Bigger isn't better when talking about our waistlines. But it is when examining restaurant's same-store sales figures. A recent study prescribes a simple plan for eateries' survival in this cutthroat industry: Restaurants must pay attention to the pulse of their consumers.
A recent Hudson Institute study (link opens PDF file) found that restaurants offering more low-calorie menu options enjoyed higher foot traffic and sales. The study -- which analyzed 21 restaurant chains including McDonald's (NYSE:MCD), Panera Bread (NASDAQ:PNRA), and Denny's (NASDAQ:DENN) -- measured the amount of "low-cal" offerings against the restaurants' foot traffic and same-store sales from 2006 to 2011. Low-calorie offerings were cited as entrees containing 500 or fewer calories and beverages with fewer than 50 calories per eight-ounce serving.
Remarkably, restaurants that increased their lower-calorie offerings enjoyed a nearly 11% increase in foot traffic and a 5.5% surge in same-store sales between 2006 and 2011. Meanwhile, venues that did not increase their low-cal options -- or even decreased them -- saw traffic drop nearly 15% and same-store sales decline 5.5% during the same time period.
Chain restaurants with 20 or more locations must list calorie information for standard menu items. Both McDonald's and Panera Bread started posting this information on menu boards across the U.S. ahead of the deadline for doing so. According to The Wall Street Journal, after Panera started displaying the calorie information a few years ago, it noted that 20% of its consumers started ordering lower-calorie menu items. Panera's same-store sales soared more than 5% in fourth-quarter 2012.
A fast-casual restaurant known for its focus on food quality, Chipotle Mexican Grill (NYSE:CMG) also recently announced a surge in same-store sales. Even though Chipotle's sales have declined while its costs have increased in 2012, the Mexican restaurant reported 3.8% sales growth during the same period.
Seemingly seeing the writing on the wall, some not-traditionally-thought-of-as-healthy restaurants are carving out special sections of their menus to highlight healthier, lower-calorie options. Denny's "Fit Fare" designation displays number of calories and grams of protein, fat, and fiber for some of its entrees. Not surprisingly, the number of healthy options at Denny's still has a long way to go. Only a slice of its entrees boast the "Fit Fare" label. But the home of the Grand Slam recently posted its second consecutive year of positive same-store sales. Perhaps its efforts are starting to pay off.
Several years ago, McDonald's shifted its focus from growing its number of restaurants to driving sales at existing stores. It did so by launching premium products and offering healthier options like its "Favorites Under 400 Calories" menu. Up until very recently, this strategy has paid off. Sales and earnings accelerated from 2005 to 2011. However, just last week, the Golden Arches posted a 1.9% decline in same-store sales worldwide.
Unquestionably, food quality greatly impacts sales. Look no further than Yum! Brands' (NYSE:YUM) recent chicken snafu in China for an example of this. The company's "adverse publicity from the poultry supply situation" made for a difficult quarter. Same-store sales declined 6% in China. Lower sales in the Asian nation hurt Yum!'s overall fourth-quarter earnings, and the company lowered guidance for 2013.
After Yum! had grown impressively in the years preceding the chicken crisis, maybe this will serve as a wake-up call and the company will make a change for the better. One positive note for Yum! Brands is that a board member scooped up 35,000 shares of the company after it announced its disappointing report.
Foolish bottom line
Clearly, the writing is on the wall. Lower-calorie menu items are driving restaurant growth. And restaurants that cut corners and don't offer high-quality, nutritious options will be punished. More and more, consumers are voting with their wallets. Eateries that offer a greater number of these options are not only doing what's right for consumers' bottoms, but also enjoying top-line growth as a result.
I like McDonald's for its dividend, but if I had to pick one of these stocks right now, I'd go with Chipotle. The company has made its name (and a 206% return for shareholders in three years!) by focusing on the quality of its food. This focus on quality coupled with the company's long-term international growth prospects appears extremely enticing.