Fast food chains are struggling in 2016 with company after company releasing worse-than-expected earnings each quarter and increasingly bizarre food options being introduced to woo customers.
Arguably the biggest name in fast food, McDonald’s Corp (MCD) has seen its revenues fall 4% this quarter when compared to last year. McDonald’s attributes this drop in revenue to the fact that the company is selling corporate-owned restaurants to franchisees. However, as McDonald’s CFO Kevin Ozan said in the company’s latest earnings call, fast food prices are increasing faster than the cost of preparing food at home. He goes on the clarify that while McDonald’s is experiencing a 3% increase in its food prices, the average increase on food prices away-from-home was only 2.6%. In contrast, The Consumer Price Index Summary reports food deflation this past year, with June 2016 at-home food prices 1.3% lower than in June 2015.
The Wendy's Co (WEN) CEO Todd Penegor spoke of this problem as well saying “The most notable driver behind the sales slowdown appears to be the continued gap between cost of eating at home and cost of dining out, which is now at its widest point since the recession.”
Wendy’s same-store-sales, like McDonald’s, failed to meet analysts’ expectations. Wendy’s saw its revenues fall drastically for other reasons including corporate-owned restaurant sales to franchises and the 2016 Presidential election. (Related: 4 Ways that the Presidential Election Will Affect Your Portfolio)
Other Struggling Restaurants
Luckily for McDonald’s and Wendy’s shareholders, these fast-food chains aren’t the only fast casual restaurants feeling the effects of increased operation costs causing higher prices.
Shake Shack Inc (SHAK) and Starbucks Corp (SBUX) performed more or less as analysts expected. Starbucks slightly missed on revenue, blaming its performance on customer uncertainty, mis-execution of its Frappuccino happy hour and a change in its popular rewards program. Shake Shack beat on both revenue and EPS but revealed that its growth has slowed down tremendously from last year and that its operating profit margin has decreased slightly from 30.8% to 30.3%.
Dunkin’ Brands Group Inc (DNKN) shares fell on poor earnings. In the U.S., Dunkin’ Donuts’ same-store sales increase 0.4% versus the 0.9% analysts had expected. Baskin Robbins performed even worse, with same-store sales only growing by 0.6% instead of the expected 3.4%. Dunkin’ Brands beat on EPS but posted slightly lower than expected revenue. The chain also revealed that it would follow McDonald’s and Wendy’s lead and continue selling its corporate-owned restaurants to franchisees.
The Bottom Line
Fast food chains are suffering despite increased product offerings. A big reason for decreased revenue is that fast food prices are increasing quicker than at-home food prices as well as the continuous sales of corporate-owned restaurants to franchisees.