The health of the restaurant consumer isn’t a novel topic. It was likely on the mind of Billy Ingram and Walter Anderson when they decided 100-plus years ago to sell square burgers for 5 cents apiece. But the notion has absorbed added gravity of late if, for no other reason, burgers cost a lot more than they did a year ago, let alone a century.  

Talk of a potential recession and the recalibration of spending habits has surfaced often across recent quarterly reports. Wendy’s CFO Gunther Plosch told investors after the chain’s Q2 recap he was in the camp of there being a “mild recession,” or perhaps none at all. He added net disposable income has started to improve in quick service, even as diners continue to face pressures from macroeconomic forces. Wendy’s CEO Todd Penegor added he felt the category would weather turbulent times better than most, as it historically has. It saw some trade down from mid-scale casual last year, and those guests appear to have stuck around.

“You’re seeing higher-income cohorts start to shift into [quick service], which is good for our brand,” he noted. “And we do know the lower-income cohort, as inflation starts to moderate in the back half with all the gross income improvements they had, real income will start to improve, which could be a nice tailwind for our business.”

A more recent firestarter has been student loan repayments, and how it might further tighten consumers’ wallets. Will that lift quick service? Some brands more than others? What kind of response would show up in LTOs and other promotions?

Penegor pointed to Wendy’s Biggie Bag as an insulator, or “relative value” add that’s designed to protect Wendy’s from whatever might manifest. And another potential sign of the times the chain noticed—a material guest shift to mobile grab-and-go, where customers who order pick up in-store at the racks Wendy’s implemented late last year. Naturally, they’re more cost-effective for diners than third-party delivery.

McDonald’s CEO Chris Kempczinski, in the chain’s period review, said sentiment improved through 2023 but is “certainly still far off of where we were back in 2019.” Likewise, McDonald’s has resonated with incomes under $100,000, hinting there’s been trade down from casual dining and other full-service occasions. With $45,000 cohorts and under, he added, what McDonald’s observed is a “little bit” of a decrease in order size offset by strength in traffic. “So I think net-net, when you look at all of it, there is certainly concern with the U.S. consumer that shows up in their sentiment,” he said. “But our business, and particularly I think our value positioning in the market, has put us into a good position to be able to weather that and continue to drive the share gains that you’re seeing.”

CFO Ian Borden continued there’s been two broad areas of adjustment among customers. Firstly, some diners are laddering down from premium or higher-priced items to more core and value (Applebee’s, long a champion of value in its category, recently said the percentage of guests selecting from limited-time and value offerings hiked from 15 to 19 percent, quarter-over-quarter). And as Kempczinski mentioned, guests continue to visit but are buying less. “So their basket sizes are a little bit smaller than what they’ve been previously,” he said. “I think the context is those two factors, though, have been really, while they’ve been in play for a number of quarters now, have been very consistent. So we’re not seeing any further kind of deterioration, which is encouraging.”

BTIG analyst Peter Saleh believes the upcoming resumption of federal student loan payments will produce an adverse impact on restaurant spending, “but will likely remain a modest issue for the broader industry given the relatively small population of customers this applies to.”

 

“We see a greater impact on operators serving higher-income, more educated customer bases,” he wrote in a note, pointing to Starbucks, Chipotle, and Shake Shack as brands that could face stiffer kickback due to consumer profiles and higher prices.

Saleh and BTIG conducted a proprietary survey on student loan borrowers, adding in thoughts from Washington policy analyst Isaac Boltansky, to frame up the impact.

 

For timing purposes, the vast majority of borrowers expect to resume payments in October. Roughly 82 percent of BTIG’s survey of 1,000 student loan borrowers that benefitted from the COVID-19 payment moratorium circled that window. Saleh said he was somewhat surprised by the finding given the available grace period and recent posturing around student loan cancellation. But it’s a timeframe that supports other findings from the group. Saleh did add he expects, as borrowers become more aware of the benefits of the grace period, it is “very likely” more people opt to delay payments for a year.

