Recession Fears and Foreign Backlash Will Challenge Restaurant Brands
Trump administration tariffs have caused upheaval in the stock market and wounded nearly every economic sector. The values of restaurant stocks – including fast-food franchises – have bounced around this week but generally suffered worrisome declines.
CNBC reported that fast-food stalwarts McDonald’s Corp. and Yum! Brands Inc., the parent of KFC, Pizza Hut, Taco Bell and The Habit Burger Grill, have already felt the drag on their stock values. Ditto for many casual-dining chains such as Applebee’s and IHOP (owned by Dine Brands), Darden Restaurants (Bahama Breeze, Capital Grille, Cheddar’s Scratch Kitchen, Chuy’s, Eddie V’s, LongHorn Steakhouse, Olive Garden, Ruth’s Chris Steak House, Seasons 52 and Yard House) and Texas Roadhouse.
Economic Uncertainty
Perhaps the first thing that comes to mind when considering tariffs’ impact on fast-food restaurants would be increased ingredient prices. But UBS analyst Dennis Geiger downplayed that area of concern, according to CNBC. “We view the direct cost impact of tariffs on restaurants as manageable,” Geiger told his clients in a note on Monday.
Instead Geiger said he views “the bigger risk as incremental pressure on consumer spending and industry demand,” which would result from a recession and inflation. When money gets tight in a recession, Americans will prioritize “must” expenses and then economize by preparing more of their meals at home, Chris O’Cull, managing director of Stifel investment bank’s consumer and retail sector, told MarketWatch.
The possibility of a recession appears to be well-founded. Goldman Sachs economists recently altered their forecast to a 45% likelihood of a recession, raising it from a previous prediction of 35%, Bloomberg reported on April 6.
Foreign Backlash
Another motivation for investors’ wariness is the effect of foreign boycotts in protest of the U.S. tariffs. Goldman Sachs has estimated that foreign boycotts overall will cut America’s gross domestic product (GDP) by 0.1% to 0.3% this year, a $28 billion to $83 billion decline, Yahoo Finance reported.
MarketWatch labeled the antipathy toward U.S. brands a “wild card” in the international market. The publication quoted O’Cull as saying: “We believe sales will likely soften due to anti-American sentiment, which could impact the recent improvement in international trends that some of these companies have experienced.”
Peter Saleh, an analyst with global financial services firm BTIG, echoed O’Cull’s assessment. “Anti-American pushback in these countries on Western or U.S. brands” poses a major issue, Saleh told Yahoo Finance. He anticipated that when companies disclose financial data “in the next couple of weeks,” foreign fallout will become clearer.
Other International Damage
Fast-food brands also could face foreign bureaucratic blowback that thwarts their expansion, Saleh said. Many major American restaurant chains have set ambitious growth objectives that are contingent on either entering new international markets or adding foreign locations where they already have a foothold. “If the governments in those countries start to view U.S. brands more negatively, they can slow-roll their approval process. They can deny them in certain areas, making it much more difficult for U.S. brands to grow,” Saleh told a Yahoo Finance writer.
“Call it guilt by association,” Tematica Research’s chief investment officer, Chris Versace, told Yahoo Finance. Quoting from the publication, Versace elaborated that “the appetite for certain U.S. brands could be diminished as a result of what we’re seeing play out on the global economic and trade front. … Take a look at what we’re seeing with Elon Musk and Tesla, where people are … openly protesting, people returning their Teslas. Could we see something similar unfold with other well-known U.S. brands in foreign markets?”
Ingredient Costs
Compared to a general economic slump, consumer belt-tightening and global resistance to U.S. tariffs, rising ingredient prices will have less impact on fast-food restaurants, at least in the short term, industry analysts said. That’s because many ingredients are domestically sourced, and most Canadian and Mexican imports are exempt under the U.S-Mexico-Canada Agreement (USMCA). But EatThis.com identified these current and potential impacts of tariffs on fast-food restaurants:
- McDonald’s and Burger King import beef, some of it from Australia, which now has a 10% tariff.
- Subway’s sandwiches contain imported produce from Canada and Mexico (25% tariffs if produce exemption is lifted) as well as Guatemala (10% tariff).
- Wendy’s uses palm oil at its restaurants worldwide. Indonesia is a major source and has a 32% tariff. (Wendy’s beef comes from the United States.)
- Tim Hortons is dealing with a 10% tariff on coffee from Guatemala.
- Dunkin’ Donuts coffee sources include Brazil, which has a 10% tariff.
