Starbucks, McDonald's and Yum earnings show consumers pulling back

For months, economists have been predicting that consumers will cut back on spending in response to rising prices and interest rates. But it took some time before fast-food chains actually saw their sales contract, despite several quarters of warnings to investors that lower-income consumers were weakening and other diners were trading up for pricier options.

Several restaurant companies also gave other reasons for their weak results this quarter. Starbucks said bad weather led to a decline in its same-store sales. Yum Brands, parent company of Pizza Hut, KFC and Taco Bell, blamed January snowstorms and tough comparisons with last year's strong first quarter for the poor performance of its brands.

But these excuses do not fully explain the weak quarterly results. Instead, competition for a smaller group of customers appears to have become fiercer as diners still looking to buy a burger or a cold drink become more selective with their money.

The cost of eating out at quick-service restaurants has risen faster than the cost of dining at home. Limited-service restaurant prices rose 5% in March compared with the same period last year, while grocery store prices rose more slowly, according to Bureau of Labor Statistics.

“Obviously everyone is fighting for fewer consumers or consumers who are definitely visiting less, and we have to make sure we have a street fighter mentality to win, regardless of the context around us,” said McDonald's CFO Ian Borden. Company conference call on Tuesday.

The outliers show that customers will continue to order their favorite foods, even if they are more expensive than they were a year ago. Wingstop, Wall Street's favorite restaurant chain, reported that U.S. same-store sales rose 21.6% in the first quarter. Chipotle Mexican Grill saw traffic rise 5.4% in the first quarter. Popeyes, a subsidiary of Restaurant Brands International, reported same-store sales growth of 5.7%.

However, many companies in the restaurant sector and beyond have warned that consumer pressures may continue. Chris Kempczinski, CEO of McDonald's, told analysts that caution in spending extends around the world.

“It is worth noting that in [the first quarter]He said that industry movement was steady to decline in the United States, Australia, Canada, Germany, Japan and the United Kingdom.

Two of the chains that struggled in the first quarter cited value as a factor. Casual customers don't buy the chain's coffee because they want more variety and value, Starbucks CEO Laxman Narasimhan said.

“In this environment, many clients were more stringent “On where and how they choose to spend their money, especially with most of the stimulus savings spent,” Narasimhan said on the company's call Tuesday.

Yum CEO David Gibbs noted that value deals offered by competitors for chicken menu items are hurting KFC's U.S. sales. But he said the shift to value should benefit Taco Bell, which accounts for three-quarters of Yum's domestic operating profits.

“We know from industry data that value is more important and others struggle with value, and Taco Bell is a value leader. You're seeing some lower-income consumers backing out in the industry. We're not seeing that at Taco Bell,” Taco Bell said Wednesday.

It's unclear how long it will take for fast-food chains' sales to bounce back, though executives have offered optimistic timelines and plans to get sales back on track. For example, Yum said the first quarter would be the weakest of the year.

For its part, McDonald's plans to create a nationwide value menu that will attract frugal customers. But the burger giant may face opposition from franchisees, who have become more vocal in recent years. While the deals increase sales, they put pressure on operators' profits, especially in markets where they are already expensive to operate.

However, losing ground to competition could motivate McDonald's franchisees. This marks the second straight quarter in which Burger King has posted stronger same-store sales growth in the U.S. compared to McDonald's. The Restaurant Brands chain has been in turnaround mode over the past two years and has spent heavily on advertising.

Starbucks is also betting on deals. The coffee chain is preparing to release an upgrade to its app that allows all customers — not just loyalty members — to order, pay and get discounts. Narasimhan also praised the success of the new lavender beverage line launched in March, although business was still slow in April.