Why Fast Food Has Gotten So Expensive

CNBC
5 May 202408:00

Summary

TLDRThe transcript discusses the rising costs of fast food in the United States, with prices increasing nearly 28% from 2019 to 2023 according to the Consumer Price Index. Factors contributing to this inflation include higher food, beverage, and packaging costs, as well as increased labor costs due to a competitive job market and minimum wage laws. Fast food chains are adapting by passing these costs onto consumers and focusing on affordability to maintain customer traffic. Despite the price hikes, sales have remained strong for major chains like McDonald's and Wendy's, with revenue surpassing pre-pandemic levels. However, there is a shift in consumer behavior, with customers visiting less frequently but spending the same amount. To counteract the decrease in value, fast food chains are investing in mobile apps and loyalty programs to attract and retain customers.

Takeaways

  • 🍔 Fast food prices have significantly increased, with items like three Filet-O-Fish at McDonald's costing $17.
  • 💵 The average cost of fast food items such as fries from McDonald's, a Happy Meal, and a burger combo from Burger King have risen.
  • 📈 From 2019 to 2023, prices in the limited service meals category, which includes fast food, have increased by nearly 28%.
  • 📊 The rise in fast food prices is higher than the increase in full service meals and overall inflation.
  • 💰 The cost of food, beverage, and packaging for fast food chains like McDonald's and Chipotle has risen by around 11% between 2022 and 2023.
  • 👷 Labor costs have become a significant factor, with wages being about a third of the cost of a menu item and remaining high due to minimum wage laws.
  • 🧮 The fast food labor market became more competitive during the pandemic, leading to a shortage of employees and an increase in the percentage of sales going towards labor costs.
  • 📊 Despite higher prices, fast food sales have remained strong, with companies like McDonald's, Wendy's, and Yum Brands seeing revenue surge past pre-pandemic levels.
  • 🛒 Consumers are adjusting their behavior, spending the same amount but visiting less frequently due to higher prices.
  • 💸 High-income households continue to spend at normalized levels, while lower-end consumers are more affected by the price increases.
  • 📱 Fast food chains are investing in apps and loyalty programs to combat the decrease in value and attract customers.
  • 🔑 The future of the fast food industry may depend on their ability to offer value and maintain growth from a dollar perspective.

Q & A

  • What has happened to the price of fast food items like the Filet-O-Fish at McDonald's?

    -The price of fast food items has significantly increased, with the example given being $17 for three Filet-O-Fish at McDonald's, indicating that it's become more expensive to purchase fast food.

  • Why do people miss the days when fast food was cheap?

    -People miss the days when fast food was cheap because it was more affordable and accessible, allowing them to enjoy fast food more frequently without straining their budgets.

  • What is the average price increase for fast food items from 2019 to 2023 according to the Consumer Price Index?

    -According to the Consumer Price Index, prices in the limited service meals category, which includes fast food, have increased by nearly 28% from 2019 to 2023.

  • What factors have contributed to the high prices of fast food?

    -The high prices of fast food are due to increased costs in food, beverages, and packaging, as well as higher labor costs. The competitive labor market during the pandemic and minimum wage laws have contributed to the wage pressure remaining elevated.

  • How has the fast food labor market changed during the pandemic?

    -The fast food labor market became more competitive for employers during the pandemic, with a struggle to fill restaurant positions. Despite the growth in the number of limited service establishments, the number of employees in the category remained below pre-pandemic levels.

  • Why are fast food restaurants hiring more labor?

    -Fast food restaurants are hiring more labor to maintain service levels and expand operating hours to meet consumer demands for late-night snacks and earlier breakfasts. They also need to compete with other employers to attract workers, often by raising wage rates.

  • How have states like California influenced the cost of fast food?

    -States like California have raised the minimum wage for workers, which has led companies to pass these increased labor costs onto the customer, contributing to the higher prices of fast food.

  • What is the current trend in consumer behavior towards fast food?

    -Consumer behavior has shifted, with people visiting fast food restaurants less frequently but still spending the same amount of money. This indicates that while they are willing to spend a certain amount, they are adjusting the frequency of their visits due to higher prices.

