The American restaurant industry is confronting significant and overlapping challenges.
Recent research by UBS analyst Dennis Geiger indicates that macroeconomic pressures, persistently high gasoline prices, and weakening demand from low-income consumers are continuing to drag on traffic and sales performance for chain restaurants, with the overall industry sentiment remaining "broadly cautious."
Feedback from franchisees of McDonald's (NYSE: MCD) and Wingstop is particularly concerning. McDonald's franchisees noted that second-quarter 2024 performance to date has been mixed, with high gas prices notably impacting the spending power of their core low-income customer base. Wingstop franchisees reported ongoing negative same-store sales and traffic, with multiple factors weighing on results.
Simultaneously, the national average gas price has remained above the politically sensitive $4 per gallon mark for ten consecutive weeks. As tax refund benefits fade, the financial strain on working-class consumers is becoming more pronounced. Geiger cautions that with tougher year-over-year comparisons approaching in the second half of the year and the persistence of recent headwinds, his outlook for the restaurant sector has grown more conservative.
Franchisee Perspectives on Traffic and Challenges
Based on UBS's recent discussions with management and franchisees of several major restaurant brands, McDonald's franchisees attributed the second quarter's softness primarily to two factors: tough comparisons from a strong April 2023, and the direct impact of gas prices on the spending willingness of their core low-income demographic in the current macro environment. Franchisees acknowledged that should macroeconomic headwinds persist, comparison pressures in the second half of the year could also be challenging.
Despite this, McDonald's franchisees maintain a cautiously optimistic view of the brand's prospects, citing several potential catalysts. Recent specialty beverage launches, including "dirty sodas" and refreshers, have already boosted average check sizes, with an energy drink expected in August alongside menu innovations like new chicken offerings and snack wraps. The World Cup-themed meal with collectibles has started well, and a "Home Alone" meal is anticipated for the fourth quarter. Value platforms like the "$3-and-under menu" and "$4 breakfast bundle" are expected to gradually drive traffic in the coming quarters. Digital initiatives, delivery, and the loyalty platform continue to provide incremental benefits.
For Wingstop, franchisees cited a more diverse set of pressures: ongoing macroeconomic impacts on the core customer base; difficult comparisons against several years of strong sales growth fueled by delivery expansion, marketing, and sports sponsorships; consumer fatigue with chicken as most fast-food competitors have pivoted to it amid high beef costs; some self-cannibalization in markets with high delivery penetration; intensified competitive promotional activity; and a recent decline in social media buzz. However, franchisees expect a temporary boost from the World Cup (June-July) and anticipate sales trends turning positive later this year or in early 2025.
Restaurant Prices Outpace Groceries, Driving Shift to Home Cooking
Price data also paints a concerning picture. According to government figures, the inflation rate for food away from home (FAFH) eased slightly to 3.5% in May (from 3.6% in April), while inflation for food at home (FAH) also decelerated to 2.7% (from 3.0%). However, restaurant price increases remain about 80 basis points higher than grocery stores, a gap that widened from approximately 60 basis points in April. Fast food pricing rose 3.3% and full-service pricing 3.8%, both largely flat with April. UBS expects restaurant price inflation to moderate in the coming quarters as higher-priced menu items cycle out.
Consumer behavior data confirms the real-world impact of these price pressures. A Technomic industry survey found 83% of consumers have noticed increased menu prices, and 63% have responded by cooking at home more often. Looking ahead 12 months, 45% plan to eat out less, and 38% are actively seeking out promotions.
The survey also revealed generational differences in value perception: Baby Boomers and Gen X prioritize speed and product quality, while younger consumers consider factors beyond price, such as brand affinity, digital convenience, and social values.
Long-Term Impact of GLP-1 Weight-Loss Drugs
UBS also conducted a dedicated study on the long-term implications of GLP-1 weight-loss drugs for the restaurant industry. Michael Yee, Global Head of Biotech Research at UBS, projects the global GLP-1 market could reach approximately $133 billion by 2030. In the U.S., patients on GLP-1 therapy for obesity are expected to grow from about 5 million in 2025 (roughly 1% of the population) to over 10 million by 2030 (around 5% of the adult population), with potential upside from new drug development and improved convenience.
While recently launched oral GLP-1 pills are expected to capture about 20% of the total market long-term, their weaker efficacy compared to injectables means they are unlikely to be disruptive in the U.S. market near-term. Currently, about 50% of GLP-1 users discontinue treatment after one year due to high costs, but adherence is expected to improve as insurance coverage (including Medicare and Medicaid) expands and out-of-pocket costs decline.
UBS believes the primary impact of GLP-1 drugs on the restaurant sector will manifest in four areas: a reduction in the frequency of eating out, with the effect deepening as drug adoption rises; a continued decline in alcohol consumption at full-service restaurants; a growing consumer preference for healthier food options and smaller portion sizes; and a reduction in overall calorie intake for GLP-1 users, even if dining frequency remains unchanged. While this is a structural long-term trend, it is already entering the strategic planning horizon for the industry.
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