Fast-Food Chains Confirm Trading Down Trend as Prices Rise

© Reuters.

By Liz Moyer

AiVIF.com – Fast food restaurants are confirming a trend highlighted by Walmart last month: some customers are “trading down” amid inflation that is cutting into household budgets.

McDonald’s Corporation (NYSE:MCD) said customers were opting for lower-priced value menu items and visiting less frequently, while Chipotle Mexican Grill (NYSE:CMG) said some customers were visiting less frequently and Restaurant Brands International (NYSE:QSR), which owns the Burger King and other brands, said customers are using more coupons and promotions. 

Shake Shack (NYSE:SHAK) noticed a shift in consumer patterns amid the rising inflation this spring and early summer, a reason why it missed its sales estimates and projected third quarter revenue might be lower than analysts have modeled.

Shares of McDonald’s are down 4% year-to-date, while shares of Chipotle are down 9%, and shares of Restaurant Brands are down 1.7%.

Visits to quick-serve restaurants, which make up 82% of restaurant visits, were down 2% in the second quarter, according to data firm NPD Group, and were 3% below pre-pandemic levels.

Consumers cut back overall on restaurant visits by 2% versus last year’s second quarter, NPD said, and traffic was 6% lower than pre-pandemic levels. Meanwhile, consumer spending in restaurants rose 2%, reflecting higher costs.

Walmart (NYSE:WMT) warned on profit after noticing that shoppers were putting off buying higher margin items such as clothing because rising prices meant they were spending more on necessities such as food.

One thing fast-food restaurants are benefitting from, according to McDonald's: People choosing lower-cost restaurants rather than opting for higher priced full-service dining experiences.

That said, costs continue to rise for restaurant consumers. Chipotle, which is raising prices another 4% starting this month, and Shake Shack, which will raise prices 5% to 7% in the fourth quarter, are just the latest to increase prices because of rising supply costs.

Some chains see an opportunity in the challenging environment. Papa John's International (NASDAQ:PZZA) CEO Rob Lynch told CNBC earlier this week that pizza was a great business to be in during a recessionary period. “It’s pretty much the best value you can get” for feeding a family, he said.

Shake Shack shares are down 29% year-to-date, while Papa John's is down 31%.