McDonald’s and Chipotle Mexican Grill say inflation-pressed customers are choosing cheaper menu items and visiting their restaurants less often, signaling trends that could affect the entire restaurant industry.
The two companies were among the first restaurant chains to report their second quarter results. wing stop, Starbucks and owner of Taco Bell Yum Brands are all expected to release their earnings reports over the next week.
Starting in mid-May, Chipotle said Tuesday that low-income customers visited its restaurants less frequently, which slowed traffic. Earlier today, McDonald’s executives also said some low-income customers switched to its value menu or opted out of combo meals to save money. But McDonald’s executives added that the chain is also benefiting as customers bargain for more expensive full-service or fast-food restaurants.
The comment from the catering companies follows walmart reduce profit prospects, citing soaring food and gasoline prices that are squeezing consumers’ wallets. Rising prices for basic necessities have reduced shoppers’ willingness to purchase items such as clothing and electronics – or dine out and order food delivery.
On average, restaurant menu prices rose 7% in the three months to May compared to the year-ago period, according to the NPD Group. During the same period, consumers from households with incomes below $75,000 reduced their visits to fast food restaurants by 6%, the market research firm said.
Restaurant general managers, including Chris Kempczinski of McDonald’s, have pointed to the discrepancy between rising grocery prices and restaurant meals as a benefit for restaurants. Home food prices have climbed 12.2% in the past 12 months, while out-of-home food prices have risen just 7.7%, according to the Bureau’s consumer price index. of Labor Statistics.
“I don’t know what the impact of that is, but we certainly expect that we’ll see some benefits from that,” Kempczinski told analysts Tuesday on the company’s conference call.
Historically, fast food chains have done well during economic downturns as diners turn to cheaper options without giving up eating out.
McDonald’s is one of the restaurants best positioned to take advantage of lower consumer prices, according to BMO Capital Markets analyst Andrew Strelzik. Executives touted the chain’s value offerings over competitors, even as the company and its franchisees hiked prices.
As a fast-casual chain, Chipotle says most of its customers aren’t as price-sensitive.
“The low-income consumer has definitely reduced their frequency of purchases,” CEO Brian Niccol said on the company’s conference call. “Fortunately for Chipotle, you know, the majority of our customers are higher family income consumers.”
The burrito chain said it was confident it could raise menu prices without scaring off key customers. He plans to raise prices by about 4% in August to cover rising costs for tortillas, avocados and wrappers.
Chipotle stock rose 11% in morning trade on Wednesday after news of another round of price increases and declining earnings. Shares of McDonald’s fell less than 1% after Deutsche Bank downgraded the stock, citing its valuation relative to its fast food peers.
By the end of the year, BTIG analyst Peter Saleh predicts Chipotle menu prices will be around 20% higher than they were two years earlier. The chain’s competitors have raised their prices to similar or even higher levels, according to a survey conducted by the company.
“Our pricing survey results indicate that Chipotle still has pricing power it can leverage to support margins in this inflationary environment,” Saleh wrote.
For the second quarter, Chipotle reported comparable store sales growth of 10.1%, below Wall Street expectations of 10.9%. This increase is largely the result of past price increases, which offset a decline in ridership.
Some analysts have wondered how much the additional Chipotle could boost prices. Cowen analyst Andrew Charles wrote in a note that expected increases this summer could further erode traffic, especially given the uncertain economic environment noted by company executives.
— Ian Krietzberg contributed to the reporting of this story.