McDonald’s and Chipotle say customers are trading less and visiting less often as inflation hits budgets

0
20

McDonald’s and Chipotle Mexican Grill say customers pressured by inflation are choosing cheaper menu items and visiting their restaurants less frequently, suggesting trends that could affect the wider restaurant industry.

The two companies were among the first restaurant chains to report their second-quarter results. Wingstop, Starbucks and Taco Bell owner Yum Brands are all scheduled to release their earnings reports within the next week.

As of mid-May, Chipotle said on Tuesday that low-income customers were visiting the restaurants less frequently, leading to traffic slowdowns. Earlier in the day, McDonald’s executives also said some low-income customers have switched to the low-cost menu or opted out of combination meals to save money. But McDonald’s executives added that the chain also benefits from customers trading in for more expensive full-service or fast-casual restaurants.

The restaurant companies’ comment comes on the heels of Walmart slashing its earnings outlook, citing rising food and gas prices weighing on consumers’ wallets. Higher prices for supplies have curtailed shoppers’ willingness to buy items such as clothing and electronics, or eat out at restaurants and order food.

ALSO READ  Adidas lowers outlook for slower recovery in China in 2022, possibly global slowdown

According to the NPD Group, restaurant menu prices rose an average of 7% in the three months to May compared to the same period a year ago. During the same period, consumers from households with incomes less than $75,000 reduced their fast food visits by 6%, the market research firm said.

Chief executives of restaurants, including McDonald’s Chris Kempczinski, have pointed to the difference in rising prices for groceries and restaurant meals as a benefit to eateries. According to the Bureau of Labor Statistics’ Consumer Price Index, home food prices have risen 12.2% in the past 12 months, while out-of-home prices have increased by just 7.7%.

“I don’t know what the impact of that is, but we certainly expect there to be some benefit that we see as part of that,” Kempczinski told analysts on Tuesday during the company’s conference call.

Historically, fast food chains have thrived during economic slowdowns as diners switch to cheaper options without eating out altogether.

ALSO READ  Brad Jacobs of XPO Logistics discusses stepping down as CEO with Mario Harik to succeed him

According to BMO Capital Markets analyst Andrew Strelzik, McDonald’s is among the best positioned restaurants to take advantage of falling consumer prices. Executives praised the chain’s value proposition compared to rivals, 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 prices.

“Low-income consumers have definitely pulled back their purchase frequency,” CEO Brian Niccol said during the company’s conference call. “Luckily for Chipotle, you know, the majority of our customers are higher household income consumers.”

The burrito chain said it believes it can raise menu prices without scaring off its key customers. It plans to raise prices by about 4% in August to cover rising costs for tortillas, avocados and packaging.

Chipotle stock rose 11% in morning trading on Wednesday after news of another round of price hikes and a decline in earnings. Shares of McDonald’s fell less than 1% after Deutsche Bank cut its stock, citing its valuation relative to its fast food peers.

ALSO READ  The best interior trends for summer 2022 - and the ones to avoid at home

By the end of the year, BTIG analyst Peter Saleh predicts that Chipotle’s menu prices will be about 20% higher than two years earlier. The chain’s competitors have raised prices by a similar level or even higher, according to a study by the company.

“The results of our pricing research indicate that Chipotle still has pricing power it can lean on to support margins in this inflationary environment,” Saleh wrote.

For the second quarter, Chipotle reported same-store sales growth of 10.1%, which was below Wall Street’s expectations of 10.9%. The increase was largely the result of previous price increases, which offset a decline in customer traffic.

Some analysts wondered how much more Chipotle could raise prices. Cowen analyst Andrew Charles wrote in a note that the planned hikes this summer could further erode traffic, especially given the uncertain economic environment noted by the company’s executives.

Ian Kritzberg contributed reporting for this story.

LEAVE A REPLY

Please enter your comment!
Please enter your name here