The U.S. economy since the pandemic has grown increasingly bifurcated, which is wreaking havoc throughout the restaurant industry while creating challenges for executives looking to address those concerns.
But it also creates risks for smaller companies that are less able to deal with some of these challenges.
According to Oxford Economics, higher-income households now exceed 50% of spending. House prices are up. So are stock prices. Because these consumers feel good about their finances, they are dining out more often, taking international vacations and doing whatever else they want.
On the other hand, spending by lower-income households have not improved since the pandemic. These consumers are hurt more disproportionately from government policies, notably tariffs, promising to exacerbate this problem.
Restaurant chains know this issue full well, particularly those sectors that cater to a lot of lower-income households.
Many companies have been complaining about the impact from weakening spending by lower-income consumers for some time. “Overall QSR traffic in the U.S. remained challenge as visits across the industry by low-income consumers once again declined by double digits,” McDonald’s CEO Chris Kempczinski said in August.
This spending has been stubbornly weak, and nothing seems to be improving it for very long.
Restaurant chains are introducing more limited-time offers. They’re releasing new partnerships almost every couple of months. They’re getting into fancy drinks and new dayparts. They’re firing CEOs and spending hundreds of millions on turnaround plans. And they’re also lowering prices.
Consider McDonald’s, which has been a focal point over consumer frustration about prices.
Last year, the fast-food giant introduced a $5 Meal Deal. In January the company introduced a “McValue Menu” with a broader set of offerings across all channels. More recently it brought back Extra Value Meals and convinced franchisees to lower prices.
Why would lowering prices work when a $5 meal would not?
Regardless, the problem with this strategy—or any value-focused strategy in the fast-food world—is that you’re offering a broad-based solution to a limited problem. Companies can’t, or at least won’t, restrict such deals based on consumer income. So consumers who might be willing to pay $11 or $12 for a combo meal may pay $9.
To be sure, fast-food chains in particular need to put value on their menu. But that still puts the onus on them to get enough new customers in the door to offset the lower sales from those better-off customers.
But that brings us to another challenge: Smaller businesses have a tougher time addressing the issue. And the restaurant industry is dominated by small businesses, either independent restaurants or franchisees.
Smaller companies are less able to take some of the steps that larger companies can, because they do not have the financial wherewithal to do so. They are less able to negotiate deals or find alternative sources for goods when costs increase because of tariffs, for instance. And they can’t access the lower-cost bond markets when they need debt like larger companies can.
According to PCSB Bank, small businesses with fewer than 49 workers have cut payroll in two of the past three months and were most responsible for recent downward revisions in payrolls.
If the stock market or home prices stumble, that could spread the economic pain to higher-income groups, as it did earlier this year when tariff fears hammered markets. But this dual economy will still create headaches until lower-income consumers feel better. And that hasn’t happened yet.