Discounts at your favorite fast-food restaurants may be fewer and far between in 2019. According to a new note from BTIG, big promotions will slow down this year as companies face increasing minimum wages.
Restaurants will have to re-evaluate their pricing and promotional strategy because those deep discounts failed to produce desired results and were criticized by franchisees at McDonald’s and Jack in the Box, among others. And at the same time, wage inflation is pushing labor costs up, with 20 states raising their minimum wages this year – including a $1 or 9% increase to $12 an hour in California.
“We believe 2019 could be a year highlighted [by] less aggressive discounting, driven partly by consistent and broad-based wage inflation,” wrote analysts Peter Saleh and Ben Parente in BTIG’s Restaurants 2019 Outlook & Top Picks.
Olive Garden has been leading the way; limiting discounts contributed 30 bps to its 3.5% same store sales in fiscal 2019 Q2. While still maintaining its Dollar Menu, McDonald’s is currently promoting meals at the $4 and $5 price point.
“We believe the current promotions are designed to lift the average check and support healthier margins for franchisees,” the analysts wrote.
Saleh and Parente have two picks for 2019 winners in the fast-casual category, both with a buy rating:
Chipotle Mexican Grill
After a tough couple of years, BTIG says Chipotle “has multiple levers at its disposal in 2019 to drive both top and bottom line outperformance.”
Chipotle’s (CMG) digital sales, which includes all sales not from the front counter, grew from mid-single-digits to over 11% over the past year and increased 48% in the third quarter of 2018.
“We believe Chipotle has multiple levers at its disposal in 2019 to drive both top and bottom line outperformance, including menu innovation, digital sales growth, loyalty, menu pricing and improving new unit economics,” BTIG wrote.
On Jan. 2, Chipotle unveiled four new diet-driven menu offerings (including Whole30 and Keto salad bowls) available only through its mobile app and website for delivery or in-restaurant pickups.
BTIG analysts say Chipotle’s online strategy mitigates the risk of introducing new menu items, because they don’t require new ingredients.
“We believe the introduction of these bowls has low-risk but high-return potential as they cater to consumers’ prevalence for lifestyle/diet-oriented meals while utilizing existing ingredients already in the restaurant,” wrote Saleh and Parente.
Another top fast-food pick for BTIG: Domino’s (DPZ). The pizza chain established its dominance 10 years ago with its two-medium, two-topping pizza deal for $5.99, and has expanded its menu to include chicken, pasta, salads and sandwiches over the years. Analysts attribute the restaurant's success to its value offering to consumers, and say there’s more opportunity for Domino’s to boost sales by focusing on its carryout business.
“We believe the compelling equity Domino’s has achieved on value and convenience should continue to drive sales and allow shares to again outperform in 2019,” they said.
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