After a few busy weeks of mid-year updates from restaurant operators, the general consensus appears to be: what gives? Chains like Chipotle posted strong visitation trends, but McDonald’s and Starbucks saw declines in U.S. comparable transaction trends. With such a wide range of transaction trends across the industry, it’s understandable that industry observers may be looking for clarity. The reality is the results from each one of these operators tells us something about the state of consumers and the retail/restaurant industry today.
Chipotle: Innovation Pays Off
Let’s start with Chipotle. The company posted transaction growth of +8.7% year-over-year, which puts it among the top performing restaurant chains this quarter. At first glance, Chipotle’s results may seem to fly in the face of the “value” mantra we’ve discussed across the food retail environment at length this year, especially with Chipotle sitting on the sidelines during this summer’s restaurant value wars. However, we believe Q2 results offer two takeaways.
First, despite being budget-conscious, consumers are willing to pay a premium for innovation. Q2 2024 marked the return of Chicken al Pastor as a protein option. Chicken al Pastor (which first debuted in March 2023) was relaunched on March 12, 2024 and will continue through August 2024. According to management, Chicken Al Pastor “surpassed expectations, reaching over a 20% incidence rate and, more importantly, driving incremental transactions and spend.” Our monthly visit per location data shows acceleration since the launch (below), confirming management’s commentary and reinforcing consumers’ willingness to pay for innovation in today’s environment.
Of course, restaurant operators need to be prepared for incremental visits when launching a new product, which leads us to throughput. We’ve largely focused on the price component of value, but the reality is that value can take many forms. In an industry still dealing with labor shortages, the ability to move consumers through a line is another form of value. Chipotle has discussed its efforts to improve throughput the past several years, and we see improvement on this front as peak hours continue to shift away from lunch and toward the evening daypart.
We see opportunities to improve throughput speed in the future and enhance its overall value equation. The company will launch its Hyphen automated digital makeline at a restaurant in late August/early September, and we expect to see a similar lift in peak hour throughput that we saw with sweetgreen’s automated digital makeline location.
McDonald's: Leaning into Value and Nostalgia
McDonald’s generated a lot of headlines during its Q2 2024, most notably that U.S. comparable store sales declined -0.7% during the quarter (representing the first decrease in same-store sales since Q4 2020). We’ve spoken in the past about McDonald’s and new sources of competition for lower-income consumers, many of which have begun shopping at value-oriented grocery stores like Aldi or convenience stores. We’ve also discussed the launch of its $5 Meal Deal, which was only available for one week during the quarter (which also happened to lap last year’s viral Grimace Shake promotion) and didn’t have an impact on Q2 2024 results.
Going forward, it appears that McDonald’s will elevate its value messaging while doubling down on innovation. On the value front, 93% of McDonald’s U.S. restaurants have extended the $5 Meal Deal promotion into August, which is not surprising given the weekly visit per location trends before and after the promotion (below). McDonald’s management noted that comparable sales were negative year-over-year, which we attribute to a smaller average check due to promotions and distortions in group size (i.e., larger group orders, which is something we’ve heard from other QSR operators as of late).
Despite the early success of its $5 Meal Deal, McDonald's continues to see a high degree of cross-visitation with value-oriented grocery chains like Aldi, Walmart Neighborhood Market, Trader Joe’s, and Food Lion, as shown below. As such, it makes sense that McDonald’s management continues to discuss the implementation of an updated national everyday value platform with its franchisees. McDonald’s CEO Chris Kempczinski described the current $5 Meal Deal as "a bridge to a more permanent value program, much like we had previously" (referring to McDonald's' previous $1, $2, $3 value menu). Expect more news on that front in the coming months.
On the innovation front, McDonald’s announced this week that it will be releasing a “Collector’s Meal” beginning on August 13, featuring six collectible cups inspired by past Happy Meal and other promotions. Nostalgia has been an effective tool for driving visits across the QSR space the past several years–McDonald’s October 2022 Adult Happy Meal promotion remains one of the most successful promotions we’ve observed with our data the past few years–and we expect this promotion to help drive incremental visits later this month.
Starbucks: Smaller Market Strength Flying Under the Radar
Out of any of the restaurant chains reporting results the past few weeks, the spotlight on Starbucks has been perhaps the brightest, most notably the -6% decline in U.S. comparable transactions. Earlier this year, we analyzed Starbucks visitation trends by visit frequency cohort, noting that the chain had seen the weakest performance among its occasional customers. Management again attributed the recent softness in visits to occasional visitors, specifically calling out non-Starbucks Rewards customers (which represent roughly 40% of U.S. revenue). Starbucks management also cited increased coffee consumption at home, evidenced by growth in Starbucks’ North American Coffee Partnership joint venture with Pepsi (which produces ready-to-drink Starbucks beverages that are sold through the grocery channel).
Despite the soft quarter, our data indicates that Starbucks’ three-pronged action plan to improve visit trends–(1) creating incremental capacity for transactions through improved store operations, (2) attracting new customers through new products while maintaining a focus on its core coffee offerings; and (3) reaching new customers by demonstrating value–is starting to gain traction. For starters, our data suggests improving visitation trends among casual visitors (representing 1 monthly visit) in July, which we attribute to new seasonal drinks and the company’s Pairing Menu pilot (which appears to have ended for the time being). While the shift in casual visitor visits during July may seem modest, it represents the highest percentage of casual visitors visits we’ve observed since 2022. Between new product launches, offer-driven promotions through the Starbucks app, and implementation of the Siren Craft System (which includes new crew member responsibilities and routines during peak hours, strategic investments in partner hours, elevated training, enhancements to technology, and an evolved beverage build process), we believe Starbucks casual visit trends will remain ahead of recent trends in the back half of the year.
Somewhat overlooked with the market’s focus on recent same-store sales trends is the recent success that Starbucks has had in underpenetrated markets. We analyzed Starbucks’ unit expansion opportunities in detail in September 2022, and we’ve seen progress on this initiative since then. Management has noted that its recent store development effects have been focused on “Tier 2 and Tier 3 cities where we see population growth and forecast both underserved demand and high incrementality.” We compared visit per location trends for Starbucks’ in the Top 25 designated market areas (DMAs) versus non-Top 25 DMAs over the last 12 full months below. As we’ve seen with other restaurant chains like Chipotle, Starbucks is also seeing higher visits per location in its non-Top 25 markets. Many of these non-Top 25 DMA stores have been opened in the past 12-18 months, which suggests improved metrics as these locations enter the same-store sales base.