  • How have fast food sales been performing despite the price increases?

    -Surprisingly, sales have remained strong for fast food chains like McDonald's, Wendy's, and Yum brands, with revenue surging past pre-pandemic levels. Much of this growth is attributed to higher prices rather than an increase in the number of visits.

  • What challenges are fast food giants facing in terms of earnings and consumer behavior?

    -Fast food giants like McDonald's have missed earnings estimates, and there is a consumer pullback observed in brands like KFC and Pizza Hut. The focus is now on affordability and maintaining good entry-level price points to attract consumers.

  • How are fast food chains responding to inflation and changing consumer behavior?

    -Fast food chains are relying on apps and loyalty programs to combat the decrease in value offered by their products. They are investing in enhancing mobile app experiences and expanding loyalty programs to offer targeted advertisements and promotions based on consumer preferences.

  • What is the outlook for the fast food industry in terms of value and consumer visits?

    -The value offered by fast food is a key factor that customers continue to evaluate with each purchase. The industry needs to focus on driving growth from a value perspective to continue attracting consumers and maintaining profitability.

Outlines

00:00

📈 Fast Food Inflation and Its Impact

The video discusses the rising costs of fast food, noting that the days of the dollar menu are over with items like three Filet-O-Fish at McDonald's costing $17. It highlights the average prices for fast food items nationally and compares them to the prices near NBC offices in Midtown Manhattan. The video explains that sales are strong despite a decrease in foot traffic due to higher prices. It delves into the Consumer Price Index to illustrate the significant increase in fast food prices, which have risen nearly 28% from 2019 to 2023, outpacing both full-service meals and overall inflation. Factors contributing to this price surge include the increased cost of food, beverage, and packaging, and more significantly, labor costs. The competitive labor market during the pandemic has led to higher wages, which constitute about a third of the cost of a menu item. Fast food chains are hiring more labor to maintain service levels and are passing these costs onto consumers, especially in states with increased minimum wages. The video also mentions how full-service restaurants have seen a surge in revenue as consumers shift their spending from fast food to more value-oriented sit-down meals.

05:00

🛑 Fast Food Earnings and the Focus on Affordability

This paragraph addresses the recent challenges faced by fast food giants like McDonald's, which missed earnings estimates in the first quarter of 2024. It discusses the consumer pullback from fast food due to high prices and the need for chains to focus on affordability. The video emphasizes the importance of good entry-level pricing to keep the business competitive. It also touches on the impact of inflation on lower-income consumers, who are less able to maintain their previous spending habits. The video notes that while prices generally do not decrease once they have risen, the rate of increase is slowing. Chains are investing in apps and loyalty programs to combat the perceived decrease in value. Wendy's and McDonald's are specifically highlighted for their plans to enhance digital experiences and expand their loyalty programs, respectively. The video suggests that the ability to target advertisements based on consumer preferences allows companies to measure the effectiveness of their promotions more accurately. It concludes by stating that as long as fast food chains can continue to drive growth from a value perspective, the industry is likely to remain profitable despite the shift in consumer behavior.

Mindmap

Keywords

💡Fast Food Prices

Fast Food Prices refer to the cost of food items at fast food restaurants. The video discusses how these prices have significantly increased over the years, with a nearly 28% rise from 2019 to 2023, which is higher than the overall inflation rate. This is a central theme as it impacts consumer behavior and the affordability of fast food.

💡Inflation

Inflation is the economic term for a general increase in prices over time. The Consumer Price Index is mentioned in the video as a measure of inflation. It is directly related to the rising cost of fast food, which has seen substantial price increases, more so than full-service meals or the overall inflation rate.

💡Labor Costs

Labor Costs are the expenses associated with employing workers. The video highlights labor as a significant factor in the rising prices of fast food, with wage pressures remaining elevated due to minimum wage laws and increased competition for workers in the fast food industry.

💡Limited Service Meals

Limited Service Meals are meals that are typically ordered at a counter and taken to go, such as those from fast food restaurants. The video notes that prices in this category have risen more than full-service meals, which involves sit-down restaurants with servers.

