Bernstein's latest GLP-1 tracker has Eli Lilly's Mounjaro leading script growth, with downstream effects compounding pressure on the restaurant industry already facing weakening consumer confidence, as gas prices nationwide remain above a politically sensitive $4 a gallon in late summer.
Turning to UBS's latest note on the restaurant industry, Dennis Geiger, who covers U.S. restaurants and consumer discretionary names, wrote in a note on Sunday that restaurant investors are struggling to identify opportunities across the space amid sharp share-price volatility, weakening consumer confidence, growing uncertainty over the second-half outlook, and increasing GLP-1 adoption.
He points to a widening divide across the industry:
- Fast casual: Cava and Chipotle remain preferred, while Wingstop is attracting interest after its selloff. Investors see the NFL season, easier comparisons, and new value promotions as potential catalysts for Wingstop.
- Casual dining: Brinker International and Cheesecake Factory remain favored because of resilient sales momentum. Sentiment toward Darden is more cautious amid signs of slowing Olive Garden same-store sales.
- Quick service: McDonald's faces the most negative sentiment among large global chains as weak U.S. trends collide with difficult comparisons. Domino's is attracting more interest because of its depressed valuation and expectations for improving sales.
Geiger's note touched on not just an increasingly bifurcated U.S. consumer environment and dismal University of Michigan consumer sentiment, but also pointed out that quick-service chains face a particularly difficult combination of sluggish traffic, persistent inflation, and GLP-1 adoption.
Geiger cited a new survey from the National Restaurant Association that showed GLP-1 impacts: users are ordering smaller portions and fewer indulgent items after starting the wonder anti-fat drug, with Gen X cutting desserts and portion size most aggressively and Gen Z more likely to swap entrees for appetizers, add fiber, and drink less alcohol. The result is pressure on check averages and mix, especially desserts, sugary drinks, alcohol, and oversized entrees, rather than an immediate collapse in visits.
He expanded:
While GLP-1 users are less frequently going out to eat at restaurants, ordering takeout and using delivery, users are purchasing a meal / snack / beverage from a restaurant / coffee shop / snack place more often than non GLP-1 users, according to a recent webinar from the National Restaurant Association (NRA). GLP-1 users skew toward a higher-income cohort that is likely to eat out more frequently, but as GLP-1s become more accessible (w/ lower prices and oral forms), adoption across income cohorts should be more balanced. We note the NRA also indicated: a high percentage of GLP-1 users agree that healthy menu items are available at restaurants; GLP-1 users enjoy going out to restaurants; and users indicate going out to eat is a way to socialize, suggesting changing eating habits do not greatly affect affinity for dining out. Additionally, a high percentage of users indicate better communication of healthy options and portion size options is preferred at restaurants. The NRA highlights 1) value is not just the amount of food for a low price, but can include high protein, other nutrients, or health benefits for a low price, 2) growth in snacking and smaller portions among GLP-1 users, 3) lower ticket averages for users offset by increased visit frequency, add-on, and upcharges, and 4) beverage consumption away from alcohol, towards non- alcoholic options. The NRA also called out select brands with menu changes that have responded to GLP-1 preferences, including Chipotle, Olive Garden, and Shake Shack.
Figure 1: After starting GLP-1 drugs, users increasingly order smaller portions and less indulgent items.
The second chart shows why consumers are pulling back on alcohol at restaurants, citing mostly personal preferences and health concerns.
Figure 2: Reduction in alcohol consumption is driven by personal preferences and health reasons.
Traders are still searching for winners inside an increasingly pressured restaurant complex as several headwinds hit at once: weakening confidence, $4 gasoline, a bifurcated consumer, and rising GLP-1 adoption.
No Direction in S&P500 1500 Restaurant Index
UBS's Geiger and the NRA survey only suggest that consumers are trading down, ordering smaller portions, skipping desserts and sugary items, and drinking less alcohol - more selective, not necessarily boycotting visits. This is a lower-ticket issue that restaurants must adapt to.
Professional subscribers can read the full note here at our new Marketdesk.ai portal