The survey found average monthly payments would be between $250–300, consistent with published reports of about $275. Unsurprisingly, higher-income borrowers proved more likely than lower-income ones to resume payments in October. In fact, 97 percent of consumers earning $150,000 or more said they planned to start paying again. It was 61 percent for those earning $25,000 to $35,000 per year.

 

There are roughly 45 million student loan borrowers in the country, or 17 percent of the adult population. Twenty-four million people (9 percent) benefited from the payment pause that went into effect March 2020. So given the $275 average monthly payment figure, we’re looking at an aggregate of $80 billion of payments annually.

Saleh estimates the payment will reduce monthly take-home pay by a mid-single-digit percent for those borrowers who opt to begin repayment in October.

BTIG’s survey suggested nearly 75 percent of borrowers earn more than $60,000 per year, with 57 percent making north of $75,000, and nearly a third taking in $100,000 or more. These borrowers tend to be older, with only 6 percent under 25 years old. Forty-seven percent were 25–34 and 7 percent 50 and above. 

 

“None of these findings were particularly surprising to us, as higher education generally aligns with greater income,” Saleh said. “That said, slightly more than 25 percent of these consumers are considered lower-income with 13 percent earning less than $35,000 per year.”

“While lower-income consumer exposure to student loan debt is relatively modest,” he continued, “it could still spur some quick-service operators to become more promotional this fall in an effort to defend market share.”

The data uncovered a mid-teens percent of higher-income borrowers feel the restart of student loan payments would have no impact on their spending habits. Roughly 60 percent indicated they’d dine out less often or reduce their spending when doing so. “While we don’t expect these consumers to significantly change their habits, we do believe that some could manage their check, trade down within the menu, or modestly reduce their visit frequency,” Saleh said.

Getting into (or out of) the restaurants

Saleh conducted a separate survey of more than 5,000 restaurant consumers. This revealed customers of Starbucks, Chipotle, and Shake Shack over-index toward higher-income, more educated guests. For Starbucks, BTIG found 72 percent of customers earning $150,000 or more claimed to have ordered from the brand recently, as compared with about a third of diners earning $45,000 per year or less. At Chipotle, it wasn’t quite as dramatic—30 percent of consumers making $150,000 or more said they’ve visited versus 18 percent who took home the lower range. Similarly, Shake Shack split at 20 and 5 percent.

Due to these potential trends, Saleh reduced same-store sales and EPS estimates for the three chain. “The combination of reduced discretionary spending and less pricing benefit for these names in the second half leaves us more cautious,” he said.

Shake Shack was the most significant comps line—down 100 basis points to 3 percent in Q3 and 300 basis points lower in Q4 to 1.5 percent, followed by 2.9 percent in 2024, or a 150-basis-point slide. The Starbucks revision is 100 basis points over the coming year to 5 from 6 percent in North America and 3 percent below the company’s three-year target. Saleh trimmed Chipotle’s estimate 50 basis points to 4 percent from 4.4 percent.

The expert outlook

BTIG’s Director of Policy Research Isaac Boltansky shared a few high-level thoughts. From a policy perspective, he said there’s “deep concern” regarding federal student loan payments beginning again this fall. After three years of payment forbearance, roughly 24 million student loan borrowers will see their $275 average monthly payment come due again in October. Concerning the scope of the impact (that $80 billion mentioned earlier), there is some debate about the impact. “Given that the White House has announced a 12-month grace period for missed payments on student loans, as well as a new income-driven repayment plan that should deliver immediate savings for low- income households, our sense is that the resumption of student loan payments could prove far more nuanced than the bearish narrative has suggested,” Boltansky’s findings pointed out.

• Let’s level set the landscape a bit, with help from BTIG.
• Roughly one in five Americans, or 45 million individuals, have some amount of student loan debt. 
• There is $1.77 trillion in total student loan debt with $1.64 trillion, or about 93 percent of the total comprised of federal student loan debt. 
• The average federal student loan balance is about $37,000, but more than half of borrowers owe less than $20,000 and a third of the total more than $10,000. 
• Looking at age bands, 24 percent of Americans aged 18 to 24 have student loan debt and 33 percent of Americans aged 25 to 34 have student loan debt. 
• The CFPB estimates: “About one-in-five student loan borrowers have risk factors that suggest they could struggle when scheduled payments resume.” The same report added: “More than one-in-13 student loan borrowers are currently behind on their other payment obligations. These delinquencies are higher than they were before the pandemic, despite a small seasonal decrease in the most recent data.” 
• A recent paper by Georgia Tech and Yale scholars found that distressed student loan borrowers took on 12.3 percent more credit card debt relative to their peers. Additionally, researchers found that “after 3 years of forbearance, financially vulnerable federal student loan borrowers’ student loan balances are 12.1 percent higher than vulnerable borrowers whose student loans are not in forbearance.” 

