It appears the time to retire the phrase “new normal” has arrived at last. This far removed from COVID’s 2020 onset, the “new normal,” is, for all definitions, just the “present.” But to a larger scope, 2024 has the makings of the most “normal” year since the crisis, BTIG analyst Peter Saleh shared in a recent note. Unpacking what that means, however, isn’t as simple as celebrating the sunset of one of the worst and most tangled stretches in sector history.

With sales, unit development, and commodity and labor inflation, BTIG analyst Peter Saleh believes 2024 will more closely resemble 2019 than any of the years in between. Yet in turn, “some less desirable elements” are going to resurface. It feels bankable that heightened promotions and value offerings will dominate the landscape as operators work to restore customer traffic.

For a snapshot, quick-service restaurant U.S. traffic was down 1.8 percent in November, year-over-year, according to Revenue Management Solutions. November 2022 was off 5.3 percent from 2021. RMS estimated industry traffic today stands 18.4 percent lower than pre-virus life.

Dinner was the lone daypart up (0.8 percent) in November, while breakfast (negative 3.2 percent) and lunch (negative 3.4 percent) slid. Delivery traffic was 12.4 percent higher versus this time last year. But it has been declining since September.

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Takeout rose 10.2 percent and dine-in traffic 6.1 percent. Drive-thru traffic decreased 6.9 percent, yet remains elevated over 2019.

Net sales for quick-service restaurants grew 2.4 percent, driven by a 4.3 percent increase in average check. Quantity per transaction lowered 0.5 percent—a measure that sunk negative last year and has steadied as this level.

Average price, per RMS, climbed 4.9 percent. Worth noting: pricing trends, month-over-month, have been stable since September. RMS doesn’t see that changing in any material fashion next year, suggesting the industry has neared the ceiling.

Additionally, independent of the sales and traffic trends, RMS recently completed year-over-year analysis using the company’s AI-driven Restaurant Price Index, which tracks menu prices from 170,000 restaurant locations.

According to its metrics (this covers all segments, not just quick service), menu prices were up 5.9 percent nationally when comparing November 2023 to November 2022. It varied by region. In November, saddled by climbing labor costs, California’s prices were up 6.6 percent, for instance.

Saleh’s prediction chains will dial up promotions and discounts in 2024 isn’t a horizon one. Pizza Hut ($7 Deal Lovers menu); Burger King ($2.99 wraps); Popeyes ($5.99 wings); and McDonald’s (2 for $6 Breakfast Mix and Match) are among the brands mixing it up already. The significant national advertising for these offers follows heavily promoted discounted price points from brands like Sonic Drive-In and Wendy’s, Saleh added. “In our view,” he continued, “the heavily advertised promotions should help larger chains regain share from independents, albeit at a steep cost that should keep restaurant margins muted as they continues to recover from their 2022 lows.”

Put in plain terms, Saleh expects 2024 to see the steepest discounts in four years. There will be a particular focus on the lower-income consumers that pulled back in recent quarters.

McDonald’s has spoken about this development throughout 2023 earnings calls, suggesting it’s been more than balanced by the brand’s ability to gain market share from middle- and higher-income households who traded down from casual dining. The chain’s average price was a shade over 10 percent for the year—a fact management said hadn’t deteriorated its position as a value leader. Yet guest counts dipped in Q3 (they were up on a two-year stack).

All said, however, it was always a matter of when, not if, large quick-serves would begin trying to court that historically loyal diner again.

A combination of normalized sales trends, greater promotions, continued inflationary pressures, and more modest pricing create a “cautious outlook” for restaurant margin and unit economics, Saleh said.

“We expect a modest increase in restaurant margins for most operators as margins continue to slowly recover from last year’s lows, but don’t see any catalyst for outsized margin improvement,” he said.

Saleh did note a few exceptions for operators with favorable commodity exposure, like Wingstop, strong sales growth/leverage like Chipotle, or unique geographic factors like Shake Shack. “We think this sets up 2024 to be the second year of a likely multi-year recovery trajectory for restaurant margins amid continued, albeit moderating, inflationary pressures,” he said.

Even though pricing, comparatively, should be muted in 2024, it doesn’t mean things won’t become more expensive. Saleh sees a low-single digit commodity inflation environment on deck, largely driven by continued inflation in beef, with most other categories flat to slightly down.

Labor inflation, he added, will continue at mid-single-digit rates thanks to minimum wage hikes and ongoing increases as the market remains tight, “thought we have heard some encouraging signs that increases will be more normalized compared to recent years,” Saleh said.

