[San Francisco, CA, October 10th, 2024] - After spending the past few years raising menu prices to offset rising food costs and higher wages, fast-food chains are experiencing a reckoning.
Traffic at the nation’s largest fast-food chains is slowing down as consumers grow tired of the rising cost of burgers, pizza, and lattes.
And while inflation has cooled down, the cost of dining out has not.
From 2021 to 2024, fast-food prices have gone up roughly 20 percent, according to the government data.
Chains like McDonald’s and Starbucks are experiencing backlash from budget conscious consumers. In their most recent quarter, both chains reported a decline in same-store sales, a key indicator of restaurant’s financial health. Consumer visits have also slipped at both brands.
“Beginning last year, we warned of a more discriminating consumer, particularly among lower-income households,” McDonald’s CEO Chris Kempczinski told investors during the chain’s July 29 earnings call. “And as this year progressed, those pressures have deepened and broadened. The QSR sector has meaningfully slowed in the majority of our markets and industry traffic has declined in major markets like the U.S., Australia, Canada and Germany.”
In May, Joe Erlinger, president of McDonald’s USA, defended the price increases after several viral media reports focused on one U.S. store selling a Big Mac meal for $18. In reality, the average price of a Big Mac in the U.S. has increased 21% from $4.39 in 2019 to $5.29 in 2024, according to McDonald’s.
“Many of our menu items have risen less than the rate of inflation – and remain well within the range of other quick service restaurants,” Erlinger said.
Still, restaurant prices remain high compared to last year.
According to the Consumer Price Index for August, restaurant meals rose 4 percent year over year. Fast-food prices increased 4.3 percent over the last 12 months.
“I don’t see prices really going down in the short term,” said Tim Powell, managing principal at Foodservice IP consultancy.
According to Lending Tree, three in four Americans typically eat fast food at least once a week, but 62% say they’re eating it less due to rising prices.
“Right now people are very fearful, so therefore are not spending,” consumer behavior strategist Lisa Miller said.
With traffic slowing, chains are now resorting to the oldest trick in the book – value meals.
Consumers are seeing a surge in bundled deals from chains such as Burger King, McDonald’s, and Starbucks.
Value wars are not new. Chains dust off bundled discount programs and put them back on the shelf whenever they experience a drop in traffic.
Sheryl Kimes, a revenue management expert and emeritus professor at Cornell University, said value wars emerge as chains try to “undercut” competitors with discounting.
McDonald’s kicked off the summer value war with the late June launch of a $5 Meal Deal. Other chains such as Starbucks, Del Taco, Taco Bell, and Sonic followed with their own value meals.
Because these deals are seen as loss leaders, chains typically only offer them for a limited time, Kimes said.
Yet, McDonald’s announced plans during its latest earnings call to extend its $5 Meal Deal due to high demand.
“We've seen a lot of enthusiasm and the number of $5 meal deals sold are above expectations,” Erlinger told investors. “Trial rates of the deal are highest amongst lower-income consumers and sentiment towards the brand around value and affordability has begun to shift positively.”
Kimes explained that these deals tend to be cyclical because deep discounting is not a sustainable revenue management strategy. However, she pointed out that restaurants benefit when customers take advantage of the deal and also purchase non-discounted items.
Still, you can’t keep discounting forever as it trains consumers to always expect deals.
“Doing it every day of the week is not so bright,” Kimes said.
