Are Restaurants Safe From The Amazon Effect?

For every $1 a consumer spends online, it's $1 less that a company like Amazon.com, Inc. AMZN collects and one less dollar spent in malls. While the immediate impact to retailers and department stores is apparent, investors aren't necessarily appreciating the negative impact to the restaurant sector.

The Restaurant-Amazon Correlation

Analysts at Credit Suisse took a deep dive into retail traffic data from three sources — Prodco, RetailNext and SpendTrend — to uncover any data correlations with restaurant traffic. The main takeaway is clear: despite some inconsistencies in the trends, there is "compelling evidence that retail traffic does have some influence on restaurant traffic."

It may be safe for investors to operate under the assumption that restaurants are not immune to the traffic declines seen across retail, analyst Jason West said in a Nov. 29 report. For example, data from Prodco found an 88-percent correlation with same-store traffic for a selection of 20 public restaurant chains and an 80-percent correlation with the Black Box restaurant traffic index over the past four years.

Coffee Segment Most Exposed

Lower foot traffic in malls decreases impromptu visits, which serves as a negative overhang for the entire restaurant group with one segment more exposed than others, West said in the report. Starbucks Corporation SBUX's ex-CEO and executive chairman Howard Schultz was among the few vocal executives who highlighted this trend over the past few years. The coffee category is more than 90 percent correlated to retail traffic over the past two years, as coffee chains are losing a good amount of "pop-in visits" when consumers aren't out shopping.

While Starbucks' brand attracts a high degree of loyalty and the chain does have a higher mix of urban locations that are outside of malls, investors should still be "cautious on the traffic outlook for the coffee chains," the analyst said. The company's fiscal 2018 guidance may seem "optimistic" and investors may want to consider instead rival Dunkin Brands Group Inc DNKN, as the Street's sales and traffic expectations are "already low" and the 100-percent franchised business model makes it less sensitive to same-store sales trends, according to Credit Suisse. 

Related Link: Starbucks' Teavana Shows Troubling Metrics

Casual Dining

The correlation between casual dining traffic and retail traffic were "surprisingly weak" at 56 percent (since the fourth quarter of 2015), but going back to the first quarter of 2014, the correlation stood at 82 percent, West said. This may imply that the weakness in casual dining is partly due to a decline in foot traffic at malls but could also be attributed to structural challenges facing the entire industry.

Texas Roadhouse Inc TXRH ranked as the most correlated casual dining chain with retail traffic. This was "certainly a surprise," since the Texas-themed steakhouse chain has proven itself to be "one of the best traffic stories" in the entire restaurant sector. Texas Roadhouse is likely less impacted by structural challenges in the sector and is influenced by macro factors, particularly retail traffic trends, West said. 

Fast Food Chains

Quick service restaurants don't disclose a breakdown of traffic versus check within same-store sales, which makes it a big more difficult to jump to conclusions. Nevertheless, fast food chains showed a higher correlation to average retail traffic, but with variables from company to company. For instance, McDonald's Corporation MCD was the least correlated to traffic trends, as sales are likely influenced by company-specific drivers and promotions rather than retail traffic.

The Ranking

Here is the analyst's ranking of restaurant traffic with retail traffic:

• Average correlation: 0.33.
• Starbucks: 0.68.
• Dunkin' Brands: 0.65.
• Bloomin' Brands Inc BLMN's Carrabba's brand: 0.64.
• Jack in the Box Inc. JACK's core Jack in the Box chain: 0.62.
• Jack in the Box's Qdoba chain: 0.60.
• Sonic Corporation SONC: 0.54.
• McDonald's: 0.42.
• Chuy's Holdings Inc CHUY: 0.40.
• Cracker Barrel Old Country Store, Inc. CBRL: 0.40.
• BJ's Restaurants, Inc. BJRI: 0.33.
• Texas Roadhouse: 0.31.
• Cheesecake Factory Inc CAKE: 0.25.
• Darden Restaurants, Inc. DRI's Olive Garden chain: 0.23.
• Brinker International, Inc. EAT's Chili's chain: 0.21.
• Bloomin' Brands Inc BLMN's Outback chain: 0.15.
• Darden's Longhorn chain: 0.06.
• Buffalo Wild Wings BWLD: 0.01.
• Red Robin Gourmet Burgers, Inc. RRGB: negative 0.14.
• Chipotle Mexican Grill, Inc. CMG: negative 0.44.

Related Link: 

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