David Henkes: I think you've got to go back probably six to 12 months to look at overall restaurant industry traffic patterns, because that's really traffic is the lifeblood of the industry. If you look at fast food or limited service traffic patterns, they started to decline roughly the beginning of the year. They started to decelerate and actually, over the last four to five months, traffic patterns for fast food, limited service restaurants have been negative. Now on the full service sit down side, traffic pattern has been negative for a lot longer. What we've seen over the past several years as higher menu prices have continued to hit consumers in the face every time they dine out is that traffic has really taken a hit as a result. Traffic is slowing considerably, and really across the board, across the restaurant industry is negative now, meaning fewer consumers are visiting today than they were a year ago.

Really the best lever, and in some cases, the only lever, given that this is largely driven by pricing, has been to pivot to value. In this case, value being lower price, although, as I think we'll probably discuss value is not always price. But McDonald's probably is the largest restaurant chain in the world, probably let it off with their value meal at the beginning of the summer and a lot of chains followed suit. Largely, I would say, and firstly, other fast food chains, but then increasingly full service sit down chains as well. Really now we're in a situation where almost everyone is trying to put on some type of value equation, value bundle, value offer onto their menu. It's really intended for one purpose, and that is to drive traffic, to bring consumers back into the restaurant. So far, certainly some chains have been successful, but I would say if you still look at the overall industry patterns, the overall industry is still in decline when it comes to visits and traffic.

Ricky Mulvey: Let's talk about McDonald's for a second as the largest restaurant chain, as you mentioned. I wonder how much of this was McDonald's trying really hard to become an app company, where with the McDonald's ap, they started offering, and I'm saying this in quotations, free delivery. On the app, there's a lot of buy one get one offers, and it seemed to come at the at the expense of higher menu prices if you're just going through the drive through.

David Henkes: I think every major restaurant chain that has an app, and that's just about every fast food chain wants to drive orders through their apps. There's a lot of reasons for it, the data they can collect, the loyalty programs. The best way to do that is by giving pricing and discounts and deals through the app. To really convert that behavior or to drive that behavior, you've got to give people a reason to go to the app, and the lower prices are the reason why they're doing that. Now, if you think back to the beginning of this year or maybe it was more early spring when Wendy's got hit over the head about the variable pricing or the surge pricing, I guess the media took it as, consumers don't want to pay higher prices. There was a, I guess, I'd call it a rightful backlash against it, even though I think it was probably misconstrued a bit in terms of what Wendy's intended to do. But consumers don't want to feel that they're being taken advantage of and paying a higher price for something that 20 minutes ago would have been a lower price, even though they do it all the time in hotels and Uber and Lift and all of those other things.

I think one of the ways that restaurants are also then able to do dynamic pricing, is through the app, because now you're able to give discounts, you're able to target offers to consumers. You're able to look back and use AI or other computer learning to understand what their order pattern is and make offers to them, and then, by the way, you can promote higher margin items as part of the app or as part of the deal, and so you can manage profitability a little bit easier with the app. There's a lot of reasons that restaurants want to drive behavior or drive consumers to the app, and that pricing becomes a big reason for it. I think there's been a lot of success for McDonald's in particular in terms of getting people to move to the app and order through that.

Ricky Mulvey: Let's talk about one company that's doing really well in the value wars. That's Brinker International. You're talking about on CNBC and actually, speaking of driving consumer behavior, it drove me to Chili's to check out their Mazi sticks. But the stock is up 150% over the last 12 months. In just the last quarter, Chili's same store sales was up 15%. This is exceptional because a lot of those same store sales happen during peak times, or same restaurant sales. What's happening at Chili's? What's happening at Brinker International? What are they putting in the ribs over there.

David Henkes: Well, Chili's is really one of those that put a big emphasis on marketing themselves against fast food. The message in general was, if you want to pay 11 bucks or whatever for a burger and your meal, then why don't you come in here and we'll give you a better product, we'll give you a better experience. Again, the value for that, which is more than just price is a lot higher. They were really one of those that went hard against this perception that fast food has that it's gotten too expensive. They've certainly built upon it with service, and they've got a leadership that understands the value of, creating that atmosphere and, so again, value is more than just the price. People are going in there and obviously they're returning. When you look at our traffic numbers that we track, because in addition to what the chains put out, we do some of our own tracking behavior for traffic.

If you look at C chilis over the last we do it on a rolling three month period, but they've been high single digits or low double digits in terms of traffic. Really over the past, probably since the beginning of the summer. If you go back to what I just said about traffic in general in the industry being down, that is a phenomenal accomplishment to be able to drive that much incremental growth in traffic to your restaurant in an environment where really nobody is succeeding in doing that very well. For them to be able to do that. I think it does speak to the deal that they've developed, that it resonates with consumers, but they obviously have to back it up with more than just a low price, the products got to be good, the service has to be good. Clearly they've executed on all of those, and they're doing really well with that.

Ricky Mulvey: Dave, when I went, I was very satisfied. I got my cheeseburger, which is, it's not a thick cheeseburger, but it's a substantial cheeseburger, fries side salad, diet coke for 11 bucks. When they're doing that, are they making a profit off this or am I just getting real sleepy?