💡Consumer Behavior

Consumer Behavior refers to how consumers make decisions and the actions they take regarding purchases. The video discusses a shift in consumer behavior due to high fast food prices, with consumers potentially visiting less frequently but maintaining the same overall spending.

💡Revenue Surge

Revenue Surge indicates a significant increase in the income of a business. Despite higher prices, companies like McDonald's, Wendy's, and Yum brands have seen their revenues increase past pre-pandemic levels, primarily driven by price rather than an increase in the number of visits.

💡Minimum Wage Laws

Minimum Wage Laws are regulations that set the lowest amount of money an employer can pay to an employee. The video mentions these laws in the context of California and how they contribute to the increased labor costs for fast food restaurants, which in turn affects menu prices.

💡Food, Beverage, and Packaging Costs

Food, Beverage, and Packaging Costs are the expenses incurred by restaurants for the ingredients, drinks, and materials used for their products. The video notes an 11% rise in these costs for companies like McDonald's and Chipotle, which contributes to the overall increase in fast food prices.

💡Loyalty Programs

Loyalty Programs are marketing strategies designed to encourage customers to continue patronizing a business by offering rewards or incentives. The video discusses how fast food chains are relying on apps and loyalty programs to maintain customer engagement and offer value in response to rising prices.

💡Sales Performance

Sales Performance is the assessment of how well a business is selling its products or services. The video contrasts the strong sales performance with the decline in foot traffic, indicating that higher prices rather than more customers are driving the sales.

💡Affordability

Affordability refers to the extent to which consumers are able to pay for goods and services. The video emphasizes the importance of affordability in the fast food industry, with companies focusing on providing good entry-level price points to remain competitive in the market.

Highlights

Fast food prices have significantly increased, with the average cost of items like fries from McDonald's, a Happy Meal, and a burger combo from Burger King rising.

The Consumer Price Index shows that from 2019 to 2023, prices in the limited service meals category, which includes fast food, have risen by nearly 28%.

The increase in fast food prices is higher than that of full service meals and overall inflation, which saw increases of nearly 24% and 19% respectively.

Between 2022 and 2023, the cost of food, beverage, and packaging for companies like McDonald's and Chipotle rose by around 11%.

Labor costs have become a major factor in the increase of fast food prices, with food constituting about a third of the cost of a menu item.

The fast food labor market became more competitive during the pandemic, leading to a shortage of employees and an increase in wage pressure.

The number of employees in the limited service restaurant sector was still below pre-pandemic levels in 2022, despite a growth of over 4% in the number of establishments.

Fast food restaurants need to hire more labor to maintain service levels and accommodate consumer demands for extended operating hours.

To make jobs more enticing, fast food companies are raising wage rates, which in turn increases the cost passed onto the customer.

Minimum wage increases in states like California have contributed to the higher costs of fast food.

Despite wage inflation, other factors such as the starting check average in the fast food industry also contribute to the percentage increase in prices.

From December 2023 to February 2024, the national average for a quick service restaurant check was about $18, which is 4.5% more than the previous year.

Full service restaurants are capitalizing on the decreasing price gap between them and fast food, as seen with offers like Chili's $10.99 for three meals.

Fast food consumer behavior has shifted, with customers visiting less frequently but spending the same amount, leading to a traffic falloff.

Major fast food chains like McDonald's, Wendy's, and Yum brands have seen revenue surge past pre-pandemic levels, driven by price rather than frequency of visits.

Investors are now focused on growth based on volume, as price increases have limits.

McDonald's missed earnings estimates in Q1 of 2024, indicating a potential consumer pullback, a trend also seen in KFC and Pizza Hut.

Companies are emphasizing affordability with entry-level pricing available every day to stay competitive in the market.

Households with incomes of $100K or more are still spending at normalized levels, whereas lower-end consumers are experiencing constraints due to reduced spending power.

Inflation has led to a permanent increase in prices, with wages being a significant factor that, once increased, rarely decrease.

Fast food chains are relying on apps and loyalty programs to combat the decrease in value offered, with investments in enhancing mobile app experiences and expanding user bases.

