Consumers’ reluctance to spend is no match for fruity refreshers and chipotle honey chicken burritos.
Two of the largest US restaurant companies, Starbucks and Chipotle Mexican Grill, both raised their guidance on July 29 after stronger-than-expected quarters. Sales at both chains were bolstered by trendy new menu items and revamped loyalty programs.
Starbucks shares rose 2.1 per cent at 9.55am in New York trading on July 30, while Chipotle’s stock advanced 13 per cent.
The results show that diners are still willing to open their wallets to eat out if the prices and flavours are right. They also offer hope to consumer companies as rising gas prices squeeze budgets and stoke fears that diners will cut back even more on restaurant outings. Companies including Procter & Gamble and PepsiCo have said that consumers are retrenching.
Chipotle’s gains are “pretty broad-based” across all ages and income cohorts, but the efforts are particularly paying off with younger diners, chief financial officer Adam Rymer said in an interview.
On a conference call, Starbucks chief executive officer Brian Niccol offered a similar assessment, saying sales growth “was broad-based across generations and income groups and across both Starbucks rewards members and non-members – even with the continued pressure on US consumer sentiment”.
“We’ve not seen the customer move back as it relates to Starbucks,” Niccol said July 30 on Bloomberg TV. “They’ve been really resilient.”
Chipotle’s Rymer highlighted a lime sauce and chipotle honey chicken as well as promotions tied to the FIFA World Cup. Starbucks said new chicken wraps, blue coconut beverages and its line of iced fruit drinks with customisable levels of caffeine attracted customers.
“There’s still lots of space to add more transactions, both in the morning and in the afternoon,” Niccol said. “We’re operating better on a day-to-day basis, and I think our customers are seeing it.”
Starbucks has replaced products that weren’t selling well with trendy food and beverage alternatives. Chicken wraps, available at some stores, are meant to draw in customers in the afternoon, which has lagged the sales generated during the morning rush.
The company now has differentiated status tiers in its loyalty programme, and users have one free drink customisation per month. Starbucks says the rewards offering is exceeding its expectations. It’s also improving customer service with increased staffing and barista training while renovating its stores – measures that have helped sales but eroded profitability.
Starbucks chief financial officer Cathy Smith said customers added more food to their orders, with the afternoon hours seeing the strongest gains.
Chipotle, meanwhile, has expanded its loyalty program’s redemption options along with birthday rewards and monthly free food.
The burrito chain is looking to persuade customers that its prices are justified. It’s touting the quality of its ingredients – as well as the menu’s protein content – while offering snacking options like US$4 protein cups or a single chicken taco for US$3.50.
That has helped draw customers in on more occasions during the day without sacrificing purchases of full meals, Rymer said. “It’s not a story of of a trade-down or anything along those lines,” he added.
Chipotle is also facing higher labour costs and persistent beef inflation.
The boosted outlooks offer some good news for a beleaguered industry. Earlier on July 29, Wingstop reported stronger-than-expected profit, but same-store sales slumped more than expected. The company expects that measure to decline 4 per cent to 6 per cent for the full year, illustrating how competition is intensifying for diners’ dollars.
Last week, Lamb Weston Holdings, which supplies potatoes to restaurant chains including McDonald’s, offered modest guidance for its next fiscal year as customers switch to cheaper products and dining out frequency decreases.
In recent weeks, an outbreak of cyclospora that was tied to lettuce at Taco Bell has also hurt traffic at US restaurants. The outbreak occurred after the finish of the quarters that companies are currently reporting.
Taco Bell’s parent, Yum! Brands, is scheduled to release results on the morning of July 30 before the open of US markets. McDonald’s will report on Aug 4. BLOOMBERG
