Papa Johns on Thursday reported disappointing sales, which the company blamed mostly on its franchisees. The pizza chain said its operators raised prices too much, which drove customers away. Franchisees, executives said, focused too much on margins, and not enough on traffic.
This has been an industry-wide issue. Fast-food restaurants have raised prices aggressively to counter inflation that hit harder than anybody had ever seen. That may be reducing their value perception.
“Talk about crazy times,” Papa Johns CEO Rob Lynch said in an interview. “Think about the historic model. You have 1% to 2% inflation and you take 1% to 2% pricing that covers inflation. We’ve seen 15% to 18% inflation. And it’s not the same model. You can’t take 15% to 18% price to cover inflation. The customer won’t accept it.”
But, he said, some quick-service restaurants did take price aggressively. Indeed, some restaurants’ pricing was up in the 10% range or more. “We’ve started to see that in QSR that’s been a little punch drunk,” Lynch said.
Fast-food restaurants have priced at a relatively consistent level for the past two years. When inflation was at its peak last year, they sometimes looked almost conservative compared with grocers, which were raising prices in the double digits, and even their casual dining brethren for a time.
Most recently, however, as retailers ease back on price hikes and casual diners keep them to a minimum, fast-food operators have kept raising them.
This has come despite growing evidence that consumers are shifting more of their spending on lower-cost restaurants. David Gibbs, CEO of Yum Brands, said this week that KFC U.S. is getting most of its growth among low-income consumers. McDonald’s CEO Chris Kempczinski said his chain is getting customers trading down from higher priced restaurants, and that customers making $45,000 and less are coming in more but are ordering less when they do.
What’s more, much of the sales numbers coming back are not actually meeting inflation. KFC’s U.S. same-store sales rose 5% last quarter, for instance, while Taco Bell’s was 4%. Restaurant menu price inflation was about 8% last quarter year over year.
While fast-food restaurants can typically benefit in a weakening consumer environment, because of their general value proposition, this does mean that consumers are starting to pinch their pennies more often. The economy may avoid a recession. But that doesn’t mean the consumer won’t cut back.
Consumer credit remains elevated and there are potential problems on the horizon, notably the return of student loan payments. Do not discount that as a potential limitation on consumer restaurant spending later this year as millions of Americans, many of them in their prime restaurant consumption years, suddenly have hundreds of dollars in monthly payments they haven’t had for the past three years.
“The leading indicators show consumer spending is at risk,” Lynch said. “It might get scary.”
Pizza tends to be its own market, but in some respects it could be indicative of the challenges the broader industry could face. The product remains popular. But its customers have little loyalty and will shift their spending toward companies they perceive have a better value. When inflation hit last year, they shifted away from delivery and began eating frozen pizzas.
Yet the broader fast-food industry could experience similar issues if operators continue raising prices aggressively and consumers cut back on their spending. As Papa Johns experienced, diners do have a spending limit.