Fast Food Weighty Dilemma: Investors are closely watching U.S. fast-food chains as they navigate the challenges of an already inflation-weary consumer base. Now, they face an additional concern: the growing popularity of weight-loss drugs, such as Ozempic and Wegovy, which could alter eating habits and potentially dent the demand for traditional fast food.
Leading off the earnings season, Chipotle Mexican Grill is set to provide insights that investors will scrutinize. The impact of appetite-suppressing medications is a top-of-mind concern. According to BTIG analyst Peter Saleh, “It’s very topical. It’s kind of the top of the list right now in terms of concerns… investors will likely want to hear more from these companies… on the impact.”
McDonald’s and Yum Brands, the parent company of KFC, are already grappling with slowing customer traffic due to high inflation, eroding consumers’ purchasing power. However, Chipotle and Starbucks enjoy some insulation from these issues, thanks to their relatively more affluent customer base. To attract diners, restaurants have refrained from raising prices and have resorted to additional promotions, potentially squeezing profit margins, which many chains had previously seen grow in the July-September quarter as costs eased.
There have been early warnings regarding the surge in demand for weight-loss drugs. Walmart noted a slight dip in food consumption among customers using these treatments, and Conagra Brands hinted at possible adjustments to portion sizes or ingredients. These comments briefly rattled the S&P 500 restaurants index, which dipped 1.3% at the time but later recovered.
Also Read: California Boosts Minimum Wage for Fast Food Workers to $20 per Hour
While the effect of these drugs on restaurant sales is still hard to quantify, analysts agree that they might lead to reduced snacking and fewer appetizer and dessert orders. In contrast, the declining customer traffic at fast-food establishments from July to September is more apparent. Overall traffic went from a 0.8% drop in July to a 4.2% decline in September, as per Placer.ai, a location analytics firm.
Notably, foot traffic at McDonald’s, KFC, and Taco Bell, while holding steady at the quarter’s start, ended with declines of 3.7%, 2.1%, and 1.2%, respectively. The difference was partly due to lower inflation in food-at-home (as much as 360 basis points less, according to Wells Fargo) compared to food-away-from-home, prompting more Americans to prepare meals at home.
On Thursday, Chipotle is expected to report a 4.5% increase in Q3 same-store sales, with profits rising about 18%. McDonald’s, reporting on Monday, is also likely to post slower same-store sales growth, though profits are expected to rise more than 10%. Yum Brands, reporting a day later, is expected to announce same-store sales growth of 4.7% and an 11% profit increase. Starbucks’ Q4 earnings report on Nov. 2 is projected to show a 6.5% rise in same-store sales, with profits jumping about 26%.
Despite the challenges and recent stock price declines, analysts maintain a “buy” rating on major S&P 500 restaurant stocks. However, price targets have been adjusted downward in the past month, reflecting the uncertain environment.
Our Reader’s Queries
Are fast foods a real reason behind obesity?
Consuming fast food has been linked to an increase in body mass index, difficulty maintaining weight loss, and weight gain. These types of foods often lack the necessary nutrients for a healthy diet and offer unhealthy options, particularly for children and teenagers, which can lead to a higher risk of obesity.
Is the fast food industry accountable for obesity?
No, the fast-food industry cannot be held legally responsible for obesity. This is because if they were, it would set a precedent for tobacco and alcohol companies to also be held accountable.
What is the argument against fast food?
Fast food has a negative impact on blood sugar and blood pressure in the short term. It also increases inflammation and may result in a lack of essential nutrients. In the long term, consuming fast food regularly can lead to various health issues such as poor digestion, weakened immunity, heart problems, obesity, and more. It is important to be mindful of the negative effects of fast food and make healthier choices for long-term health benefits.
Is junk food to blame for the obesity epidemic?
The global obesity epidemic is largely attributed to the consumption of fast food. Studies have revealed that a diet high in junk food can result in serious health issues such as cardiovascular disease, type 2 diabetes, certain types of cancer, and even premature death. It is crucial to be mindful of the food we consume and make healthier choices to prevent these health risks.