Earlier this week, McDonald’s said that it was losing lower-income customers to grocery stores, saying that it was not getting as much traffic from customers making $45,000 per year or less. The result helped explain a decline in traffic in the fourth quarter.
A couple of days later, Yum Brands executives said that Taco Bell was having no such problem, that its locations in lower-income areas were doing better than the system as a whole.
The apparent gap in performance between those two fast-food chains makes us wonder about the whole “consumers are abandoning restaurants for grocery stores” suggestion. Instead, we wonder if the low-income consumer is a McDonald’s problem and not a restaurant chain problem or even a fast-food problem.
To be sure, we are certain that sky-high inflation is causing some consumers to cut back or look for a deal. And we are sure that high prices have forced consumers to limit how much they’re spending and where.
But there is a paltry amount of evidence to truly suggest some sort of mass exodus of restaurant diners to grocers.
For one thing, restaurant and bar sales last year increased 11.3%. At grocers they increased 2.5%. Adjust both numbers for inflation, and restaurant and bar sales increased 6.1% to grocers’ 1.2%. Restaurants continue to generate sales growth even when accounting for soaring prices.
Side note: One reason restaurants keep raising prices at levels much higher than grocers isn’t entirely because of costs, though that’s one reason; it’s because they can. If customers were roundly rejecting price hikes, restaurants would not take them. In short, the demand continues to be there.
In addition, it’s not as if McDonald’s is doing all that bad. Take a step back in fact, and it generally held serve last quarter despite losing those low-income consumers. Same-store sales on a two-year stacked basis rose 14.6%.
By comparison, Taco Bell’s same-store sales were up 14% on a two-year basis. We may wonder, in fact, whether that chain is losing higher-income consumers based on its apparent overindexing with the lower-income set.
Still, both brands have long had a reputation as low-priced purveyors of food to the masses. McDonald’s for a long time staked much of its growth on its Dollar Menu and its need to push for traffic at all costs. It shifted away from that once the Dollar Menu became profitably untenable for its franchisees. And in recent years the company has discovered that consumers value its convenience.
Taco Bell is Taco Bell and it has long been known for its ability to balance consumers’ desire for innovative new products with their desire to not spend a lot of money on food.
The company continues to index well on value with consumers.
Thus, a brand that has a good value perception can keep its low-income consumers. So what can we make of McDonald’s then? That it has lost that value perception. Consumers in 2024 do not consider the Golden Arches to be the low-cost meal they thought it was.
Any time we write anything, we get responses about how expensive McDonald’s is. Social media and mainstream media paid a lot of attention to the $18 Big Mac. Consumers see that. And if they’re cutting back on dining out, that means they might just opt against McDonald’s.
That may not necessarily be a bad thing for its franchisees or even the brand. Its sales are still doing fine, after all. But it appears that we’ve lived to see the day when McDonald’s is too pricy for some people.