Full-serves Texas Roadhouse (read more here) and Darden have offered a peek of late. The steakhouse chain said it expects commodity inflation of 5–6 percent next year, pushed primarily by higher beef costs, with labor 4–5 percent higher. Darden outlined 2024 commodity inflation at 2.5 percent and labor inflation of 6 percent.

The tandem of low-single-digit commodity and mid-single-digit wage inflation indicates, Saleh said, that while conditions will be more normalized next year, costs will still be inflationary and menu price increase should follow. A 2–3 price jump, more in line with historical norms, could be ahead, with California alone accounting for 1 percent of the outlook. So, in sum, not nearly as accelerated, but hardy a reversal, either.

Several months ago, California’s hotly debated FAST Act required restaurants with more than 60 national units to pay a minimum wage of $20 per hour starting April 1. Not only will this pressure other industries that rely on hourly labor bump wages as they fight for talent, Saleh said, but it could also compel fellow states to follow suite with similar legislation. Saleh predicted most restaurant operators will need to raise menu prices by mid-to-high single digits in California to offset soaring labor costs. That, he added, could generate 50–100 basis points of same-store sales benefit in the spring, although at the expense of higher labor costs and lower restaurant margin.

Why 2024 might not be so “normal”

All of these factors happen to be intersecting with what promises to be a heated election year. Looking back on prior cycles, Saleh pointed out, presidential debates tend to attract large audiences, keeping consumers glued to streaming devices and less likely to dine out on those nights. Significant advertising from candidates also pushes rates up in aligned markets.

Saleh feels the TV dynamic will benefit brands that operate a delivery model (pizza) and negatively hit casual chains, at least in the back half of the year. The advertising disruption should favor larger chains over smaller ones, as well as regional operators, due to the collective scale and sophistication of bigger groups able to navigate hurdles.

Just as he did last year, Saleh picked Domino’s as a brand poised to emerge through the collective noise. He also highlighted Chefs’ Warehouse, a specialty food purveyor, as a company to watch.

Domino’s, the largest pizza chain in America, reported nine consecutive quarters of negative delivery same-store sales and traffic, but appears to have reversed the trend in Q4 following a September loyalty revamp. Management recently indicated at the company’s investor day that same-store sales were running ahead of its expectation of positive gains provided in October. “And this is before the Uber Eats rollout coming by year-end,” Saleh said.

Domino’s guided domestic comps above its 3 percent outlook in 2024 as the brand benefits from the loyalty changes and Uber Eats deal. The recent turn in delivery sales trends, Saleh said, plus expectations for an outside sales gain next year, its customer tech refresh, and the chain’s potential for earnings upside, keeps Domino’s as BTIG’s Top Pick stock for the second straight year.

Deeper into the Domino’s dish

Leveraging scale and tech to reinvest back into value, and, in turn, scoop market share, is nothing new at Domino’s. Saleh said it’s been the playbook for going on 15 years now. But he believes the company’s benefits of scale today are underappreciated by investors. The brand’s tech platform allows it to operate with a lower digital ordering cost relative to independent peers. Those savings flow back into value (Mix and Max, two or more, $6.99 each) and Domino’s efforts to grow its customer base through trial and repeat orders.

And Domino’s is only getting bigger. At its investor day, annual global retail sales growth from 2024–2028 was bumped from 4–8 to 7 percent. Or over $7 billion in incremental sales during five years, $3 billion of which stems from the U.S. segment.

Then, management presented an annual global net unit growth target raise from 5–7 percent to 1,100 net stores, or 5,500 across five years—close to Domino’s systemwide count in 2017. In the U.S. specifically, Domino’s has about 6,800 stores and expects that to reach roughly 7,700-plus by 2028 and 8,500-plus in the longer term. On the international side, the brand projects that it will go from 13,400 locations to 18,500-plus in 2028 and 40,000-plus in the longer term. Combine those two and Domino’s will approach 50,000 global stores.

On the topic of market share, Domino’s charges franchisees just over 1 percent of the average check (about 39 cents) for digital orders (85 percent of sales), compared with the third-party aggregators that independents use for similar digital access, of which charge upward of 10 percent or more of the average check.

Saleh said the competitive advantage is the reason customers see deals like Mix & Match (which was the same price for a decade until it changed recently). That positions the brand uniquely to capture share, especially price-sensitive consumers—a historic reality that fits nicely into what lies ahead in 2024.

In the past 15 years, Domini’s has increased its share of the quick-service pizza category from 9 percent (2008) to nearly 23 percent (2023). “These gains have come from all three sets of competitors, independents, regional chains and large chains,” Saleh said, “and we stress that 23 percent market share is still a small position relative to other categories, like hamburger, chicken, sandwich, etc., suggesting ample opportunity remains as momentum returns.”