The pillars of restaurant, retail, and service growth
So what drives fast food restaurant sales? Let’s begin with the basics. Everybody needs food, often recommended as three meals a day to a working person. We can broadly break the food options down into full-service, quick-service, limited-service (fast-food), and home cooking. Generally, people tend to go for the cheapest option, home cooking, when they don’t want to spend as much. When they do decide to spend more on food, they go out and take the more expensive options. So the three building blocks of restaurant sales are:
When employment rises, it’s often positive for the restaurant industry, as people who didn’t have a job now have income. As income rises, there’s less incentive to spend time cooking at home and more incentive to eat out or trade up, which increases the market size of the restaurant industry. This is a direct positive for the restaurant business. Indirectly, higher employment is also positive for people who already have jobs.
When more and more people are employed, it often means business is better. So those who already have jobs would likely see positive growth in salary. Socially, higher employment will draw more people together to eat outside. Just imagine eating at restaurants when all your friends are unemployed. And as psychologists often say, we eat (and drink) more when we’re in a social setting, which is a further boost to restaurant sales.
Disposable income growth
Higher disposable income, which also depends on employment growth, is another factor that can affect restaurant sales. It’s measured by taking personal income and subtracting tax payments. When disposable income grows, consumers will often trade up on their eating habits. On the contrary, falling disposable income is often viewed as a negative for the restaurant industry as a whole because people will eat more often at home, which reduces the market size for the restaurant industry.
This also explains why, when the economy is in a downcycle and unemployment is rising, low-priced restaurants tend to perform much better than more expensive options. Restaurants that are priced in the middle are most negatively affected then, as their customers become more price-conscious and trade down to lower priced places. High-end restaurants tend to perform better than mid-tiers because their customers are often still employed and well-off despite a poorer economy and are more inclined to maintain their social image.
Consumer sentiment growth
Last but not least, consumer sentiment is another critical factor that reflects customer behavior. Even if employment or disposable income is growing, if consumers aren’t optimistic, they could be unwilling to spend. Plus, the indicator partially reflects individuals’ financial situation. If consumers believe the outlook is unfavorable and decide to pay down debt more, this can negatively impact sales for restaurants like McDonald’s Corp. (MCD) and Yum! Brands Inc. (YUM). This also applies to the Vanguard FTSE Europe ETF (VGK), iShares Dow Jones Consumer Service ETF (IYC), and Consumer Discretionary Select Sector SPDR ETF (XLY).
Interested in XLY? Receive notifications on the latest research and sign up for a Market Realist account in one simple step: