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Fast-food price hikes reach 'tipping point' as chains try to reset their menus with value deals and combos

Aug 19, 2024, 19:45 IST
Business Insider
Fast-food prices may have hit a "tipping point," one analyst said.Matthias Balk/Picture Alliance via Getty Images
  • Fast-food prices have risen so much they've hit a "tipping point," one analyst said.
  • Restaurants are having to reset their menus with value deals, Chris O'Cull of Stifel said.
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Prices at fast-food chains have been skyrocketing since the start of the pandemic — and one analyst thinks they may now have reached a "tipping point."

McDonald's, Starbucks, and KFC all recently reported decreases in US same-store sales as rising prices kept some customers away.

In response, fast-food chains have been turning to combo deals and value menus. McDonald's, Burger King, Jack in the Box, and KFC have all launched $5 combo deals — and even Starbucks experimented with bundling.

"I think pricing has probably hit a tipping point now where a lot of these restaurants are having to reset their menus with these value menus and value deals," Stifel analyst Chris O'Cull told Business Insider.

Too expensive

Before the pandemic, limited-service restaurants in the US generally put their prices up by less than 3.5% a year, consumer price index data shows. All that changed in 2020.

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The cost of labor and commodities soared — and chains raised their prices in response. In the year to April 2023, prices at limited-service restaurants went up by 8.2%.

Those rises are cooling, but remain far above pre-pandemic levels — and are coming back to bite fast-food chains.

"Consumers are kind of pushing back on spending and are deciding to find cheaper ways to eat," O'Cull said. Low-income diners in particular are buying more groceries, turning to diners or casual-dining chains to get a sit-down experience for just a few dollars more — or they're still getting their fast-food burgers and fries, but are being more prudent about what they buy.

"Quick service posted its fifth straight quarter of decelerating comp trends, marking a change from prior times of consumer choppiness during which quick service tended to be the most resilient space," William Blair analyst Sharon Zackfia said in a note on Thursday.

McDonald's US sales dipped in the second quarter.Beata Zawrzel/NurPhoto via Getty Images

During a slowdown, lower-end consumers cut down on fast food, but this is typically more than offset by the influx of middle- and higher-income consumers, Brian Yarbrough, an Edward Jones analyst, told BI.

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But in this instance, fast-food chains have raised prices "so much" that it's shrunk the gap between fast-food and fast-casual prices, meaning more low-earners are trading out of the sector than high-earners are trading in, he said.

Traffic boost

As customers turn their noses up at high prices, restaurants have resorted to value meals and combo bundles to draw in new diners. Andy Barish, an analyst at Jefferies, said this represented a return to a pre-pandemic promotional approach.

Executives at McDonald's and Burger King have said their $5 deals have proved popular, especially among lower-income consumers.

But restaurants have to ensure the deals drive enough traffic to offset the lower prices, Yarbrough said.

Bosses also hope that once value menus get customers through the door, they'll end up bulking up their orders with extra items, too. Both McDonald's and Burger King said the average order including their combo meals came to more than $10. Jack in the Box said that its Munchies Under $4 deal didn't drive as much traffic as expected, but did lead to higher average order sizes.

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O'Cull of Stifel said he thought the value deals had been a "positive" for both fast-food chains and their franchisees: "For the time being, I think they'll probably stick with this."

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