According to a recent CNN survey of earnings calls and analyst commentary, the key word this summer, at least on Wall Street, is “bifurcating,” or splitting something into two. In this particular instance, bifurcating means that higher-income consumers are doing just fine, while lower-income consumers are really starting to struggle.
In fact, 80% of American households have less cash on hand than they did in 2019, and credit card debt is at an all-time high. Meanwhile, a survey by JPMorgan found that more than 70% of low-income consumers are struggling to make ends meet. Middle-income households are also struggling, with 67% feeling that their income is not keeping up with current living expenses.
It's no wonder, then, that the majority of Americans (78%!) now consider fast food a “luxury.” This shift in attitude has led 62% of American consumers to eat less QSR food, according to a new LendingTree study. Don't take LendingTree's word for it: declining customer traffic has been telling us this for at least two quarters now, with restaurateurs like McDonald's, Jack in the Box, Dine Brands, and Bloomin' pointing to the increasingly discerning nature of lower-income consumers. This is especially concerning for the QSR segment, which skews toward households making under $50,000.
Following first-quarter reports, several brands appear to be rushing to correct this “indulgence” perception. McDonald's and Burger King are battling for $5 meal bundles; Wendy's is offering $3 breakfast combos; and Jack in the Box has released its Munchies menu, offering items under $4. Even smaller chains are emphasizing value messaging; Peter Piper Pizza, for example, launched a menu it calls “inflation-beating summer fun family bundles.”
These value messages are now proliferating everywhere: on TV, social media, branded apps, and consumers' inboxes. I personally received direct mail from four restaurant brands in the past two weeks alone, and as a loyalty member of one of them, I sense the desperation here. I began covering this industry just after the Great Recession in 2009, and this all sounds eerily similar. That said, if aggressive discounting is what's needed to make fast food more accessible to more consumers, so be it. Surely they're smarter this time around, right? Surely they won't totally eat into their margins this time?
Either way, this acceleration of activity begs the question: what is the end goal here? People have been talking about the risk of an economic recession since at least the second half of 2022, but signs of one have yet to materialize. But given the increasing polarization, signs are beginning to emerge bit by bit and quickly. After all, consumer spending is the biggest driver of the economy, and when that slows, things start to get a bit shaky. In the meantime, our industry has a perception problem that needs to be solved quickly.
This afternoon, McDonald's USA president Joe Erlinger released a letter to the company's fans in which he reiterated the company's “relentless focus on value and affordability.”
“It's the foundation of our brand, and we're committed to upholding that tradition — especially at a time when our customers need it most,” he wrote.
But the letter goes much deeper than reiterating McDonald's value targets. Erlinger refers to “viral social media posts and poorly sourced reports that McDonald's has raised prices significantly above the rate of inflation.” He called the information inaccurate, adding that the company has a responsibility to debunk it. Erlinger goes on to list several reasons why the chain's prices have increased, including the pandemic, supply chain costs, and wages. He adds that these various pressures have combined to cause the average price of a Big Mac to increase 21% since 2019, not 100% as has been widely shared. Open letters like this are not unprecedented, but they are by no means common. This may say a lot about the current environment we find ourselves in and the current perceptions of customers.
It remains to be seen whether Erlinger’s letter will change perceptions of fast food for the better. Meanwhile, what is clear at this point is that inflation across the QSR segment actually accelerated last month, despite price declines at grocery stores and supermarkets. QSR prices rose 4.8% year over year, while full-service restaurant prices rose 3.4%, in line with the overall Consumer Price Index. And certainly, QSRs have been disproportionately affected by labor inflation, which has driven up prices, especially in California. But the point is that most consumers who need a quick burger aren’t thinking about the input costs of a particular franchise, but why their money is being cut and where else they can go to ease their burden. That’s going to take some effort, and it’s going to require more than open letters, temporary meal discounts, and mailers.
Please contact Alicia Kelso [email protected]
