Rising Prices in the Fast Food Industry
Remember the dollar menu? Well, you may be hard pressed to find any fast food item that actually costs a dollar anymore. For example, three Filet O Fish at McDonald’s now cost $17. This significant price increase has made fast food less affordable for many consumers who used to rely on it as a cheap option for a quick meal.
Increasing Costs for Consumers
When looking at fast food menus nationally, the average prices for items such as fries from McDonald’s and a Happy Meal and burger combo from Burger King have also seen a significant rise. Even in locations like the NBC offices in Midtown Manhattan, prices are higher than the national averages, making it even more expensive for consumers in urban areas.
Factors Driving Price Increases
Sales in the fast food industry continue to perform strongly, even as foot traffic decreases. One of the main reasons for this trend is the higher prices that fast food chains are charging. The Consumer Price Index shows that prices in the limited service meals category, which includes fast food, have increased by almost 28% from 2019 to 2023. This rate is higher than the increase in full-service meals and overall inflation rates.
Impact of Labor Costs
Between 2022 and 2023, the cost of food, beverage, and packaging rose by around 11% for popular fast food chains like McDonald’s and Chipotle. However, the main factor driving up prices in the fast food industry is labor costs. As the demand for higher wages for fast food workers continues to grow, many chains are forced to increase their prices in order to cover these rising expenses.
Rising Labor Costs
Food is about a third of the cost of a menu item. Even as those costs moderate in many cases, the wage pressure remains elevated due to the minimum wage laws and other wage increases that are happening. The fast food labor market became increasingly competitive for employers during the pandemic, as companies struggled to fill their restaurants.
Labor Market Challenges
In 2022, the number of employees in the limited service restaurant category were still below 2019 levels, while the number of limited service establishments grew. As things normalize after Covid, there is a higher amount of job openings and less people coming in to fill those jobs. This has led to a need for fast food restaurants to hire more labor across the day to maintain service levels and accommodate consumer demands.
Wage Increases
Restaurants like Wendys and Shake Shack have seen an increase in the percentage of sales going towards paying for labor, as they need to compete with other potential employers by raising wages. Companies are passing these costs onto the customer, especially in states like California that have raised the minimum wage for workers.
Operational Expansion
In order to expand their operating hours to cater to late-night snack demands and earlier breakfasts, fast food restaurants need to hire more labor. This increased demand for labor and the need to make jobs more enticing has led to a rise in wage rates, ultimately contributing to the increase in fast food prices.
Impact of Inflation
In an obviously, despite this huge wage, inflation theres a lot of other factors at play. I think when you look at inflation within limited service. First of all, youre starting with a lower check average. And so any increase of 1 or 2 that an operator passes on just by definition, as a higher percentage increase on it. From December 2023 to February 2024, the national average for a quick service restaurant check was about 18, which is 4.5 more than the same time period last year. That’s a higher percentage increase than both casual and fine dining and full service.
Capitalizing on Price Gap
Restaurants are capitalizing on the decreasing price gap. How is this Chili’s three for me only 10.99. When fast food is so expensive, it could be because we don’t have to pay for any mascots. Please. It has created a shift in fast food consumer behavior. Perhaps before they were going there ten times, but now they’re still only spending 100 and maybe they’re going there eight times or seven times. And so you start to see this traffic falloff because they’re still spending essentially the same amount but they’re now going less frequently.
Sales Increase Despite Price Hike
Although prices for fast food have soared, sales have remained strong. McDonald’s, Wendy’s and Yum Brands, which owns KFC Pizza Hut and Taco Bell, have all seen revenue surge past pre-pandemic levels. A lot of the sales are still going up and a lot of that’s driven by price, as opposed to frequency or visits.
Focusing on Volume Growth
A lot of investors are now focused on who is best positioned to drive growth based on volume, because you can obviously only push your price higher for so long. And that for so long may have arrived. McDonald’s missed earnings estimates in the first quarter of 2024 and an Evercore analyst called it one of the most sobering quarters for the fast food giant. Others like KFC and Pizza Hut are experiencing the same consumer pullback.
Importance of Affordability
We must be laser-focused on affordability, which means good entry-level price points available every day. In the markets where we’re doing this well, the business is outperforming. However, it’s clear we still have opportunities to strengthen our proposition. Households with incomes of 100K plus are still spending at normalized levels. The constraint or behavioral changes are noticeable in consumers with incomes of 50K and below, who are facing spending power limitations.
Inflation Impact on Fast Food Prices
Remember the $5 footlong at Subway? Well, that’s a thing of the past. This turkey sub now costs over $11. The bad news about inflation is that prices aren’t going to go down. However, the good news is that the increases are slowing. Prices in general across the economy very rarely ever come down once they’ve been reset higher. One of the reasons for that is wages.
Rising Costs and Value Perception
Once the prices of fast food items are raised, they are rarely lowered back down. This increase in pricing has led to a decrease in the value offered by fast food chains. Customers are now evaluating whether the quality of food justifies the higher cost.
Utilization of Apps and Loyalty Programs
To combat the decrease in value, fast food chains are relying heavily on apps and loyalty programs. Companies like Wendy’s and McDonald’s have announced significant investments to enhance their mobile app experiences. McDonald’s has set a goal to expand its loyalty program to reach a larger user base by 2027.
Targeted Advertisements and Consumer Preferences
What fast food chains have been able to do recently is to implement targeted advertisements that directly reach consumers based on their consumption preferences. This allows companies to monitor the return on investment of these promotions in almost real-time. For example, if a promotion is pushed to a consumer on Tuesday, the company can track if the consumer makes a purchase on Wednesday or Thursday.
Future Industry Trends
The value offered by fast food chains will continue to be a crucial factor for customers when making a purchase decision. This evaluation may influence how the industry reacts in the future. Ultimately, the industry is still driven by revenue, and as long as there is growth from a financial perspective, it will be considered positive news for the fast food industry.