Edit
OPINIONFinancing

Burger chains face a growing affordability problem

As fast-food chains up their quality, prices increase, and customers might think twice, says RB’s The Bottom Line.
Photograph by Jonathan Maze

the bottom line

Hamburgers have long been considered a more affordable entree for diners. People buy steak in good times and burgers in bad.

That might be changing, as chains raise prices or push more premium items.

According to the 2019 Burger Consumer Trend Report from Restaurant Business sister company Technomic, 46% of consumers who eat burgers “strongly agree” that they’ve noticed price increases over the past year.

They may be noticing those price increases at specific chains. Fast-casual burger chains such as Shake Shack, and to a lesser extent, Five Guys, received lower scores last year when Technomic asked them about the chains’ value in terms of prices.

The survey scores highlight one of the challenges facing burger chains, and the restaurant industry overall: balancing the need to make margins with the desire to generate traffic.

At the moment, many chains appear willing to sacrifice some of the latter to ensure the former. That choice makes sense. The operating environment is especially challenged, as rising wages are driving up labor costs while new technology and delivery add new cost elements.

But customer count is important, too, and when the restaurants focus too much on margins, they risk losing traffic.

Customer count declines have been common industrywide. And while there are numerous stated reasons for this—too many restaurants and weak retail traffic, to name two—price value is a legitimate concern.

It’s important to note that “value” isn’t just about price but about what you get for that price. Consumers are willing to pay more for what they consider a higher-end product, especially if they believe they’re getting a lot for their money—as they apparently do with Krystal’s all-you-can-eat deal.

The burger sector’s apparently weakening affordability ratings, however, could suggest that the business faces further traffic challenges in the near future. When customers notice price hikes, they make changes. 

While the economy is going well, the higher prices could lead some customers to shift spending to other chains they consider to be a better overall value. Or they could simply dine out less.

As it is, burger chains’ overall same-store sales have been relatively weak.

Publicly traded burger chains averaged a 0.5% decline in the first quarter, considerably lower than Mexican (3.9% growth), chicken (1.9%) or pizza (0.6%).

Casual-dining steak chains, meanwhile, averaged 4.2% growth. Maybe customers are trading up from burgers to steak in a good economy.

The strongest-performing burger chain in the first quarter, incidentally, was McDonald’s, where same-store sales rose 4.5%.

But its traffic was still down around 2%, meaning the chain has seen a significant shift as customers pay a lot more for their food but dine out less. While the company has blamed the problem in part on speed, particularly in its drive-thru, along with lower breakfast traffic, operators say price is a huge factor.

The price-value equation in the burger sector needs to be a key consideration, as many restaurant chains, and their investors, start pushing plant-based products. While those burgers could well bring in customers in the short-term, their generally higher prices could push this high-priced perception even further in the wrong direction.

Trending

More from our partners