With several restaurant operators providing updates this week, it’s becoming increasingly evident that we’re settling into a “winners and losers” scenario across much of the industry. We’ve previously discussed that many operators were optimistic heading into the year because of adjustments in store layouts to better accommodate changing consumer behavior coming out of the pandemic and enhancements to digital marketing/loyalty programs, but also acknowledging that persistent inflation and new store construction delays and costs were likely to dampen results somewhat through at least the first half of 2023. These sentiments were echoed by several management teams the past few weeks, prompting even more questions about where the industry is headed in 2023.
We’ve said it before, but 2023 is shaping up to be the year where restaurants and retailers look to take the learnings from the past several years and maximize returns on their physical store assets (especially against a rising interest rate backdrop). It’s early in the year, but it’s becoming evident that some operators are further along in these efforts to refine their business models and adapt to changes in consumer preferences. Two weeks ago, we discussed how McDonald’s was one of the operators separating itself from the pack due to improvements in its loyalty program that are helping to drive greater visit frequency. Last week, we also looked at how Cava has adjusted to a changing consumer environment to position itself as the first Mediterranean concept to build a national presence.
Below, we’ve identified other situations where operators have been able to adjust to changing consumer behavior to offer some additional commentary on what to expect from this industry in 2023.
- Full-service restaurant winners and losers. We’ve received questions about which full-service restaurant chains are well positioned in 2023 and beyond,so we’ve presented Yo3Y visitation trends for 20 of the largest full-service dining chains below. We’ve chosen to present Yo3Y visitation data here instead of YoY data because it offers a more comprehensive look at where a chain stands compared to pre-pandemic trends. While visitation trends compared to pre-pandemic levels have to be taken with some context–some chains are seeing visits down YoY due to closing underperforming stores and other portfolio optimization efforts, for instance. We believe these trends still provide a good barometer for identifying winners and losers in the category.
Looking at the data below, two trends stand out to us. First, steakhouse chains and breakfast-first concepts have really emerged as the winners in the full-service category coming out of the pandemic. We’ve spoken in the past about how First Watch has reinvigorated the breakfast full-service category and Placer’s blog team has looked at the factors driving success among steakhouse chains, but seeing the outperformance of these two categories across multiple players also reinforces that these chains are seeing greater visits because of combination of more aggressive unit expansion efforts and also higher visits per location, which suggests to us that this outperformance will continue in 2023. Second, we’re also seeing a bifurcation in consumer behavior. Visits to most casual-dining chains remain below pre-pandemic levels, which partly reflects trading down and trading out among lower- to middle-income consumers. However, fine-dining chains like The Capital Grille and Eddie V’s are trending ahead of pre-pandemic levels due to the health of higher-income consumers and improved trends in business travel.
- Pricing changes can cull less-productive visits. The most frequent topic that our restaurant customers have wanted us to look into early in 2023 is the impact of pricing increases on visitation trends. Brinker International–the parent company of Chili’s and Maggiano’s recently discussed its decision to raise YoY pricing–including incremental pricing on the menu and in third-party delivery–by approximately 10%. Management is making an effort to move away from “higher unnecessary levels of discounting” while “protecting an opening price point for the guests that would otherwise not be able to afford Chili's or casual dining” (which is why the chain kept its $10.99 opening price point intact), and expressed comfort with this more elevated price structure relative to its competition. Management acknowledged that the decision to raise prices likely cost the brand a bit of visitation market share during the quarter–and our data indicates that Chili’s YoY visitation trends lagged YoY visitation trends for the full-service restaurant category after implementing the 10% price increase.
However, management believes that Chili’s grew dollar market share, as some of these lost visits represented unprofitable visits (i.e., guests that are heavily dependent on discounts to make a purchase). The company has shifted away from sending coupons via email, as many customers were using these coupons for “freebies in addition to layering on our lowest price point on 3 for Me” promotions. As the company has shed some of those customers, they’ve lagged behind the full-service industry on traffic but simultaneously growing dollar share.
- Blurring of the lines between QSR and Fast Casual. Chipotle’s Q4 2022 update offered additional insights into another chain that has adapted to adjusting consumer behavior. Chipotle’s price increases had a negative impact on visits, as menu price increases of 13.5% compared to the year ago period directly led to a decrease in visits and transactions (down about 4%) and menu mix (less items per order, which was down about 3%). The company was also lapping last year’s limited time brisket product and saw “lower than expected benefit from Garlic Guajillo Steak”.
Similar to Chili’s, we believe Chipotle was willing to make the trade-off for higher prices at the expense of losing some of its more discount focused, lower-income customers, which should help profitability going forward. However, the company reported that transaction trends improved throughout the quarter as they lapped last year’s brisket LTO–something our data corroborates below–and that underlying trends have improved in 2023 with transaction trends turning positive. For the first quarter, the company anticipates comps in the high single-digit range, with some moderation as it laps menu price increases in early Q2 2023 and the middle of Q3 2023.
Despite the softness in Q4 2022 visitation trends, we continue to see Chipotle as one of the leaders in the fast casual space through its Chipotlane format locations (management noted that new restaurant productivity has improved by about 1,000 basis points since the company began operating Chipotlane format stores in 2018 (our data also suggests that Chipotlane format stores opened the past two years have generally outperformed non-Chipotlane locations). As visits per location for the fast casual category continues to converge toward QSR category levels because of a blurring of the lines between the two categories (below), Chipotle continues to see visits per location on par with pre-pandemic levels and well ahead of category averages.
Strong visitation trends relative to the category have helped the company remain a key tenant for many commercial retail real estate owners. Despite the ongoing material shortages and permitting and inspection delays, the company opened 236 new restaurants during 2022 (including 202 Chipotlane locations) with 100 locations opened in the fourth quarter alone. For 2023, the company plans to open 2555-285 new restaurants, with over 80% featuring a Chipotlane.
- Subway Explores Possible Sale: Rounding out our discussion of the restaurant category is Subway’s announcement that it is exploring a possible sale. This development isn’t terribly surprising, as rumors about a potential sale have been in the market for several weeks (and as far back as 2020). We’ve previously discussed the company’s “quality over quantity” approach to rightsizing its store footprint and how a revamped franchisee base may have been equally as important as the company’s menu changes in driving visits. The chain recently reported that same-store sales increased 9.2% during 2021, and while that was primarily driven primarily by price increases, our data indicates that visits per location increased in 2022 compared to 2021 (26.5K versus 25.7K) because of the chain’s menu and franchisee base changes. While 4Q22 visits per location declined versus 4Q21 (below), post-COVID visit per location trends remain ahead of pre-COVID levels, offering another incentive for a potential buyer.