David Henkes: Well, margin always becomes a challenge with this. I think there's a little bit of a trade off in the industry going on right now where listen anytime you sell something for a lower price, your margin, all things being equal, is going to be less. What you're banking on with people coming in. There's a couple of things. One, you're banking on them, not just getting the deal, but maybe then either bringing in some other people that are going to order some desserts or extra side dishes or appetizers or maybe a beer or some beverage alcohol or something like that, that's going to drive some incremental profit. But there's no question that, if you're selling that whole meal for 11 bucks, and if you look at beef costs and you look at labor costs, and you look at all of the drivers of costs, and everything right now in the restaurant industry is going up. Margin, I've said this publicly. I've been at Technomic 28 years, and I believe harder today to profitably run a restaurant than it ever has been in my entire career doing this type of work. You are taking as a restaurant tour a lower margin to do that, but you're trying to gain traffic. You're trying to then gain a new customer that again, may come back again and build some loyalty to them. I think the bet that a lot of restaurant leadership is making is that that lower margin in the short term it's worth it for the longer term benefits that you're going to accrue because of that.

Ricky Mulvey: To be fair with the second part of this. I got the mozzarella sticks, which are like three for $10.30. I'm like, that's where all the margin went after you sold me a hamburger and two sides for 11 bucks. My partner got the Chipotle chicken bowl for a little under 15 bucks. I can see how what you're talking about works. Come in for the great value but if you want to get those viral mozzarella sticks, that's what's going to cost you, especially on the appetizer side. Continuing on price, though, there's this convergence happening, which is that these sit down restaurants, these sit down casual chains are now competitive with quick service restaurants on price. Even looking outside of McDonald's, even a Chipotle meal is 11 bucks, and I got to stand and order my food there. How are these sit down places able to now compete so meaningfully with the fast food chains and the quick service restaurants?

David Henkes: Well, I think there's a couple of things that's happening. You're right, and it's not Technomic data, but there was just some UGov survey data published just recently that showed that, basically of all restaurant types, fast food is seen as having the lowest value perception, which is gob-smacking to me because the whole, I don't want to say rationale for fast food, but fast food has always excelled in value and has been the haven that consumers flee to in tough economic times for value. The fact that casual dining now, at least per the UGOv data, outperforms fast food on value is just really amazing. It goes back, I've seen some other data that a lot of fast food customers now describe fast food as a luxury. There is a perception.

Again, going back to what I was saying earlier about pricing, if you look at and believe the government CPI numbers, and there's no reason not to, you would see that there has been a growing discrepancy between limited service pricing and full service pricing. Both are going up a lot faster than grocery store pricing so it's not as though, one is significantly cheaper, but the price increases that have been driven by limited service have been higher in aggregate than full service. Now, there's a couple of reasons for that. There's been a lot of upward push on minimum wage, and so a lot of times fast food restaurants have a lot, higher share of fast minimum wage workers. Particularly in California now where going back to the first quarter that, the minimum wage skyrocketed, menu prices the next day immediately followed suit. When you're paying a lot of minimum wage people now and extra, even just a couple of bucks, percentage wise, it's got a huge increase. I think a big part of it has been labor cost increases. You still have a lot of full service restaurants that are able to I don't want to say, avoid labor challenges or cost issues but because of them are still working on the tip credit, they're able to offer a lower minimum wage to their servers, especially that then, theoretically gets made up in the tip that those servers earn.

There's definitely upward pressure on labor and sit down restaurants, but it's not nearly as pervasive as it is in fast food. I think that's the biggest thing. I think when you look at cost increases right now, food costs have generally last year, we saw PPI producer price index for a lot of the foods that are used in restaurants that were soaring high single digits or double digits, and a lot of those cost increases have at least decelerated into normal ranges. It's really still the labor that's driving it. The fast food labor situation, I think is a big reason why the value perception has gotten out of hand. By the way, that's the reason there's been a lot of tech investment in fast food, because labor has gotten so expensive. Now, what they're not doing necessarily is taking a lot of labor out of the restaurant, but they are redeploying it and hopefully, using it more efficiently. I don't know if I just answer to your question or not, but, that's really why the value proposition, I think is getting so out of whack, and consumers have noticed based on all the surveys we've seen, and it's a really interesting phenomenon now.

Ricky Mulvey: No, you did answer the question because if you're at a fast food restaurant, you're going to be able to it's a per hour cost. This is something I notice. I'm not in California, but I see it driving around with, 15, 20 bucks an hour to work at a fast food restaurant. It's a very difficult job. I imagine why there's a demand for higher labor costs there. But if you're at a full service restaurant, when I go to went to Texas Roadhouse last night. Those servers are paid based on the tip I'm interested in with essentially steaks for a number of reasons. Texas Roadhouse stock has done exceptionally well. Longhorn Steakhouse has been a bright spot for Darden Restaurants. Now we're at this another interesting convergence point where you can get a one pound rib eye at Texas Roadhouse with two legendary sides for 32 bucks, and that's before tax and tip. But that doesn't feel super far off from grocery stores, where a one pound ribi at Safeway right now is like 25 bucks. You mentioned earlier that there's a convergence where they're using that to draw people to buy appetizers, to buy drinks, that thing. How are you seeing that play out with the traffic data that you look at at Technomic?

