Fast-Food Giants Pivot to Value Deals as Consumer Pushback Hits “Tipping Point”

Fast-Food Chains Face “Tipping Point” as Rising Prices Drive Consumer Pushback

Fast-food prices have reached a “tipping point,” according to analyst Chris O’Cull of Stifel, prompting major chains to adjust their menus with value deals to attract customers. This shift comes as diners, particularly those in lower-income brackets, are cutting back on visits to popular chains like McDonald’s, marking a departure from consumer behavior during previous economic slowdowns.

Since the onset of the pandemic, fast-food prices have been on an upward trajectory. Industry giants such as McDonald’s, Starbucks, and KFC have reported decreases in US same-store sales, largely attributed to higher prices. In response, these chains are introducing combo deals and revamping value menus to entice cost-conscious consumers.

The current pricing landscape stands in stark contrast to pre-pandemic trends. Before 2020, limited-service restaurants in the US typically increased prices by less than 3.5% annually. However, post-2020 surges in labor and commodity costs have led to significant menu price hikes. In the year leading up to April 2023, prices at limited-service restaurants rose by 8.2%, a figure that remains well above pre-pandemic levels.

This pricing pressure has resulted in a shift in consumer behavior. Fast-food chains have experienced five consecutive quarters of decelerating comparable sales trends. Historically, the fast-food sector has shown resilience during economic downturns, but the current price increases are altering this pattern.

To combat declining traffic, restaurants are leveraging value meals and combo bundles. Popular offerings include $5 deals from McDonald’s, Burger King, Jack in the Box, and KFC. Starbucks is also experimenting with bundling options. These strategies aim to drive sufficient traffic to offset lower prices and encourage additional purchases. Both McDonald’s and Burger King report that average orders including combo meals exceed $10.

However, the effectiveness of these strategies varies. While Jack in the Box’s “Munchies Under $4” deal increased average order sizes, it fell short of driving expected traffic.

Chris O’Cull of Stifel views these value deals as beneficial for both fast-food chains and franchisees. As the gap between fast-food and fast-casual prices narrows, the strategy of using value menus is likely to persist in the foreseeable future, as chains strive to maintain their competitive edge in an increasingly price-sensitive market.