Hey, America, Fast Food Is Back
Darden Restaurants' recipe for growth seems to be working so far. But context is important.
The operator of Olive Garden and Capital Grille on Friday reported its fifth consecutive quarter of sales growth at established locations and raised its 2016 financial outlook. Shares rose about 6 percent on the news and are up 20 percent in the past year.
Kudos to Starboard Value, the activist investor that pushed Darden to go easy on the breadsticks, sling more alcohol to customers, and spin off 424 of its 1,500 restaurants into a separate real estate investment trust.
But before you break out the champagne, Darden's rising shares still pale in comparison to its peers. This year, the S&P 500 Restaurant index rose 25 percent, as Americans spent more at restaurants than at the grocery store for the first time ever.
Curiously, the bulk of growth in restaurant spending isn't coming from casual and fast-casual restaurants. The steady rise of such chains has prompted prognosticators to proclaim a shift in consumer preferences in favor of healthier food and the end of fast food. But now it seems like fast food could be coming back in vogue.
McDonald's, which struggled over the past few years as people supposedly turned to healthier fare, has seen its shares rise by 28 percent this year as it orchestrates a turnaround. Wendy's shares are up by 20 percent during that time. Meanwhile, fast-casual chains such as Noodles & Co. (down 58 percent), Chipotle (down 15 percent) and Zoe's Kitchen (down 7 percent) are on the decline. Sales growth shows similar trends.
Fast food's revival may be helped by the recent weakness of the one-time fast-casual leader, Chipotle, hit by a series of food-borne illnesses. Chipotle recently said it expects fourth-quarter sales at established restaurants to fall by a range of 8 percent to 11 percent from a year ago. Fast-food chains such as McDonald's and Taco Bell have also stepped up their breakfast games, seriously undercutting casual dining establishments, such as Bob Evans and Denny's, that once cornered the breakfast market.
Fast-food restaurants are also adopting many of the hallmarks of the "fast casual" experience, sprucing up restaurants and offering healthier and higher-quality fare such as cage-free eggs and gluten-free menu items. Even convenience-store chains such as 7-11 and Wawa are serving better food, increasing their share of all U.S. restaurant meals to 7.8 percent from 6.5 percent, according to NPD and RBC Capital Markets analyst David Palmer.
But the shift in fast food's favor could also have to do with growing income inequality. With wages stagnant and the middle class shrinking, consumers increasingly flock either to lower-end retailers and restaurants or higher-end luxury chains and upscale eateries. Chains that serve the middle market get squeezed.
Lower food prices encourage middle-income consumers to buy steak and pasta at the grocery store instead of going to Olive Garden or Longhorn Steakhouse. But they probably don't replace the quick trip through the McDonald's drive-through after soccer practice, according to Bloomberg Intelligence economist Richard Yamarone. Rock-bottom gas prices also help fuel trips to fast-food chains by lower-income consumers.
If the trends toward fast-casual dining that seemed so inexorable for nearly a decade are suddenly shifting, then even the best-executed turnaround plans won't be much help for Darden and other casual dining chains.
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