Restaurant operators have had to keep their menu prices elevated to protect margins amid relentless inflation and, for the most part, consumers have proven their willingness to accept those prices. That amenability, however, may be fading fast.
New data from HundredX shows that consumers are increasingly unhappy with rising prices. “The Sweet and Savory: Exploring Fast Food Trends” report – which examined over 400,000 pieces of customer feedback from June 2022 through June 2023 across more than 180 quick, fast casual and casual brands – shows that net sentiment toward price has fallen by 7% over the past year.
Perhaps uncoincidentally, QSR Q2 traffic decreased by 1.8% year-over-year, according to Revenue Management Solutions. During that same timeframe, the average prices were up by 10.6%. RMS’ data, as well as Bureau of Labor Statics’ data, show that menu prices have started to cool compared to last year, but HundredX’s net sentiment scores on pricing, combined with traffic declines, indicate that consumer spending fatigue may have already settled in.
Consider some commentary from the current round of Q2 earnings reports as an example. El Pollo Loco’s effective price increase in Q2 versus Q2 2022 was approximately 9.5%. The company experienced a 4.5% decrease in transactions. Papa Johns CEO Rob Lynch said April was the company’s worse comp performance month since August 2019 and cited pricing as the main culprit.
“We discovered and spent some time talking about some of the pricing that had gotten out in front of where the consumer was willing to spend,” he said during the company’s earnings call Aug. 3.
Wendy’s expanded its margins by 230 basis points year-over-year, but the expansion was primarily driven by pricing and partially offset by customer count declines. And, Restaurant Brands International CEO Josh Kobza said part of the company’s same-store sales growth came from pricing, but the company is “still not in positive territory” on traffic. Talk about trade down activity has picked up as well, and consumers have started to more aggressively seek deals and discounts to use restaurants.
In other words, while the American restaurant consumer has shown remarkable resilience throughout the past year-plus of historically high menu prices, the shoe may be inching closer to an edge. According to a U.S. Department of Commerce report released late last month, consumer spending, which accounts for about two-thirds of economic output, grew at just a 1.6% rate in Q2, down sharply from a 4.2% rate in the first quarter.
This trend may start to accelerate as additional pressures start to mount for consumers. Those pressures include a record amount of credit card debt, a record amount of household debt, a record amount in auto loans, and the highest interest rates in 22 years.
There is also a record amount of student loans and the resumption of those loan repayments, coming in October. Some companies, like Chipotle, don’t believe the restart will have an impact. Others, like Wingstop, have acknowledged those loan payments will be another consumer challenge. Rick Cardenas, CEO of Darden Restaurants, said, “any time you take money out of consumers’ pockets, it’s a headwind.”
Wendy’s CEO Todd Penegor echoed that sentiment during his company’s earnings call this week, noting, “Student loan repayments start to come in and any other things that start to provide a little bit of pressure against personal disposable income, there could be a little bit of impact there.”
Of course, not all restaurant companies are the same and the impact will vary based on consumer demographics and those consumers’ willingness to split their discretionary income into needs (the mortgage) and wants (a tall Mocha Cookie Crumble Frappuccino), but it’s hard to ignore a growing collection of big-picture anecdotes.
Taste and quality trump price
If there is a silver lining amid this confluence of consumer challenges, it’s that those consumers are drawn to restaurants for more than just menu prices and the definition of “value” has evolved to include other factors like quality, speed, convenience, and digital ease. According to HundredX, for instance, taste remains king.
“Our AI-driven resource allocation model shows that quality and taste are the two top drivers with the biggest impact on future purchase intent for restaurants, far ahead of the other 14 factors we track,” said Andre Benjamin, vice president of strategy at the consumer insights company. “While price is something that is top of mind for all consumers – thus selected 65% of the time as something they care about – we’re seeing it doesn’t have a large impact on whether they will go to a restaurant or not.”
As such, HundredX’s data shows that consumers’ intent to eat at restaurants has remained unchanged throughout the past three months, even as their net sentiment toward price has fallen. Benjamin doesn’t expect consumers’ dining-out habits to shift much in the next three months.
“Our data shows that while prices have increased across the board due to inflation, consumers are still planning to eat out in the next few months,” Benjamin said. “Given net favorability toward most top drivers of customer satisfaction have been stable in the past three-to-six months excluding price, the data indicates intent should stay stable. Strategically, brands should focus on improved taste and speed to win over consumers during times of inflation.”
Contact Alicia Kelso at [email protected]