Though plenty of studies have been done showing that a higher density of quick-service restaurants exist in lower-income neighborhoods, those with higher incomes ($100,000 and above) are more likely to consume fast food more often. Perhaps that’s because the persistent backdrop of menu inflation may be starting to price out those lower-income consumers. At least, that’s what we heard over and over (and over) again during Q1 earnings calls. Indeed, according to AlphaSense, mentions of “low-income consumers” on public company calls more than doubled in the latest quarter versus the previous quarter. Restaurant companies were certainly not immune. To wit:
Wendy’s executives noted that cohorts with a household income below $75,000 are “definitely under pressure.” They’re reducing frequency and visits. This is partially offset by more frequency from the higher income consumer. Shake Shack’s lower income consumers traded down “from time-to-time,” according to outgoing CEO Randy Garutti. Even though the company is performing well across income demographics, Liz Williams, CEO of El Pollo Loco, noted a need to have “even more value,” which is something the company is working on.
Portillo’s lower-income consumers are pressured, which has impacted the company more at the drive-thru than in store, executives said, adding that they’re seeing less drink attachments on orders. For Bloomin’ Brands, low-income consumers are “experiencing some difficulties,” though the company’s mix is stable.
“There has been somewhat of a pullback on the low-end in our concepts,” outgoing CEO David Deno said.
Dine Brands, parent company of Applebee’s and IHOP, is experiencing less visits from those making $50,000 or less.
“The higher you go in the income streams, the more consistent the performance has been quarter-to-quarter,” CEO John Peyton said. “Also, we’ve observed our lower income consumers are more aggressively managing their check, finding value-oriented items, etc.”
This trend was more pronounced in Q1 than it has been in recent quarters.
“The most impactful change in consumer behavior is clearly at the $50,000 and below segment,” Peyton said.
Darin Harris, CEO of Jack in the Box, said Tuesday that lower-income consumers are facing pressures industrywide.
“We in the industry are all seeing this kind of pressure from the headwinds of the consumer,” Harris said. “We definitely felt it coming into the second quarter, and so we know that value is going to be something we talk about for the rest of the year. We know the competition is doing that so we will be in that game.”
That game, as we’ve previously mentioned in this space, is already starting to pick up as witnessed by a bevy of new value promotions across all segments. The competition over value-seekers will unquestionably heat up if McDonald’s introduces a $5 value meal, as has been rumored. Winning back lower-income consumers is a priority for McDonald’s, which over-indexes with the cohort.
Winning back lower-income consumers should be a priority for all brands, however. Data from the Centers for Disease Control and Prevention finds that about 32% of adults in the lowest income group consumed fast food – no doubt too big a cohort to lose. It’s also too big of an opportunity to ignore. Pent-up demand for restaurant usage, across all segments, is higher among lower-income households, with 53% of consumers in households below $50,000 saying they would like to dine out more frequently, according to the National Restaurant Association. In other words, expect the competition – or as McDonald’s CFO Ian Borden called it, a “street fight” – to win over value seekers to intensify throughout the year.
“We've got a street-fighting mentality in the current context,” he said. “Clearly, everybody is fighting for fewer consumers or consumers that are certainly visiting less frequently, and we've got to make sure we've got that street fighting mentality to win regardless of the context around us.”
Contact Alicia Kelso at [email protected]