Executives at fast food companies are now prioritizing volume in their strategies, experimenting with lower prices and new value bundles to see what boosts growth the most. This isn’t a sign that prices overall are headed back to pre-pandemic levels, but we should get a long period of stability as competition for diners and market share once again becomes the measure of success for companies, rather than the rapid price increases of the past few years.
It’s interesting watching this play out now because I first started writing about these dynamics in early 2022 when consumer company behavior, inflation and profit margins were in a very different place. Back then, management teams were focused on restoring margins that had been squeezed by rising costs for commodities, labor and freight. Consumers were flush with cash, so raising prices was a sensible approach. Politicians decried the behavior as “greedflation” but in most cases companies were just trying to get back to their pre-pandemic states in what had become a higher-cost environment. Profit margins have now largely been restored, and it’s possible that some companies overshot the mark.
The wallet-friendly fast food options come as food-at-home inflation has fallen back to 1% on a year-over-year basis from as high as 13.5% in 2022. The cost of some groceries such as milk and seafood has been declining. By comparison, inflation for food away from home — what consumers pay while dining out — is easing more slowly, climbing 4% from a year ago in May.
Between McDonald’s $5 value meal, Taco Bell’s $7 cravings box and budget breakfasts from Starbucks and Wendy’s Co., fast food chains are fighting hard to win over hungry Americans this summer. Why now? It comes down to price-sensitive customers voting with their wallets and forcing companies to chase traffic to grow revenue and profits.
Fast food companies including McDonald’s Corp., Taco Bell Corp. and Starbucks Corp. are fighting for diners, but the grocery store is a competitor as well — whether you’re selling hamburgers or dry goods on a shelf at Walmart Inc., nobody is in a position to raise prices anymore. Spice maker McCormick & Co. said on an earnings call last week that it’s benefiting as spices become a relatively inexpensive way to add flavor to lower-priced groceries.
Patrick Doyle, chairman of Burger King parent Restaurant Brands International Inc., said recently that the increased focus on value could help prop up the entire industry. “There’s a perception that maybe prices had gotten a little too high,” Doyle told investors last month. The value talk is “hopefully going to help the perceptions around the category in general — get some people to open their minds to coming back.”
It’s understandable that most Americans just want to know when the inflation squeeze will be behind us after a few years of the kind of price escalation we haven’t experienced in decades. It’s important to remember though that the goal of consumer companies is driving traffic and volumes, not helping consumers. Still, the fact that those two impulses are now converging is good news. Announcements such as the McDonald's $5 value meal promotion indicate that companies have gotten the message, and the price shock should fade with time.
Of course, some firms will try other ways to draw in customers. For example, General Mills — the maker of Cheerios and Old El Paso taco shells — is also focused on growing net sales and volumes. But when company executives talked about their plans on an earnings call last week, they emphasized “significantly” increasing investments by featuring celebrities such as NFL players Travis and Jason Kelce to promote their cereal brands, and comedian Pete Davidson to sell Totino’s pizza rolls.
It’s pretty clear that consumer companies at least can no longer try to grow by raising prices; customers will find better deals elsewhere. The kinds of value menus being advertised this summer might not last long — the McDonald's promotion is only for four weeks, for instance — but we’re in a period when companies are trying to figure out what tools will be most effective in helping them grow. Marketing deals with Travis Kelce might provide some short-term boost, but until consumer wallets feel less squeezed, lower prices will probably pack a bigger punch.
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