- Fast food prices have soared since the start of the pandemic.
- Analysts say fast food prices are particularly painful because they are rising faster than food prices.
- In addition to the cost of raw materials, restaurants have faced soaring wages.
Fast food isn’t as cheap as it used to be.
Gone are the days of the McDonald’s dollar menu, $5 Subway slices and $1 New York slices.
Customers say fast food is becoming too expensive and no longer represents value. Some say they’re placing smaller orders, turning to independent restaurants or inexpensive casual dining chains, or simply cooking more at home.
“Ultimately, the consumer is fatigued” because of rising restaurant prices, Jim Sanderson, an analyst at Northcoast Research, told Business Insider.
Fast food chains have raised their menu prices during the pandemic in response to soaring food and labor costs. Analysts told BI that consumers feel prices are still rising too quickly because they compare them to the slowing inflation rate for food.
Fast food prices have skyrocketed
Restaurant prices are determined by “two broad categories”: food costs and labor costs, Citi analyst Jon Tower told BI.
In 2023, for example, for every $100 in sales made by McDonald’s corporate-owned restaurants, about $31.12 was spent on food and paper, and about $29.60 was spent on payroll and social benefits.
Prices of many ingredients used by fast food chains, particularly beef, have soared during the pandemic due to factors including changing demand and supply chain issues.
Restaurants have also had to raise wages to attract and retain staff, as large numbers of them quit in search of better wages, benefits and working conditions during what has been dubbed the “Great Resignation.” “. Average restaurant wages have spiked particularly sharply in 2021, according to data from the U.S. Bureau of Labor Statistics.
“The year 2022 has obviously been characterized by very high inflation on the food side as well as labor, particularly after Russia’s invasion of Ukraine,” said Sharon Zackfia, an analyst at William Blair. “So we saw that much higher than average price increases were starting to trickle down to the restaurant sector.”
Fast food chains have increased their menu prices to reflect rising food costs and payrolls. Price increases varied widely between chains based on factors such as the type of food, location and number of restaurants. Franchisees are largely free to set their own prices.
And while price inflation at limited-service restaurants is much lower than it was a few years ago, it remains much higher than before the pandemic, according to BLS data. California legislation that raised the minimum wage for fast food workers to $20 an hour is further driving up prices.
Food inflation cools
Fast food looks particularly expensive now as food inflation subsides much more quickly, said analysts surveyed by BI.
“What typically matters in the context of restaurants and their traffic is the delta between grocery and restaurant inflation,” said Danilo Gargiulo, an analyst at Bernstein.
Grocery stores, not rival restaurants, are fast food chains’ biggest competitors as people try to decide whether to eat at home or buy fast food, Gargiulo said.
At the height of inflationary periods, grocery prices rise at a much higher rate than fast food prices because food costs represent a much larger share of grocery store expenses than restaurant expenses. This happened during the pandemic, notably in 2022, when food prices skyrocketed.
But the opposite is also true: Grocery stores benefit much more than restaurants when food inflation calms. This has happened over the past year: food inflation has declined significantly, while prices at limited-service restaurants continue to rise at rates well above pre-pandemic levels, as shown in the graph below:
At grocery stores, where prices are determined primarily by the cost of food, “they were able to quickly reflect falling food prices at the store level, while restaurants must account for the fact that labor inflation- labor continues to outpace food inflation. Tower, the Citi analyst, said.
The guests are fed up
Price increases during the pandemic were “actually well absorbed by consumers” as the vast majority of restaurants raised their prices, Garguilo said.
But as overall inflation declines, “we expect consumers to be… less tolerant of the large price increases we’ve seen in the (restaurant) industry over the past several years.” , Bank of America analyst Sara Senatore told BI.
“It feels like what was cheap not so long ago is now expensive,” Chad Frye, a California-based cartoonist and illustrator, told BI. He said he would reduce his fast food consumption from four or five times a week to just twice.
“I find I cook a lot more at home now,” he said. “It’s much more economical.”
Do you think fast food is too expensive? Email this reporter at gdean@insider.com.
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