Companies are using targeted advertisements and real-time tracking of consumer behavior to optimize their marketing strategies and promotions.

The value proposition of fast food is continuously evaluated by customers, which will influence the industry's future reactions and strategies.

Restaurants prioritize maintaining growth from a value or dollar perspective, which remains crucial for the industry's success.

Transcripts

00:00

Big and tasty for just a dollar.

00:03

You did your thing, dawg.

00:06

Remember the dollar menu?

00:08

Well, you may be hard pressed to find any fast

00:10

food item that actually costs a dollar anymore.

00:12

$17 for three Filet-O-Fish at McDonald's.

00:16

Are you kidding me?

00:17

I don't have the money to buy fast food anymore.

00:20

Don't you just miss the days when fast food was

00:23

actually cheap?

00:24

When looking at fast food menus nationally, here are

00:26

the average prices for fries from McDonald's, a

00:30

Happy Meal and a burger combo from Burger King.

00:34

But I paid even more than that.

00:36

Here are the prices at fast food locations by the NBC

00:39

offices in Midtown Manhattan. Broadly speaking.

00:43

Sales are performing much stronger than foot traffic,

00:48

and that's due in part to higher prices.

00:50

The Consumer Price Index measures inflation or the

00:53

average increase in prices over time.

00:55

Fast food falls into the limited service meals

00:57

category. Think anything that's typically ordered at

00:59

a counter and taken to go from 2019 to 2023, prices in

01:04

this category are up nearly 28%.

01:06

That's more than full service meals.

01:08

Think sit down restaurants with servers, which

01:10

increased nearly 24%.

01:12

And it's also more than overall inflation, which

01:14

increased 19%.

01:16

So why are fast food prices so high and where will they

01:19

go from here? Can I please get a Titan turkey?

01:27

Can I get a foot long?

01:30

Yeah, just that.

01:32

Between 2022 and 2023, the cost of food, beverage and

01:35

packaging rose around 11% for both McDonald's and

01:38

Chipotle. Still, as of late, labor is the main

01:41

culprit. Food is about a third of the cost of a menu

01:44

item.

01:44

So even as those costs moderate in many cases, and

01:49

particularly given the the laws that were seen in

01:52

California and some of the other, you know, minimum

01:54

wage laws and just increases that are happening

01:57

is that that wage pressure remains elevated.

02:00

The fast food labor market became increasingly

02:02

competitive for employers during the pandemic, as

02:04

companies struggled to fill their restaurants.

02:06

In 2022, the number of employees in the limited

02:09

service restaurant category were still below 2019

02:11

levels. During that same time, the number of limited

02:14

service establishments grew by over 4%.

02:17

As things normalize after Covid, you still see a

02:21

higher amount of job openings and less people

02:24

coming in to fill those jobs.

02:28

Compared to 2019, the percentage of sales that

02:30

goes towards paying for labor has grown for many

02:33

limited service restaurants like Wendy's and Shake

02:35

Shack, where it has actually decreased for

02:37

restaurants like The Cheesecake Factory and

02:39

Darden Restaurants, which owns chains like Olive

02:42

garden, Longhorn Steakhouse, and the Capital

02:44

Grill.

02:45

In order to maintain the same service levels and

02:50

expand their operating hours to accommodate the

02:53

consumers late night snack demands and demands for

02:58

earlier breakfasts.

02:59

Fast food restaurants need to hire more labor across

03:02

the day part, and so as they're competing with other

03:05

potential employers, they need to make the job more

03:07

enticing. And the easiest way to do that is by raising

03:10

the wage rate.

03:11

And companies are passing these costs onto the

03:13

customer, especially as states like California have

03:15

raised the minimum wage for workers.

03:17

In an obviously, despite this huge wage inflation,

03:21

there's a lot of other factors at play.

03:23

I think when you look at inflation within limited

03:26

service, first of all, you're starting with a lower

03:28

check average. And so any increase of $1 or $2 that an

03:32

operator passes on just by definition as a higher

03:35

percentage increase on it.

