Fast-food restaurants are hit hardest as customers cut back

The giant food distributor Sysco said the consumer environment has been tougher on restaurants than expected this year due to highers menu prices.
Sysco is seeing weakness among its quick-service restaurant customers. | Photo courtesy of Sysco

The consumer environment has proven more difficult than expected this year, executives from giant distributor Sysco said this week, as inflation and rising menu prices lead customers to cut back on dining out.

“It’s tougher out there this year … than what we expected at the beginning of the year,” Sysco CEO Kevin Hourican told investors on the company’s Investor Day presentation on Tuesday, according to a transcript on the financial services site AlphaSense. “Consumer confidence has been impacted. Our belief is that it’s inflation-based.”

Quick-service restaurants have been hit hardest, he said. “You can see it across our portfolio of customers that we serve, from QSR to higher-end-QSR, that’s been hit the hardest,” Hourican said.

He believes that is rooted in the struggles of lower-income consumers, which make up a substantial number of customers at fast-food restaurants.

“The lower-income customer, it’s struggling more than the higher-income customer,” Hourican said. “There is some softening, we believe, tied to menu prices.”

Sysco is the country’s biggest broadline distributor. Its broad array of customers throughout the restaurant industry can provide some higher-level insight into the state of the business.

Hourican’s comments include reports from numerous restaurant chains while also reflecting some of the dichotomy that exists between concepts based on the state of their consumers.

While fast-casual chains such as Cava, Wingstop and Chipotle Mexican Grill have enjoyed strong sales so far this year, fast-food brands like McDonald’s, Jack in the Box, KFC and Papa Johns have watched customer traffic decline.

“We in the industry are all seeing this kind of pressure,” Jack in the Box CEO Darin Harris told investors earlier this month. “We definitely felt it coming into the second quarter.”

Consumer confidence has taken a substantial hit this year, according to the Conference Board. The group’s measure of consumers’ views on the state of the economy fell for the third straight month in April. Their short-term outlook for the economy plunged to a level well below what the organization considers a sign of an upcoming recession.

Many executives suggest lower-income consumers are the ones cutting back the most.

Quick-service brands typically thrive in such environments, as a weakening economy leads consumers to trade down from higher-priced restaurants to lower-priced restaurants. In this case, however, customers of fast-food brands may be trading out altogether, opting for more dinners at home.

It helps that grocers are lowering prices. Retail food prices fell 0.2% in April, while fast-food chains raised prices 0.4%. Target on Wednesday said it planned to cut prices on 5,000 items.

And Walmart said prices are luring more restaurant customers to its grocery aisles.

“If you’re trying to feed a family of four or five or six and prices at restaurants have gone up and in Walmart it’s beginning to come down,” CEO John Furner told analysts this month.

Restaurant chains are now shifting their marketing focus to value. McDonald’s plans a $5 meal offering next month. Wendy’s introduced a $3 breakfast meal offer featuring a choice of English muffin-based sandwiches and potatoes. Jack in the Box plans its own value offers this summer.

“Value is going to be something we talk about for the rest of the year,” Harris said. “We know the competition is doing that. So we will be in the game.”

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