 

The Biden administration’s new IDR plan, or “Saving on a Valuable Education plan,” will either significantly reduce or completely eliminate federal student loan payments for lower-income households. SAVE calculates a borrower’s monthly payment amount based on the borrower’s income and family size. “From a practice perspective,” BTID said, “this means that a single borrower earning under $32,800 a year and a family of four earning less than $67,500 a year would no longer owe student loan payments. Additionally, a borrower with no dependents earning $38,000 a year would see his monthly payment on a $25,000 student loan balance go from $134 per month to $43.”

The White House broadly estimated borrowers will see their total payments per dollar borrower fall by 40 percent. Notably, BTIG added, the benefit should accrue primarily to lower-income borrowers (a quick-service base) as those with the lowest projected lifetime earnings will see payments per dollar borrowed drop some 83 percent, compared to those in the top who would only appreciate a 5 percent reduction.

The White House added about a million additional low-income borrowers could qualify for zero-dollar payments under this program. The SAVE plan will offer additional benefits beginning next summer, which will promise a greater impact on higher earnings, including a reduction in payments on graduate loans from 10 percent of discretionary income to 5 percent, BTIG said.

Boltansky said it’s not clear how impactful the SAVE plan will really be, as evidenced most clearly by cost estimates. The White House tabbed the bill at $138 billion over a decade, but private projections suggest a 70 percent take-up rate could lead to the program costing about $400 billion instead. “From our seat, the SAVE plan is a meaningful expansion of government support that should deliver thousands of dollars in savings for lower-income households,” Boltansky said. “We have been surprised by some surveys suggesting that qualifying borrowers may not enroll in the SAVE plan, but our contacts believe that dynamic could change this fall when borrowers see their statement and the White House begins promoting the program.”

Also to note, there’s going to be a temporary “on-ramp” period to protect borrowers from the hardest consequences of late, missed, or partial payments for up to 12 months. Although payments will be due and interested accrued during this period, “interest will not capitalize at the end of the on-ramp period.” The White House added “borrowers will not be reported to credit bureaus, be considered in default, or referred to collection agencies for late, missed, or partial payments during the on-ramp period.” In the simplest terms, BTIG said, borrowers who fail to make their federal student loan payments for the next year will face no penalty other than the accrual of interest. “With nearly 20 percent of student loan borrowers exhibiting risk factors suggesting they could struggle when payments resume, our sense is that the 12-month delinquency grace period could see robust take-up,” Boltansky said.

“We also note that the 12-month grace period is set to expire only weeks before the 2024 election, which leaves us with the distinct sense that this grace period could be extended again,” he added. “Given the economic and political implications relating to student loan debt, our sense is that the Biden administration will extend the delinquency grace period through 2024 and possibly beyond. The 12- month delinquency grace period is a good option for struggling borrowers, and even some on the verge of struggling, which we believe will become clearer as student loan servicers begin mailing statements in the coming weeks.”

Two points have emerged as BTIG spoke to contacts and clients in recent calls. One is that technical issues with the restart of student loan payments should be expected. Second, promises from the campaign trail could impact borrower behavior. The CFPB estimates 14 million student loan borrowers will have new federal student loan servicers due to industry changes. “The Biden administration is continuing its pursuit of student loan debt cancelation, which will feature prominently on the campaign trail, and we could envision this issue gaining bipartisan support depending on the Republican nominee,” Boltansky said. “Given the difficulty in forecasting consumer behavior on student loans, we believe continued promises of federal beneficence from the campaign trail could lead to some borrowers ignoring student loan debt.