- Fast-food giants, including McDonald's, KFC, and Starbucks, reported drops in comparable US sales.
- Diners say fast food is too expensive after years of price hikes. Lower-end consumers are particularly cutting back.
- Not enough higher-earners have traded down into the category to offset the loss of lower-income diners, analysts say.
A slate of fast-food companies have reported earnings over the last three weeks — and it's painting a bleak picture of the American consumer.
Executives have referred to "more cost-conscious consumers" and "challenging consumer environments," which in many cases led to a slump in comparable sales growth.
At McDonald's, comparable US sales fell 0.7% in the quarter year-over-year, compared to 10.3% growth in the same period the prior year. At Starbucks, US comparable sales were down 2% in the quarter, versus the 7% increase it posted a year ago.
KFC, Papa Johns, Pizza Hut, and Firehouse Subs also reported a drop in same-store sales growth.
At some chains including Burger King, Popeyes, and Wendy's, sales at comparable US restaurants increased compared to the same period in 2023, but at a much slower rate.
Lower-income earners are cutting back
Part of the decline in comparable sales is simply because of a return to pre-COVID operating trends, Jefferies restaurant analyst Andy Barish told Business Insider. At some chains, sales boomed during the pandemic.
But consumers are penny-pinching, too.
Consumers say a big part of the reason they're cutting back on fast food is because it doesn't feel like such good value for money anymore. The prices of both groceries and restaurants rose at accelerated rates after the pandemic started. Grocery inflation has since cooled, but inflation at fast-food restaurants is still above pre-pandemic levels.
In particular, chains have said that it's lower-end consumers who are cutting back.
"The low-end consumer has continued to feel pressure and that's been going on for more than a year now," Barish said. Some are placing smaller fast-food orders while others are buying more groceries instead, he said.
"What's unusual is that you get a couple of the big players like McDonald's and Starbucks that are having negative traffic right now," Barish said. "And that's something we don't typically see even in these kind of environments where those brands would be typically gaining share."
Edward Jones analyst Brian Yarbrough told BI that typically during a slowdown, lower-end consumers trade out of fast food while middle- and higher-income consumers trade in at a rate that "more than offsets" the loss of lower-earning diners.
But fast-food chains have raised prices "so much," causing the gap between fast-food and fast-casual prices to shrink, that not enough higher earners are trading down into fast food to offset the trade out, he said.
And for some chains, it doesn't look like they expect spending to rebound anytime soon.
"We expect customers will continue to feel the pinch of the economy and a higher cost of living for at least the next several quarters in this very competitive landscape," Joe Erlinger, the president of McDonald's US, told investors in July.
It's not bad news for every fast-food and fast-casual chain, though. Wingstop, for example, said that same-store US sales grew 28.7% in the quarter, up from 16.8% for the same period the year before. Domino's and Taco Bell both reported increases in comparable sales growth in the US.
Consumers want value
"Value" is the word on restaurant executives' lips this summer. Joshua Kobza, CEO of Restaurant Brands International, which owns Burger King, Popeyes, Tim Hortons, and Firehouse Subs, used the word nine times in his opening remarks at the company's August earnings call.
Fast-food chains have been trying to lure cash-strapped diners in with combo deals and value menus. It's been the summer of the $5 deal: McDonald's, Burger King, and KFC have launched combo deals for five bucks.
Even Starbucks is getting into bundling.
Barish, the Jefferies analyst, said that the recent focus on value menus and bundled meals represented a return to a normal pre-COVID promotional environment.
Executives say the bundles have performed well — both McDonald's and Burger King said that their $5 deals had been selling especially well among lower-income consumers and that the average transaction that included the combo meal came to more than $10 because diners added other items to their orders.
The challenge is that the value deals have to drive enough traffic to offset the lower prices. Restaurant revenues are determined by average check size and number of orders. With the value deals, "you got to drive enough traffic to offset the pricing pressure, and that's going to be the toughest part," Yarbrough, the Edward Jones analyst, said.
Consumers should expect to see even more promotions in the fall, Northcoast Research analyst Jim Sanderson told BI. He said that consumer-packaged goods companies would increase promotions to boost sales and that restaurants would have to compete "more aggressively" with grocery stores by promoting lower-priced options or bundles.
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