The analysis of the state of the economy is all over the map, but one thing remains clear: Executives are bracing for an economic recession. McDonald’s last week said that a recession both in the U.S. and Europe was its “base case” scenario. Sysco, the big distributor, said it has seen no evidence of one yet but is preparing for that possibility.
Fast-food chains believe they could take share in an environment like that. With their food priced lower than other options—even after months of historically high menu inflation—executives generally believe they could win market share over the next year.
“I don’t know how many businesses I’d rather be than in pizza,” Papa John’s CEO Rob Lynch said in an interview. “We still offer unbelievable value, even relative to grocery. You can still feed a family of four for under $10 at Papa John’s.”
As the parent of two teenage boys I am envious of anybody who can feed a family of four for so little, but Lynch’s point remains relevant. The inherent value of pizza could be a major advantage in an economy in which consumers are cutting back.
That sort of value also works to other chains’ advantage. “I was in Europe when we were dealing with the last difficult environment,” Jose Cil, CEO of Restaurant Brands International, said in an interview. He was referring to his time in Europe working with Burger King during the 2008-2009 recession.
“It was a really difficult macro environment in Europe,” Cil said. “It was the moment we captured the most share.”
Yum Brands CEO David Gibbs this week would not provide any sort of economic prediction. “It’s hard to predict anything over the last few years in this environment,” he said.
But he likewise said his company’s brands are built to withstand a potential recession. “Our brands are incredibly well positioned to navigate any environment,” Gibbs said. “We’ve demonstrated that over the last few years and I feel confident as we move forward.”
McDonald’s, which generated traffic growth last quarter, believes it is well positioned in this economy. And investors clearly agree. Its stock is now up on the year. “Our expectation is that we’re going to perform well in this environment, certainly on a relative basis to our competitors here,” CFO Ian Borden told investors last week. “We’re gaining share among low-income consumers. We are positioned as the leading brand in terms of value and affordability for the money.”
For the most part, the economy remains remarkably resilient to the highest inflation we’ve seen in 40-plus years. The U.S. economy grew at a 2.6% rate in the third quarter, according to the U.S. Bureau of Economic Analysis. The good times will not last long. Bloomberg Economics believes there is a 100% chance that the economy will fall into a recession.
There is plenty of at least anecdotal evidence to suggest that lower-income consumers are changing their habits already. McDonald’s appears to be winning over lower-income consumers, for instance. And Burger King’s sales continued to recover, with 4% same-store sales growth in the U.S. last quarter. Other brands are also up.
There is some general disagreement on how important value is to the current consumer and whether lower-income diners are changing their habits. “We haven’t seen a material shift in behavior from our consumers,” Cil said, though he added that the company may be a beneficiary of some trade-down from more expensive restaurants and could be losing lower-income diners.
Others, however, have noticed a pivot to value. That includes Papa John’s, which started offering a deal enabling customers to pick any two items from a selection of menu offerings from $6.99. And Yum’s Gibbs said that “value does seem to be more of a factor than it might have been six or nine months ago,” though he hedged, saying that it’s “more of a return to normal for the industry than it is an exaggerated emphasis on value.”
That said, it’s worth noting that same-store sales are not keeping pace with pricing, which is up more than 7% at limited-service chains over the past year.
“A lot of us have taken 8% to 10% pricing,” Lynch said. “There is a downward slope in the elasticity curve. You can expect to see a fair amount of volume decline.”
One challenge with the current economic environment, however: The modern restaurant industry hasn’t been through anything like it. The last time we had this level of inflation, the early 1980s, there were entire sectors that didn’t even exist yet. The industry is far bigger than it was then.
The industry is also different than it was during the recession that Cil recalls. Delivery exists for chains where it did not before. So does digital. Dollar menus are largely a thing of the past.
“There are different factors at play,” Borden said. “It’s this focus on digital and delivery. We think they are going to be more pronounced now, and the fact that we have scale, we have the ability to do what we think at a lower cost than our competitors, that’s going to work in our favor. Our brand and our asset base is in a better position and gives us more pricing power than in the past.”
At the same time, the consumer relies on it a lot more these days. Restaurants account for more than half of the consumer’s overall food dollar.
And that may indeed work in the industry’s favor. “People are going to eat out,” Cil said. “They’re going to enjoy restaurant food no matter what the macro environment is like.”