What doesn’t kill fast food makes it stronger

Restaurant chains like McDonald’s and Chipotle aren’t only surviving in the U.S., but also thriving despite deep economic slump.

  • By Charley Grant,
  • The Wall Street Journal
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Not even the full force of a global pandemic can keep U.S. fast-food sales down for long.

After mandatory closures and social-distancing orders ground the restaurant industry to a halt in March, sales at quick-service chains have begun to improve noticeably.

Chipotle Mexican Grill, (CMG) which saw its share price reach a record high on Monday, said last month that comparable restaurant sales fell 35% from a year ago in the final week of March but that the decline improved to the “high teens” as April progressed.

Shake Shack (SHAK) reported a comparable weekly sales drop of 73% at the nadir, which had improved to a 45% drop by April 29. Wendy’s, (WEN) which began serving breakfast at its stores in March, said U.S. same-store sales fell 2.1% in the week that ended May 3, after dropping nearly 26% in the first week of April. Wingstop said April U.S. comparable sales actually rose by 30%. Share prices for the category have rebounded along with sales.

While U.S. payrolls dropped by 20.5 million workers in April, some money still did reach those consumers’ pockets. Enhanced federal unemployment benefits, coupled with stimulus checks for many Americans, began to reach mailboxes.

That fresh income isn’t likely to induce bigger-ticket consumer spending, but an extra value meal should be in reach for many. Companies across the industry have reported much higher average spending per customer lately as large orders for families have increased in frequency.

Serving customers is a challenge with dining rooms closed. Fast-food concepts can adjust far more easily than sit-down restaurants, though. Having an existing drive-through infrastructure certainly helps too: McDonald’s (MCD) said last month that about 90% of recent U.S. sales have been via the drive-through. In normal times, it accounts for about two-thirds of sales.

But some restaurants, like Chipotle and Wingstop, have been able to boost sales even without a major drive-through presence. Investments in online ordering capabilities from 2019 and before have paid off. In the case of Wingstop, digital sales made up about two-thirds of total revenue in the first quarter. That is up from 40% in the final three months of 2019, according to analysts at Wedbush Securities.

Chipotle Finance Chief John Hartung told analysts last month that online sales tended to recur since the customer had already saved order and payment information in a mobile app. Those sales more than doubled in April as on-site order rates plunged.

Delivery and drive-through can’t fully replace the lost sales from closed dining rooms, but those closures mean operators can reduce major expenses such as utilities, labor to clean the dining room, and trash-removal services. Wendy’s told Wall Street analysts earlier this month that it has reduced the average daily sales break-even point for breakfast by 35%.

The stock price rally might not last. Supplemental unemployment insurance runs out in July, for starters, and there is no guarantee that the economy will improve or that fresh stimulus will arrive by then. Higher meat prices as a result of packing-plant closures could eat into profits, too, because passing on rising food costs to customers in this environment will be difficult. Chains with a heavy presence in airports, shopping malls and other large gathering sites also will take longer to recover.

But investors with a longer horizon should be heartened by one basic truth: U.S. consumer demand for fast food has exhibited a V-shaped recovery.

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