Why Fast Food Has Gotten So Expensive

Big and tasty for just a dollar. You did your thing, dawg. Remember the dollar menu?

Well, you may be hard pressed to find any fast food item that actually costs a dollar anymore. $17 for three Filet-O-Fish at McDonald's. Are you kidding me?

I don't have the money to buy fast food anymore. Don't you just miss the days when fast food was actually cheap? When looking at fast food menus nationally, here are the average prices for fries from McDonald's, a Happy Meal and a burger combo from Burger King.

But I paid even more than that. Here are the prices at fast food locations by the NBC offices in Midtown Manhattan. Broadly speaking.

Sales are performing much stronger than foot traffic, and that's due in part to higher prices. The Consumer Price Index measures inflation or the average increase in prices over time. Fast food falls into the limited service meals category.

Think anything that's typically ordered at a counter and taken to go from 2019 to 2023, prices in this category are up nearly 28%. That's more than full service meals. Think sit down restaurants with servers, which increased nearly 24%.

And it's also more than overall inflation, which increased 19%. So why are fast food prices so high and where will they go from here? Can I please get a Titan turkey?

Can I get a foot long? Yeah, just that. Between 2022 and 2023, the cost of food, beverage and packaging rose around 11% for both McDonald's and Chipotle.

Still, as of late, labor is the main culprit. Food is about a third of the cost of a menu item. So even as those costs moderate in many cases, and particularly given the the laws that were seen in California and some of the other, you know, minimum wage laws and just increases that are happening is that that wage pressure remains elevated.

The fast food labor market became increasingly competitive for employers during the pandemic, as companies struggled to fill their restaurants. In 2022, the number of employees in the limited service restaurant category were still below 2019 levels. During that same time, the number of limited service establishments grew by over 4%.

As things normalize after Covid, you still see a higher amount of job openings and less people coming in to fill those jobs. Compared to 2019, the percentage of sales that goes towards paying for labor has grown for many limited service restaurants like Wendy's and Shake Shack, where it has actually decreased for restaurants like The Cheesecake Factory and Darden Restaurants, which owns chains like Olive garden, Longhorn Steakhouse, and the Capital Grill. In order to maintain the same service levels and expand their operating hours to accommodate the consumers late night snack demands and demands for earlier breakfasts.

Fast food restaurants need to hire more labor across the day part, and so as they're competing with other potential employers, they need to make the job more enticing. And the easiest way to do that is by raising the wage rate. And companies are passing these costs onto the customer, especially as states like California have raised the minimum wage for workers.

In an obviously, despite this huge wage inflation, there's a lot of other factors at play. I think when you look at inflation within limited service, first of all, you're starting with a lower check average. And so any increase of $1 or $2 that an operator passes on just by definition as a higher percentage increase on it.

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 same time period last year. That's a higher percentage increase than both casual and fine dining, and full service restaurants are capitalizing on the decreasing price gap.

How is this Chili's three for me, only $10. 99. When fast food is so expensive.

It could be because we don't have to pay for any mascots. Please. I was born for this.

It has created a shift in fast food consumer behavior. Perhaps before they were going there ten times, but now they're still only spending $100, and maybe they're going there eight times or seven times. Right.

And so you start to see this, this traffic falloff because they're still spending essentially the same amount, but they're now going less frequently. Although prices for fast food have soared, sales have remained strong. Mcdonald's, Wendy's and Yum brands, which owns KFC, Pizza Hut and Taco Bell, have all seen revenue surge past pre-pandemic levels.

A lot of the sales are still going up, and a lot of that's driven by price as opposed to frequency or visits. A lot of investors are now focused on who is best positioned to drive growth based on volume, because you can obviously only push your price higher for so long. And that for so long may have arrived.

Mcdonald's missed earnings estimates in the first quarter of 2024, and an Evercore analyst called it one of the most sobering quarters for the fast food giant. Others, like KFC and Pizza Hut, are experiencing the same consumer pullback. We must be laser focused on affordability, which means good entry level price points available every day.

In the markets where we're doing this well, the business is outperforming. In some markets, however, it's clear we still have opportunities to strengthen our proposition. $100K plus income households are really powering through and still spending at kind of normalized levels where we see a lot of the constraint or perhaps behavioral changes is the 50 K and below consumer.

And so your lower end consumer who just doesn't have enough spending power to keep doing everything that they were doing when the economy had a lot of additional Covid stimulus available. Remember the $5 footlong at subway? Well, that's a thing of the past.

This turkey sub cost me over $11. The bad news about inflation is prices aren't going to go down. The good news is the increases are slowing.

Prices in general across the economy very rarely ever come down once they've been reset higher. One of the reasons for that is wages. Once they're reset higher, very rarely get pushed back down and reset lower.

To combat the decrease in value offered by fast food, chains are relying on apps and loyalty programs. In its 2023 fourth quarter earnings call, Wendy's says that it plans to invest approximately $15 million, primarily in 2024 to further enhance its mobile app experience, McDonald's announced its goal to expand its loyalty program from 150 million to 250 million 90 day active users by 2027. They haven't been able to do before is have targeted advertisements that go directly to consumers based on their consumption preferences, and the companies will be able to see, almost in real time, the return on investment of those advertisements and those promotions that they push to the consumer, because they can tell I pushed them the promotion on Tuesday, and they made a purchase on Wednesday or on Thursday.

The value offered by fast food is something that customers will continue to evaluate each time they make a purchase, and it may ultimately determine how the industry reacts going forward. Restaurants still take dollars to the bank, not consumer visits. And as long as they're able to continue to drive growth from a value or from a dollar perspective, I think, you know, that's still good news for the industry.

Two burgers 447.