McDonald’s and Chipotle Mexican Grill say customers squeezed by inflation are choosing cheaper menu items and visiting their restaurants less often, signaling trends that could affect the broader restaurant industry.
The two companies were among the first restaurant chains to report second-quarter results. Wingstop, Starbucks and Taco Bell owner Yum Brands is due to report earnings next week.
Since mid-May, Chipotle said Tuesday that low-income customers have been visiting its restaurants less often, causing traffic to slow. Earlier in the day, McDonald’s executives also said some low-income customers were switching to the bargain menu or forgoing combo meals to save money. But McDonald’s executives added that the chain is also benefiting from customers trading down from more expensive full-service or fast-casual restaurants.
The restaurant companies’ comments come after Walmart cut its profit outlook, citing rising food and gas prices that are weighing on consumers’ wallets. Higher prices for essential goods have limited shoppers’ willingness to buy items such as clothing and electronics – or to dine out and order food delivery.
On average, restaurant menu prices rose 7% in the three months ending in May from a year ago, according to the NPD Group. During the same period, consumers in households with incomes below $75,000 reduced their visits to fast-food restaurants by 6%, the market research firm said.
Restaurant CEOs, including McDonald’s Chris Kempczynski, have pointed to the gap in rising grocery and restaurant meal prices as an advantage for diners. Food prices at home rose 12.2 percent over the past 12 months, while prices for food outside the home rose just 7.7 percent, according to the Bureau of Labor Statistics’ Consumer Price Index.
“I don’t know what the impact of that is, but we certainly expect that there is some benefit that we see as part of that,” Kempczynski told analysts on Tuesday on the company’s conference call.
Historically, fast-food chains have fared well during economic slowdowns as diners shift to cheaper options while still eating out.
McDonald’s is among the best-positioned restaurants to benefit from the consumer downturn, according to BMO Capital Markets analyst Andrew Strelzik. Executives touted the chain’s value proposition compared to competitors, even as the company and its franchisees raise prices.
As a fast-casual chain, Chipotle says most of its customers aren’t as sensitive to pricing.
“Low-income consumers have definitely reduced the frequency of purchases,” Chief Executive Brian Nichol said on the company’s conference call. “Fortunately for Chipotle, you know, the majority of our customers are higher-income household consumers.”
The burrito chain said it was confident it could raise menu prices without scaring away its core customers. It plans to raise prices about 4 percent in August to cover rising costs for tortillas, avocados and packaging.
Shares of Chipotle rose 11% in morning trading Wednesday on news of another round of price hikes and earnings growth. McDonald’s shares fell less than 1 percent after Deutsche Bank downgraded the stock, citing its valuation of its fast-food rivals.
By the end of the year, BTIG analyst Peter Saleh predicts that Chipotle’s menu prices will be about 20% higher than they were two years earlier. The chain’s competitors have raised prices by similar levels or even more, according to a survey conducted by the firm.
“The results of our pricing research show that Chipotle still has pricing power it can rely on to maintain margins in this inflationary environment,” Saleh wrote.
For the second quarter, Chipotle reported same-store sales growth of 10.1%, below Wall Street expectations of 10.9%. The increase was largely the result of earlier price spikes that offset a drop in customer traffic.
Some analysts have questioned how much more Chipotle can raise prices. Cowen analyst Andrew Charles wrote in a note that planned increases this summer could further erode traffic, especially given the uncertain economic environment noted by company executives.
— Ian Kritzberg contributed to the reporting of this story.
Add Comment