03:37

From December 2023 to February 2024, the national

03:41

average for a quick service restaurant check was about

03:43

$18, which is 4.5% more than the same time period

03:47

last year. That's a higher percentage increase than

03:50

both casual and fine dining, and full service

03:53

restaurants are capitalizing on the

03:54

decreasing price gap.

03:56

How is this Chili's three for me, only $10.99.

03:58

When fast food is so expensive.

04:00

It could be because we don't have to pay for any mascots.

04:02

Please. I was born for this.

04:05

It has created a shift in fast food consumer behavior.

04:08

Perhaps before they were going there ten times, but

04:11

now they're still only spending $100, and maybe

04:13

they're going there eight times or seven times.

04:15

Right. And so you start to see this, this traffic

04:19

falloff because they're still spending essentially

04:22

the same amount, but they're now going less

04:24

frequently.

04:31

Although prices for fast food have soared, sales have

04:34

remained strong. Mcdonald's, Wendy's and Yum

04:37

brands, which owns KFC, Pizza Hut and Taco Bell,

04:40

have all seen revenue surge past pre-pandemic levels.

04:43

A lot of the sales are still going up, and a lot of

04:46

that's driven by price as opposed to frequency or

04:48

visits.

04:49

A lot of investors are now focused on who is best

04:53

positioned to drive growth based on volume, because you

04:56

can obviously only push your price higher for so

05:00

long.

05:01

And that for so long may have arrived.

05:03

Mcdonald's missed earnings estimates in the first

05:05

quarter of 2024, and an Evercore analyst called it

05:08

one of the most sobering quarters for the fast food

05:10

giant. Others, like KFC and Pizza Hut, are experiencing

05:13

the same consumer pullback.

05:15

We must be laser focused on affordability, which means

05:18

good entry level price points available every day.

05:22

In the markets where we're doing this well, the

05:24

business is outperforming.

05:26

In some markets, however, it's clear we still have

05:28

opportunities to strengthen our proposition.

05:31

$100K plus income households are really powering through

05:35

and still spending at kind of normalized levels where

05:39

we see a lot of the constraint or perhaps

05:43

behavioral changes is the 50 K and below consumer.

05:47

And so your lower end consumer who just doesn't

05:50

have enough spending power to keep doing everything

05:55

that they were doing when the economy had a lot of

05:58

additional Covid stimulus available.

06:02

Remember the $5 footlong at subway?

06:04

Well, that's a thing of the past. This turkey sub cost

06:07

me over $11.

06:09

The bad news about inflation is prices aren't

06:11

going to go down. The good news is the increases are

06:14

slowing.

06:15

Prices in general across the economy very rarely ever

06:19

come down once they've been reset higher.

06:22

One of the reasons for that is wages.

06:26

Once they're reset higher, very rarely get pushed back

06:30

down and reset lower.

06:31

To combat the decrease in value offered by fast food,

06:34

chains are relying on apps and loyalty programs.

06:37

In its 2023 fourth quarter earnings call, Wendy's says

06:40

that it plans to invest approximately $15 million,

06:43

primarily in 2024 to further enhance its mobile

06:46

app experience, McDonald's announced its goal to expand

06:49

its loyalty program from 150 million to 250 million

06:53

90 day active users by 2027.

06:55

They haven't been able to do before is have targeted

06:58

advertisements that go directly to consumers based

07:03

on their consumption preferences, and the

07:06

companies will be able to see, almost in real time,

07:10

the return on investment of those advertisements and

07:14

those promotions that they push to the consumer,

07:17

because they can tell I pushed them the promotion on

07:20

Tuesday, and they made a purchase on Wednesday or on

07:24

Thursday.

07:24

The value offered by fast food is something that

07:27

customers will continue to evaluate each time they make

07:29

a purchase, and it may ultimately determine how the

07:32

industry reacts going forward.

07:34

Restaurants still take dollars to the bank, not

07:36

consumer visits. And as long as they're able to

07:38

continue to drive growth from a value or from a

07:41

dollar perspective, I think, you know, that's

07:43

still good news for the industry.

07:45

Two burgers 447.