While many sectors of the US economy are doing better than they have in years, fast food chains aren't one of them, according to the Financial Times.
US fast-food outlets experienced a 2.6% drop in customers during September vs. a year ago, according to MillerPulse, a restaurant industry data provider. The decline compares to a meager 0.8% y/y drop in August.
Industry insiders are placing blame on several factors, including consumer demand for healthier alternatives and lower construction activity - "which means fewer building workers are picking up fast food on lunch breaks," according to FT.
And despite the lowest unemployment levels in decades (notwithstanding questionable number fuzzing), a seemingly robust economy isn't translating to higher consumption of burgers, pizzas and milkshakes.
Earlier this month Wendy's CEO Todd Pengor said that low-income customers were failing to benefit as much as those with higher incomes.
About 40 per cent of so-called quick-service restaurants’ customers earn $45,000 or less, said Mr Penegor as he presented his company’s third-quarter earnings. Wendy’s like-for-like sales in North America ticked down 0.2 per cent in the three months to September.
“We are seeing the lowest unemployment levels in a long time, high consumer confidence . . . but as you look at that income growth, it skewed significantly to higher-income households,” he said. “On the low end, you start looking at folks with rent and healthcare costs starting to rise that are really eating into some of the headway that they are making.” -FT
The lack of customers is having an effect up and down the industry. Earlier this month, the New England-based owner of D'Angelo Grilled Sandwiches and Papa Gino's filed for bankruptcy protection and put itself up for sale after the two brands shuttered 95 restaurants. The company, PGHC Holdings, has $62 million in secured debt out of an overall debt burden of $100 million.
The 169-strong Texas-based Taco Bueno chain, meanwhile, filed for Chapter 11 as well this month under a "prepackaged" restructuring plan under which franchisee Sun Holdings will take control of the Tex-Mex fast food chain.
At the same time, fast food companies are pulling out all the stops to lure customers to their stores; McDonald's recently introduced a $6 meal deal, while Burger King recently advertised 10 chicken nuggets for $1, and Applebee's is trying to get people through the door with $1 cocktails.
MillerPulse co-founder Larry Miller says the fast-food landscape is highly competitive. "Everyone wants to be their own boss and thinks they can run a restaurant, and access to capital is pretty easy with interest rates still fairly low."
Wedbush analyst Nick Setyan added to that, saying "We’ve been seeing a divergence between QSRs [quick-service restaurants] and higher end chains. We’ve really seen QSRs disappoint."
Setyan cites lower immigration, resulting in fewer low-income customers, along with the lower construction rates for the squeeze. FT notes that housing construction dropped 5.3% in September vs. August.