INSIGHTS/

Are Quick-Serve Restaurant Prices Too High?

What Consumer Behavior Tells Us: Due to increased prices, the industry is now posting higher profits than ever.

October 11, 2023

What Consumer Behavior Tells Us

Quick-serve restaurants have seen a dramatic series of changes since 2020. Dine-in traffic went down while delivery and carryout went up. Costs increased, but prices usually rose faster. Due to increased prices, the industry is now posting higher profits than ever. But as inflation continues to climb and restaurant bills balloon, some observers worry we’re reaching a breaking point.

The quick-serve restaurant industry had a minor scare at the beginning of the year when 2022 fourth quarter data showed a 4.2% decrease in traffic compared to fourth quarter 2021. While Revenue Management Solutions (RMS) reported net sales were still up 6.1%, quantity per transaction was also down by 4.8%. In other words, consumers visit quick-serve restaurants less frequently and buy less when they do. Price increases ensured sales still rose but only barely. How much more will consumers tolerate?

Research by RMS examined 2021 and 2022 year-over-year price increases for insight into the effect on traffic. It found that traffic began decreasing when prices were raised by 6% or more. But a higher per-visit spend by remaining diners more than offset the loss of those customers. While the average menu price increase was 8%, restaurants didn’t begin seeing diminishing results until they exceeded a 13% price increase. Up until that point, net sales increased.

Meanwhile, a February 2023 analysis by QSR magazine did a deep dive into the effects of price increases at the non-franchise brand Chipotle. It found that despite steep increases, most consumers considered the restaurant good value for their money. Even better, Chipotle’s heavy user behavior stayed the same and did not result in fewer items ordered.

Whether these trends will hold through 2023 and beyond is another matter. Customers are increasingly grumbling about quick-serve pricing and openly questioning whether they’re getting their money’s worth. On an April 2023 earnings call, McDonald’s CEO Christopher J. Kempczinski reported increased profits while acknowledging that fewer customers were ordering fries, and resistance to price increases seemed to be climbing.

At the same time, The Washington Post reports that grocery costs have risen faster than restaurant prices. So, while eating at home usually costs less, it saves less money than before. When and whether price increases will come back to bite the industry remains to be seen, but the market does not appear to have reached that point yet.

West Coast Franchise Law

If you have any questions about franchising, please contact the experienced franchise and business law attorneys at West Coast Franchise Law today at (206) 903-0401 to discuss your situation. Nate Riordan is a 2023 Franchise and Bankruptcy Super Lawyer with over 20 years expertise helping clients achieve their business goals.