Escalating costs of living are affecting consumers across the U.S., and fast food joints in the country are now switching up their marketing strategies to stay relevant in the mainstream consciousness. Higher inflation rates mean declining disposable income among the U.S. public, especially among those in the lower income group to begin with, which in turn puts pressure on quick-service restaurants like McDonald’s, Pizza Hut, KFC, and Taco Bell. Slow economic recovery in China is also adding to the industry-wide pressure.
Supply chain disruption caused by the effects of a global quarantine, as well as higher commodity prices all drive operational costs for quick-service restaurants even higher. At the same time, fewer and fewer people are interested in spending too much money on the products they have on offer. Fast food marketing in recent years has tended to veer toward celebrity collaborations and partnerships in rolling out limited-edition products to drive brand relevance. However, consumers are no longer prepared to buy into the hype or the premium prices of this strategy, which is prompting an industry-wide shift into how food is primarily marketed. Instead, fast food giants are giving out more expensive promotion deals to lure people out of the ‘we have food at home’ mentality.
Yum! Brands, who owns global brands KFC and Pizza Hut were among the companies that saw surprise sales growth declines in the first quarter of the year. For the first time in the company’s history, digital sales overtook the 50% mark of its total sales. This may bring shareholders little comfort as KFC’s revenue in the U.S. declined by 8%, while Pizza Hut’s fell by 6%. Overall, Yum! Brands only managed to post an adjusted earnings per share (EPS) of $1.15 as its aggregated revenue fell by about 3% to $1.6 billion. Burger and fried chicken purveyor to the world, McDonald’s was also among the companies affected by the effects of a struggling market.
In the first quarter of the year, the industry heavyweight noted that fast food traffic was on the decline across the world: in the U.S., Australia, Canada, Germany, Japan, and the United Kingdom. This prompted company President and CEO Chris Kempczinski to note that “the consumer is certainly being very discriminating in how they spend their dollar”, and that “all income cohorts are seeking value”, in a conference call with company investors and shareholders. In the same meeting, he also emphasised the need to craft a nationwide value message as well as the marketing to back it up to ensure consumer retention. According to Kempczinski, McDonald’s was losing out to the competition based on consumer views of value and affordability that the opposing camps have created through their marketing narratives: “There’s a lot of great value out there, but everyone else has a value message too”, he said.
High prices are not the only factors affecting consumer demand, at least in the case of the McDonald’s franchise. Macdonald’s same-store sales for the first quarter fell by about 0.2% overseas, while it rose by 2.5% in the U.S. This decline was primarily driven by boycotts in the Middle East, Indonesia, and Malaysia for the company’s perceived continued support of Israel in the ongoing conflict in the region. This perception was primarily fuelled by McDonald’s decision to give free meals to the Israeli troops that have been mobilised in the Gaza conflict. This is the first time that same-store sales fell in that particular segment of the market since 2020. McDonald’s, for its part, is content to wait out the issue, given the persistence of demand for deliveries. According to Kempczinski, the company does not expect to see “any meaningful improvement in the impact on that until the war is over.”
The decline in demand for what might be termed ‘easy food’ is also being felt in other product categories. Packaged food companies, in the business of selling cookies and baked snacks, for example, are also feeling the pinch. On the other hand, companies such as Burger King and Domino’s Pizza are seeing slightly better sales this year, primarily due to their extensive loyalty programs and promotions. This means that Domino’s Pizza shares grew by 27%, at a time when Starbucks shares fell by 22%, and McDonald’s fell by 6%.
More and more expenditure on promotions that attract budget-conscious customers may be the way to go for fast-food restaurants for quite some time yet. Not everyone in their consumer base might be wholehearted fans of the approach however; one commenter writes below a Japan Today article,
“When it gets to the point where your price increases aren’t justified by the food you’re serving… you have major problems with your business ‘model’. ‘Deals’ are a start, but in the end, there are now much better ‘deals’ outside Mac – for the same price or even lower.”
However, others are confident that market equilibrium will not fail to strike a balance between companies’ profit goals and the prices that customers are willing to pay for their products. Perhaps the promotions and the value deals are only an inkling of what’s to come.
(Theruni Liyanage)