A stubbornly sluggish economy is weighing down sales at fast-food restaurants, forcing rivals to pump up promotions to steal away business.
In first-quarter results, chains ranging from Tim Hortons Inc. to McDonald’s Corp. and A&W Revenue Royalties Income Fund struggled with declining sales at their established eateries as cautious consumers restrained their spending.
“Probably everybody in the industry right today is running a $1 beverage somewhere, somehow, some type,” Paul House, interim chief executive officer of Tim Hortons, told analysts on Wednesday. “That wasn’t normal activity a couple of years ago, before we hit these current economic headwinds.”
Although the recession ended a few years ago, a soft economy keeps eating away at fast-food restaurants’ business, adding pressure on operators such as Tims to offer $1 iced lattes, cutting into margins.
Tims feels the added challenge of holding on to its top spot in the restaurant coffee market in the face of aggressive initiatives from global titan McDonald’s, even as an activist U.S. hedge-fund investor calls for dramatic changes at the Mississauga, Ont.-based chain to bolster results.
Tims first-quarter sales at outlets open a year or more fell 0.3 per cent in Canada and 0.5 per cent in the United States. It marked the chain’s first Canadian same-store sales decline since it was spun off as a public company in 2006.
The economy continues to be a sore point for Tims and others, said Avery Shenfeld, economist at CIBC World Markets.
After deducting inflation, retail volumes gained less than 0.5 per cent on average in the three months to the end of February, Mr. Shenfeld said.
“Canadians have dramatically slowed the growth in their use of credit, forcing them to hold spending more closely in line with incomes,” he said. “We will need faster growth in wages and total working hours to turn these numbers around, and that will depend on seeing a brighter global market for our exports.”
Fast-food chains have felt the bite. “While there are mixed signs of a slow recovery, in the U.S. significant headwinds persist as consumer confidence continues to waver,” Don Thompson, chief executive at McDonald’s, said last month.
“Persistently high unemployment rates and ongoing austerity measures in Europe, and soft macroeconomic conditions in APMEA are pressuring consumer purchasing power as well. And the informal eating out industry is either flat or declining in many markets around the world.”
For Tims, Mr. House also cited a challenging first-quarter operating environment, which he said is hurting consumer confidence and constraining their discretionary spending. In March alone, Canada lost 53,000 jobs, he noted.
“The difficult conditions have also led to an intensified competitive environment in our sector over the past several quarters, characterized by more aggressive discounting,” he said.
First-quarter profit fell 2.9 per cent to $86.2-million, or 56 cents a share, while revenue rose 1.4 per cent to $731.5-million.
Tims also unveiled a new chief executive officer – Marc Caira, former head of a global food services supplier Nestlé Professional – after two years without a permanent CEO. He will start on July 2. But it is not prepared to make sweeping changes called for by hedge-fund Highfields Capital Management, such as spinning off its real estate holdings.
It is looking at a new franchising system for its U.S. stores to improve their performance, and raising debt to repurchase shares, executives said.
Tims also sealed a deal to expand into Saudi Arabia and an agreement to introduce a second single-serve coffee system after having launched the Tassimo one last fall.
Still, Tims is far from alone among so-called quick-service chains to suffer reduced sales at established outlets this year.
In their first fiscal quarter, same-store sales fell 3.7 per cent at A&W, 1.2 per cent at McDonald’s U.S. eateries and 3.3 per cent at Second Cup.
“It was an awful period for restaurants,” said Keith Howlett, retail analyst at Desjardins Securities.
Mr. House pointed to cold weather – in sharp contrast to the unusually warm period a year ago – as well as the added drag of two holiday period in the first quarter this year that weren’t a factor a year earlier, resulting in fewer sales.