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.