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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The US restaurant industry has had a rough start to 2024. Sales and footfall are sliding as customers pull back their spending. Price increases can no longer be relied on to pick up the slack. Starbucks and KFC owner Yum Brands are among the big chains that reported a drop in same-store sales in their most recent quarter. At McDonald’s, growth on the same metric has fallen for four straight quarters.
Yet there has been one bright spot: “fast-casual” chains. These pitch themselves as a healthier option, or cater to a slightly better-off customer than their fast-food rivals.
This focus has helped salad purveyor Sweetgreen, burrito hawker Chipotle and burger slinger Shake Shack to buck the wider gloom to report higher like-for-like sales last quarter.
Shares in these companies have in turn served up market-beating returns. Sweetgreen is up more than 190 per cent so far this year, topping even tech darling Nvidia’s gains. Cava, a Mediterranean-inspired eatery that went public last June, has doubled in value. Chipotle is up about 40 per cent over the period, compared to McDonald’s 13 per cent decline.
Several factors are driving the divergence in performance. Fast casuals’ higher-income customers have helped shield the chains from the worst of the reduction in consumer spending, which has hit the less well-off the most.
Fast food is also no longer a bargain. Inflation and new minimum wage laws in states such as California have forced the likes of McDonald’s to raise prices. In New York City, a Big Mac meal plus tax now tops $12. Suddenly, the $13 carnitas rice bowl from Chipotle or an $18 salad from Sweetgreen do not look so expensive. The average cost of lunch at a fast-casual restaurant was only $2.64 more compared to one at a fast-food restaurant in the first quarter of 2024, according to consumer consultancy Circana.
Fast-casual chains may be in a sweet spot but their valuations are starting to look spicy. Sweetgreen, which has yet to make an annual profit, is now trading on six times revenues, compared with its 12-month average of about three times. Cava, which swung into an annual profit in 2023, is trading at 12 times revenue, also well ahead of its 12-month average of eight times. That makes it hard for investors to justify adding second helpings to their plates, especially if fast-food operators start cutting prices again.
