Last year was a bit of a mixed bag for restaurant stocks, and 2019 looks like it could be a lot of the same.
In general, the restaurant segment of franchising did well on the market. More than half of the public restaurant companies were positive for the year. An index supported by Franchise Times’ sister publication the Restaurant Finance Monitor showed the segment doing well, rising about 12 percent through 2018 and far outpacing the 1 percent gain for the S&P 500, according to Bloomberg analyst Matthew Moros.
But some macro trends could affect the restaurant segment, and fixed costs are a big one. Bloomberg analyst Jason McGorman pointed to healthcare costs. While overall prices in the Affordable Care Act marketplaces are expected to rise just 3 percent in 2019, “high-population states California, New York and Pennsylvania asked for a weighted-average increase of 9 percent,” wrote McGorman in a coverage note. And a handful of states could see double-digit increases. This comes after a 30 percent rate hike in 2018 and 25 percent in 2017.
Rent and student debt are serious factors as well. Median rent has jumped 40 percent since 2010, while student debt levels reached $1.5 trillion and a median amount of debt rose to $19,000. Meanwhile, Pew showed personal income has grown by an average of 1.6 percent since 2007.
That means less casual diner traffic from boomers retiring and cutting costs as well as younger diners who have seen very anemic wage growth and who prefer fast-casual chains “that offer higher-quality food and counter service, which typically carries lower average checks,” wrote Moros.
This also means more and possibly deeper quick-service restaurant discounting. The brutal chase-the-discount-leader game will likely continue if the latest round of bundle and value meals are any indicator. Moros said that doesn’t bode well for smaller chains.
“Scale matters, and those that have it will likely snag market share by attracting value-conscious consumers. This will continue to force smaller chains such as Sonic and Jack in the Box to compete on price,” wrote Moros.