inflation eases on the commodity front and there is more disposable personal income for the consumer, that bodes well for the industry,” said CEO Todd Penegor. “The healthier consumers will continue to come out. We’re going to see those frequency gains and move people from eating in to eating out.”

Wage inflation has also improved. Currently, wage inflation is hovering around 6% compared to last quarter when it was 12%, Plosch said.

“We definitely expect commodity inflation to be lower than … what we saw in 2022,” Plosch said. “As a result, we would also expect that our price increases that we will make in 2023 will be smaller than this year.”

Wendy’s U.S. menu prices are currently about 10% higher than a year ago and restaurant profitability is nearing pre-pandemic levels, he added.

But Plosch doesn’t expect the inflation problem to go away anytime soon.

“Inflation is here to stay, especially on the labor front,” he said.

To offset this, Wendy’s relies on its third-party pricing specialists, improves its analytics to better reach customers, and markets products that encourage guest action and a positive sales mix, he said.

Restaurant Brands International CEO Jose Cil

Though the past few quarters have been difficult for Restaurant Brands International, the chain has also seen moderation in raw materials and labor, RBI CEO Jose Cil said during the company’s third-quarter 2022 earnings call.

“Our franchisees are feeling the pressure. Our guests feel the pressure too,” said Cil. “And every conversation I’ve had with franchisees here in the US and Canada, as well as in Europe and other international markets, quickly turns to the volatility and tremendous pressure that they and all of us are feeling and what is in our restaurant-level margins.” the steps we are taking to address it? And it’s a huge focus for our team. We are working on this together with our franchisees.”

An image of a man against a white background
Retrieved from Restaurant Brands International on November 10, 2022

RBI has used its size and purchasing power to facilitate commodity growth in domestic markets and international pricing. The company has been working to understand “elasticity of demand.” The company has managed the product mix to ensure margins remain strong. For example, Burger King removed its Whopper from the $2-for-6 platform and has seen margin increases since then, Cil said.

“We drive efficiency through simplification, which helps our owners work more effectively and efficiently. And in some cases, we’re looking at ways to help restaurant owners with working capital during times of seasonally low cash flow,” Cil said. “These are things we are working on to help the team and the franchisees in the short term. And despite these challenges, based on our outlook, we believe profitability and cash flow are moving in the right direction.”

Robert Lynch, CEO of Papa Johns

Consumer sentiment has fallen amid the challenging economic climate, but Papa Johns has worked to strike a balance between offering premium menu innovations like its Epic Pepperoni-Stuffed Crust pizza and delivering value to cost-conscious diners, said Robert Lynch, Papa’s CEO Johns, during the company’s third-quarter 2022 earnings announcement.

Papa John's CEO Rob Lynch

Permission granted by Papa John’s

Papa Johns’ strategy continues to rely on carryout, in-house delivery drivers, or third-party aggregator partnerships. These channels help meet a customer’s need for value, speed, or convenience, and give Papa Johns the ability to serve customers from diverse socioeconomic backgrounds, Lynch said.

“We will continue to be agile in this challenging macro environment to adapt to changing consumer needs without sacrificing our premium position,” said Lynch. “Pizza has traditionally done well during a recession because it’s an affordable meal. This is consistent with our solid start to the fourth quarter and our continued expectation to end with positive comparable sales in North America.”

Share.

Comments are closed.