Food Inflation Hurting Some QSRs

Quick-serve restaurants (QSRs) are in a mixed state. Some aspects had been doing well through the end of 2023, with most showing growth in same-store sales or holding up well under general CRE industry strain.

At the same time, others are following the 007 recipe for a martini: shaken, not stirred.

A recent Avison Young report noted that many QSR operations were holding up relatively well under challenging conditions. The U.S. market has a current count of 195,507 QSR locations and is valued at a current $406.7 billion. The firm projects a 10.28% expected growth from now through 2029. “These expectations reflect the resilience of the QSR industry, particularly in the net lease sector, as it continues to adapt to the constantly evolving landscape,” they wrote.

Yum! Brands had the leading market share of 6.47%. Average 12-month trailing cap rate was 5.44%. As of April 25, 2024, there were 943 active QSR listings for sale, with an average asking price of $2,526,700, an asking cap rate of 5.62% and average remaining term of 13.86 years.

Trinity Capital, a Citizens company, looking at the last quarter of 2023, wrote, “Sales growth across the restaurant industry remained relatively healthy in Q4 2023, as 68% of brands in our index reported positive same-store sales (“SSS”), with an average increase of 2.2%.” QSR operations were up 2.9% for the period, with fast casual at 4.4%, 1.2% for family dining, 1.3% for casual dining, and a 2.1% drop in fine dining.

Coffee and snack operations were up 6.1% in Q4; fast casual came in at 4.4%; chicken saw an average 2.9%; Mexican was at 2.6%; and both burger and pizza have 1.9.% increases.

The year closed with 11 consecutive months of consecutive growth, “despite net declines in customer traffic.”

So much for the happy news; now the other side. Red Lobster weighs a Chapter 11 bankruptcy filing, reports Bloomberg. The move would let the chain “shed some long-term contracts and renegotiate a swath of leases,” allowing a major cost restructuring, much the way WeWork rid itself of lease expenses during its bankruptcy proceedings. Rite Aid is doing the same thing with its bankruptcy.

“The reliance of a chunk of the restaurant industry on lower-income households means their customer base has been disproportionately impacted by rising prices, analysts from the analytics unit of Moody’s Corp.’s wrote last week,” Bloomberg wrote.

A number of chains indicated difficulty and are on the edge of bankruptcy or have entered it. Food prices are up, business must pass them on, but the customers who depend on low costs can’t keep up with food inflation.