David Henkes: I think, when I pull my state restaurants specifically, and I look at, who the winners are right now in traffic anyway. Texas Roadhouse is by far the winner. They've had either mid to high single digit growth in traffic. A lot of the other at least big chains that we track, Longhorn is decent. They're trending OK, but not performing nearly as well as Texas Roadhouse, but then outback has been declining, Ruth's Chris has been declining. Capitol Grill has been declining, Logans, which was really bad last year has flattened out, and I think that's just because of comparisons to this year. I think when I look at steak, and steak is beef prices are still really through the roof right now, to your point about grocery. I think the value perception for steak is, first of all, a lot of the more expensive cuts, the Tender Lys, porterhouse, prime ribs aren't the things that are being promoted right now. They tend to be maybe focusing on some of the other maybe lower cuts, and look at like Fogo to Cho right now at their best of Brazil. They're doing a lot of Brazilian style cuts that maybe aren't the highest price cuts, but they're able to offer a value deal with that, so $39, $40, whatever it is.

But I think when you look at the state houses and what's happening there, from a value perspective they are probably taking a lot lower margin than they want to be. I think that again goes back to traffic, and especially if you're a publicly traded business, excuse me. You are reporting not only on your margin and profitability, which given the environment and restaurants, I think every investor probably expects margins to be challenged right now anyway, but if you can tell a positive story from a traffic perspective, that is great news for at least for your investors or for the CEO to go out on a quarterly call and talk about that. I think, there are some margin challenges or some margin massaging maybe that is going on. I think when you look at a lot of the LTOs, and so we look at limited time offers as a good barometer for what's happening on the menu. When you talk about in general terms, what's been happening on the restaurant menu over the last couple of years, core items are down and LTOs are up, meaning that restaurants have trimmed back, paired back their core offer, and they're offering a lot more things on a limited time offer. The reason for that is that they are able to value engineer a lot of those LTOs.

Maybe they're smaller cut steaks. Maybe they're filling the plate more with some different starches as opposed to the protein. There's a lot of different ways you can value engineer a plate but with an LTO because you're not now promoting a menu item that maybe consumers knew before that they compare to something else, it becomes a new item to the consumer. You can price that even if you're more aggressive on the price, you can price it aggressively while still trying to manage your margin a little bit. I think that's some of what's been going on as well. I look back at like Ruth's Chris, and they actually did have an LTO with a file and they had a glass of rose that they were doing. They had a file and Bayu Lobster LTO that they were doing. They are also doing that with some of the maybe higher or higher cost items, but again a lot of that becomes a traffic play to try to get people in the restaurant and, again, hopefully up-sell them. Particularly in a steakhouse or a seafood or any type of sit down restaurant, that alcohol sale is a high margin. We've seen alcohol sales really slow significantly, which has also had a big impact on full service chain profitability because that and appetizer and dessert is where all of the margin is often made. If you can bring people in and get them in on, you know, a $39 deal or something like that and then create all of these other things to have maybe a 50 or $55 check average, you're still, in a way you take dollars to the bank, not margin. If you can build up that dollar spend and create some dollar margin on that guess, then it becomes a win for the restaurant.

Ricky Mulvey: On vacation to Switzerland and Germany. You posted about some of your experiences on X. I know your brain was on vacation mode, but any interesting food or beverage trends during your travels.

David Henkes: Well, I was really struck by a couple of things. There's a lot of automation over there, a lot more not only in the quick service environment, but even vending. I was struck by two things. One, the higher degree of technology usage and integration. But then, frankly, I was quite impressed and this is, maybe a little weird because I don't think I've really noticed it in the past when I've been Europe, the surface level seemed really good. I don't know if, because they're paid, and going back to the pay and the financial structure of restaurants that they're paid differently, you'd say, well, they're not working for tips maybe like they are in the states, but I was really struck by the attentive service levels that we receive now.

I was in some touristy towns are probably catering more to tourists that are going to, maybe tip a little bit more than the locals are. But I was really struck by that and I was struck by some different packaging type of things that they do. They have much more stringent packaging regulations than we do in the states, a lot more compost ability, a lot more just environmentally friendly packaging. It's really interesting, you never really turn your brain off completely when you travel, and, particularly because dining is such a central experience to travel, that I am always just at least looking at what is happening, but anyway, those are a couple of the things that struck.

Ricky Mulvey: The principal and head of Strategic Partnerships at Technomic. Thanks for joining us. Appreciate your time, your insight, and I'm going to go eat lunch.

David Henkes: Great. I appreciate it.

Ricky Mulvey: Got a chain restaurant that you love going to? Let us know at [email protected]. That is podcasts with S at fool.com. As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. I don't buyer sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.

Ricky Mulvey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Texas Roadhouse. The Motley Fool recommends Bloomin' Brands and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

Restaurant Value Wars Heat Up was originally published by The Motley Fool