As inflation continues to be a budgetary challenge, more fast-food companies, including McDonald's (MCD), Restaurant Brands International's Burger King (QSR), and Starbucks (SBUX), are rolling out value menus to attract consumers.
RJ Hottovy, Head of Analytics Research at Placer.ai, joins Asking for a Trend to discuss the overall state of the food industry and consumer spending.
Hottoby attributes success to a variety of value meal offers, explaining: “These promotions are key to driving foot traffic across the restaurant industry right now. Why? Because we've seen a huge decline in foot traffic to low-cost grocery stores, discount stores, etc. Convenience stores are another channel where we're seeing a similar trend. It's a way for restaurants to regain a little bit of lost market share. They're being driven by at-home dining and easing inflation. Restaurants are able to bear it a little bit more in terms of discounting.”
He said the big question facing restaurants is whether they can maintain their momentum amid growing competition from value-for-money menu offerings.
“I think consumers are really trying to save money, and what's interesting is that while they are willing to spend around big events, activities and holidays, it's the slow periods in between that where they're really taking a breather right now,” Hottoby said, adding that low- and middle-income consumers have become a “focus” as restaurants try to lure them back to spend.
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This post was written by Melanie Leal
Video Transcript
In the fast-food industry, restaurants are rolling out discount menus to encourage customers to return to restaurants amid high inflation.
McDonald's announced earlier this year that it would be launching a new $5 meal deal later this month. For $5, customers can order four McChickens or McDolls chicken nuggets, fries, and a drink. Just thinking about it makes you hungry, but McDonald's isn't the only one. Rival Burger King is also following suit with a $5 meal deal.
And this week, breakfast foods are also becoming a trend.
Starbucks has launched a pairing menu, offering customers drink and breakfast item combinations for between $5 and $7.
I'll throw my hat across the room too.
Wendy's and Popeyes.
But the question remains: how do these deals translate into traffic and revenue? RJ is here to help you sort it all out.
The story continues
Hoty, Head of Analytics Research at Placer dot AI RJ.
You are the one I spoke to about this.
This means that the deals RJ works on will intensify quickly and drive increased traffic.
Well, I think they've been successful so far and it's not just the QSR guys who are in the game.
It is a casual diner itself.
As you mentioned, Burger King is taking a lead over McDonald's in many ways by offering their own $5 value menu items.
And this week, we looked at the data to see what visitation trends are looking like year over year.
And Burger King's foot traffic trends have clearly accelerated over the past two weeks.
In other words, value is top of mind in consumers' minds.
right now.
I think McDonald's will see a similar spike when they look at the numbers after they launch on June 25. You know, all the promotional campaigns that are running right now, like Chili Buffalo Wild Wings, are key drivers of foot traffic across the restaurant industry.
why?
That's because they've seen a lot of visitor traffic being lost to channels like low-cost grocery stores, discount stores and even convenience stores.
It's a way for restaurants to regain some of the market share they've lost.
It also helps that food price inflation at home has come down a bit.
They can stand a little more in terms of discounts.
But it has lost market share in recent months, so this is its way of getting back into the fight.
RJ, you know, you're an investor and you're listening to this and you're invested in some of these stocks and you're hearing about all these deals.
How should we think about margins and their impact?
So yeah, I think margins are going to take a hit here too.
So, I think some of these really high value promotions are going to hurt margins in the short term.
Needless to say, this will lead to increased visitation.
But at the end of the day, I think where are we in terms of cost pressures, especially when you add in labor costs and other expenses?
Yeah, I think we'll be looking at a margin hit.
The important thing is to maintain frequency of visits.
Is it possible to get consumers who come in for the value menu to come back and buy at full price?
And how sustainable that will be is the big question mark right now, because rather than flattening out, distribution channels like low-cost grocers and other convenience stores will also get in on the promotional action.
So it's going to be very competitive.
Well, I think this summer is really going to be a summer value war for the restaurant sector.
So I'm going to ask you, RJ, you know, when you look closely at this space, when you study it, when you look at the themes, what does that tell you about the consumer landscape here?
How healthy and resilient do you think consumers are?
So yeah, I think this really points to a K-shaped recovery and post-pandemic.
Lower-income consumers continue to feel pressured, and I believe a lot of this is due to the cumulative effects of the inflation we've seen over the past few years.
You know, if you look at where food inflation is compared to the beginning or just after the pandemic, it's still up about 30%.
Though that trend has slowed this year, it still accounts for a big chunk of consumer discretionary spending, taking inflation into account.
There.
Other elements are beginning to come in, whether that be insurance or other service-oriented elements, health care being a part of that.
I think what we're looking at is consumers who are serious about stretching their household budgets.
What's interesting is that while consumers still seem willing to spend on big events, activities and holidays, it's the short periods in between that are where consumers are really pausing right now and in many cases we've seen them downgrade or step out.
So I think the current situation requires a focus not just for restaurants, but for anyone catering to low- to moderate-income consumers, on low prices being both a driver and an innovation because consumers care about them.
Not only does it have to be low or competitively priced, it also has to be something new.
It's something you won't find anywhere else.
It has to be differentiated.
I know this is a tough one, but if you look at the winners in food retail over the last couple of years, well, the last year or so, Trader Joe's stands out because they're low-cost but also innovative.
And I think restaurateurs are beginning to understand that a combination of innovation and value is the key to driving dessert RJ.
Given your broad view on the market, I will now leave you out.
Consumers, are there any brands in fast food and fast casual RJ that you feel are better positioned than others?
Yes, that's a great question. Overall, some of the casual dining chains are starting to see really positive traffic trends, but they're probably not getting as much traction as they should be.
I think Brinker International, the parent company of Chiliz, is very interesting in terms of the visitation trends that we're starting to see there.
Hmm, you know, looking at McDonald's overall, I think it'll be very interesting to see if the launch of this value menu is successful.
Well, there's an interesting story about that and I think they're starting to realize that they can innovate around that as well.
Those are the two names that immediately come to mind here.
Uh, you know, it might be interesting to see where the visitation trends are because I think, in general, there's a pretty good correlation with where these stock prices end up over time.
RJ, thank you so much for having me on the show.
I'm glad you could join me in this insight.
Have a nice weekend.
you too.
Thank you, Josh.
