COULD BE TOO EARLY TO CALL A UNIT-LEVEL VICTORY
With restaurant stocks through the roof in January (as outlined in this post), it seems that investors are expecting a material improvement in unit-level profitability for 2023. However, it maybe a bit premature to call a victory with inflation still highly elevated, even if moderating. The consumer has already absorbed hefty menu price increases throughout 2022 and it is not clear how much more they can tolerate. No matter, the restaurants must continue to pass along higher prices if they are to reclaim their margins. This is especially true in California where we maybe looking at $22/hr. this year (as discussed in this premium post).
QSR RAMPS-UP VALUE PROMOTIONS
According to RR’s Monthly LTO Promotions Tracker, QSR ramped-up value mix +8.7% to 52.8% in January (the highest level since January 2021) and cut the average promotional price point 3% to $5. While FSR value mix increased +0.4% to 30%, the average promotional price point jumped +9.6% to $10.62 (reflecting that FSR is less able to absorb current inflationary pressures because of a lower store level margin compared to QSR).
HIGHER COSTS & LOWER MARGINS PRESSURE NEW BUILD ROI
2022 new build ROI for the $1B+ Chains declined 2.2% to 11.4% which represents a new low as a result of widespread building cost inflation (+14.2% RR New Build Cost Index) and a 2.1% decline in store EBITDA margins (post G&A) to 10.4% due to higher commodity and labor costs. Order RR’s New Unit Investment Report and get the New Build ROI Model which provides data on 43 of the $1B+ Chains.