Another Red Flag: Growth In Fast Food Visits Has Hit A Wall

Earlier this month, Nomura came out with fresh downgrades to McDonald's, Domino's, Wendy's, and Papa John's, and all of the notes started with the exact same sentence: "Our downgrade is predicated on multiple factors, including slowing in the US restaurant industry same-store sales trends during Q2."

Nomura downgraded those restaurants for precisely the same reasons that market research firm NPD Group points out, which is that the growth in visits to fast food restaurants has come to a complete standstill. As the WSJ reports, visits to fast food restaurants had been growing at a quarterly rate of 2% since September 2015, but haven't grown at all in March, April or May.

CEO's are confirming the slowdown, as Clifford Hudson, CEO of Sonic Corp. told investors that the consumer as become "more guarded", and is even more sensitive to prices than just a few months ago. Wendy's CEO reiterated Hudson's comments, saying "the consumer does continue to be cautious", adding that "it has been hard to really pinpoint what's driving that." Well, allow us to take a shot at that one: the economy has created low paying jobs during the "recovery", and those lower wage workers are as cost burdened as ever as they pay more and more of their income toward rent - that would be a good place to begin to look for answers.

As NPD restaurant analyst Bonnie Riggs points out "that's a red flag because it's been an area of growth and it's 80% of the industry." Indeed, but not only that, it's a red flag because when consumers feel uncertain about their financial futures, a pullback in discretionary spend is the first place to pull back and save money.

For Tracy Schwartz, a 29 year old part-time receptionist, saving money is precisely what she is trying to do by eating more at home as opposed to going out. After losing a full-time job five months ago, Schwartz said "I needed to figure out ways to save money", so she began eating prepared meals from supermarkets and clipping coupons.

With it being more expensive to eat out than it is at home, it's easy to see how any slight shift in consumer confidence (or ability to pay) would lead to a significant pullback in restaurant spending.

And of course as rates are being driven to near record lows, not allowing for savers to earn much income at all, those that are retired have become quite careful with how money is being spent.

"I retired early and I'm not getting Social Security yet, but I and a lot of people my age are afraid of benefits changing before we get there. Right now I have short-term savings to get me by until I'm able to draw Social Security but I don't feel confident in what I can count on." said Diana Martin, a 57 year old retired pharmaceutical sales executive.

Martin noted that the bill at a fast-food chain she frequented with her son used to amount to $12, now those same two meals come to $16. Meanwhile organic chicken at the local supermarket has been selling for around $6 per pound, down from $9 per pound so Diana has been stocking up.

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Kroger CEO Rodney McMullen told investors that the state of the consumer is "really hard to describe", adding that sales of Kroger's higher-end meats and cheeses are growing faster than less discretionary items. Actually it's not hard to describe at all, consumers are worried about the state of their finances and are losing confidence in the future, thus the state of the consumer can be described as extremely cautious.

We'll be keeping an eye on this development in the future, because if this indicator spreads to other consumer goods and services, the minuscule Q1 GDP will become part of the new normal as well.