Rising gas prices are crushing restaurant sales as $4 a gallon becomes tipping point for consumers

Several U.S. restaurant chains are reporting weaker than expected sales growth in the latest quarter as high gasoline prices squeeze consumers’ budgets.

Gas prices have surged amid the war in Iran, with average gas prices reaching $4.45 a gallon around the country, an increase of about 41% in the last year, according to AAA data.

Prices have risen even more dramatically in certain states, with gas prices in California topping $6 a gallon, which can weigh heavily on restaurants with a presence in the nation’s most populous state.

An analysis by Revenue Management Solutions, a restaurant consulting firm, finds that $4 a gallon is a tipping point as consumers will gradually decrease their restaurant visits until gas prices at the pump hit that threshold, at which point the impact doubles.

DOJ CONFIRMS ANTITRUST PROBE OF MAJOR MEATPACKERS OVER BEEF PRICE INFLATION

The firm estimated that $4.20 average gas prices mean about 1.5% fewer restaurant visits, and if they rise to $5.10 or more, fast-food restaurants could see a 3% drop in traffic. Further, it estimated that for a drive-through restaurant with 300 daily transactions, a $1 spike loses about six customers per day and amounts to about $22,000 in lost annual sales.

Wingstop, a chicken-wing chain that touts its affordability, said that higher fuel prices contributed to an 8.7% decline in quarterly same-store sales. 

The chain’s CEO, Michael Skipworth, said Wednesday on a call with investors that it was “extremely difficult for anyone to predict this macro environment,” adding that he expects shrinking sales over this year in part because of expectations that gas prices will remain high.

MCDONALD’S IS QUIETLY DITCHING A POPULAR IN-STORE FEATURE NATIONWIDE

Domino’s CEO Russell Weiner told investors on Tuesday that his chain’s competitors ran promotions “out of our playbook,” which contributed to the weaker than expected same-store sales growth of 0.9% in the latest quarter. Weiner added that while his chain is still better positioned than its rivals to sustain those discounts, the company lowered its sales forecasts for the year.

Some restaurant chains that performed well in the latest quarter are remaining cautious as they look ahead in their outlook. Chipotle had better than expected same-store sales growth of 0.5%, but kept an outlook of flat growth this year, which CFO Adam Rymer attributed in part to gas price uncertainty.

Starbucks reported 7.1% quarterly same-store sales growth in North America on Tuesday and may have benefited from the gloomy consumer outlook, as CEO Brian Niccol told investors the company gained among lower-income consumers who saw the chain as offering “a little bit of indulgence.”

COSTCO CHANGES BELOVED $1.50 HOT DOG DEAL FOR THE FIRST TIME IN DECADES: REPORTS

Restaurants are also looking to meet consumer demand for affordable meals through value menu offerings. Taco Bell, a subsidiary of Yum Brands, launched a value menu starting at $3 in January and reported 8% quarterly same-store sales growth at U.S. restaurants.

Mark Wasilefsky, head of restaurant finance at TD Bank, said that the industry is “seeing a record level of value menus right now.”

Investors’ concerns about the restaurant sector’s resiliency during the gas price spike has contributed to a 5% drop in the LSEG U.S. restaurant index since the start of the Iran war, which erased over $40 billion in market value, according to LSEG data.

The next key indicator of the impact of the Iran war and the gas price shock on the restaurant industry and its consumers will come on May 7 when McDonald’s reports, after the chain had stronger sales growth than expected in the prior quarter amid a value menu push.

Reuters contributed to this report.