Lower-income consumers have reduced their visits to fast-food restaurants, an unsurprising result of soaring inflation and a reduction in government stimulus programs that had buoyed spending over the past two years.
Yet they also have little ability to deal with it.
Consider Wednesday, when Wendy’s told investors that they are seeing slowing sales from lower-income consumers. “We have seen some of those folks start to slow on traffic within the category,” CEO Todd Penegor said.
On the same call, however, the company said it plans to raise prices again this quarter because its own margins were weak. Rising labor and commodity costs hit the company more heavily than expected, sending restaurant-level margins at company locations down to 11.6% from 17% in the same period a year ago. To offset this, Wendy’s is taking prices higher.
Raising prices is a necessary evil right now. Wage rates are up 13% over the past year and wholesale food prices are up 17%. In that sense, the 7.2% fast-food chains have raised their prices over the past year are not enough to meet margins, and company after company has seen declining profits even with higher sales and those higher prices.
The consumer is effectively in the same boat. Many are getting higher wages than they did a year ago thanks to a strong economy and the labor shortage raising rates. Yet inflation has grown so severe—up 8.3% over the past year in April—that many have lost some buying power. Their grocery prices are up more than 10%. Gas prices have increased 50%.
Lower-end consumers have seen these prices and have taken steps to cut spending, even as higher-end consumers are spending more.
Penegor, for instance, said that consumers making more than $75,000 per year have increased spending enough to offset the loss of those making less than $45,000. “We think we’re hanging in there pretty well with shifts between the two,” he said.
Penegor isn’t the first executive to say such a thing. “I think it’s probably fair to say that the lower-income consumer is probably feeling more pressure than the average consumer or certainly the wealthier consumer,” McDonald’s CEO Chris Kempczinski told investors last month.
Quick-service same-store sales have slowed so far this year, in part due to difficult comparisons from a year ago when stimulus payments pushed industry sales higher. Yet the industry is quietly giving up traffic, even as executives tell investors that they have “pricing power” or have treaded carefully on their pricing actions.
It’s been difficult to truly measure the impact of higher prices on restaurant traffic, given wide swings in sales and traffic the past two years. But large-scale fast-food chains have been operating in a more normalized environment for long enough that the lower traffic could suggest a consumer reaction to the prices they’re paying.
And more companies have been promoting value. McDonald’s has a new 2-for-$6 value menu. Wendy’s has its 4-for-$4 menu and its $5 Biggie Bag. Coupons keep arriving in my mail like college junk mail to a high school junior.
Even so, the higher cost environment has limited the industry’s ability to attract these lower-end consumers. And discount efforts at franchise brands have generated some pushback.
Last week, we wrote about shortages of meat at Subway and soaring costs. In that story, we noted that more franchisees have been pushing back against the chain’s discounts, including those offered to loyalty customers.
In the McDonald’s system, there is considerable sentiment to shift away from $1 soft drinks to regain some lost margins.
Restaurants have been able to increase prices aggressively because prices at grocery stores have increased even more, which gives customers little choice, and because that “average” consumer is doing fine. Yet it’s also difficult to escape the fact that prices have increased as much as they have.
It’s also difficult to ignore those lower traffic numbers. As Rich Shank, senior principal with Technomic, said at the Restaurant Leadership Conference last month, consumers have a “recessionary mindset.” And other executives are looking at the environment and growing concerned. The average consumer may be fine, in other words, but lower-income consumers are frequently a canary in a coal mine.
“I worry about this year a little bit,” Craig Culver, the cofounder of the burger chain Culver’s, told me last week. He said traffic is down as prices have gone up, and then he lamented the state of gas prices and food prices, suggesting that it may be causing some consumers to rethink their visits. “It’s a different environment,” he said.
And a tough one.