Inflation hits the fast food counter
On a cold Tuesday afternoon this month, James Marsh stopped by a Chipotle near his suburban Chicago home to grab something to eat.
It had been a while since Mr Marsh had been to Chipotle – he estimated he went five times a year – and he stopped short when he saw the prices.
“I had my usual, steak burrito, which was maybe in the mid-$8 range,” said Marsh, who trades stock options at his home in Hinsdale, Illinois. “Now it was over $9.”
He went out.
“I thought I would find something at home,” he says.
The pandemic has led to price spikes in everything from slices of pizza in Manhattan to sides of beef in Colorado. And that has led to more expensive items on the menus of fast-food chains, traditionally establishments where people are used to grabbing a quick bite that doesn’t hurt their wallet.
At a Chipotle in Costa Mesa, Calif., the price of a chicken burrito — nothing fancy, hold the guacamole — about a year ago was $7.25. These days, that same burrito costs around $7.95, according to price data gathered by analysts. In Ann Arbor, Michigan, a ShackBurger at Shake Shack cost $5.69; now it’s $6.09. And in Oklahoma City, an order of 50 bone-in wings from Wingstop that cost $41.99 at the start of last year is now $47.49, an increase of 13%.
Last year, the price of fast food menu items rose 8%, its biggest rise in more than 20 years, according to government data. And, in some cases, the portions have gone down.
“In recent years, most fast food restaurants may have increased their prices by the single digits every year,” said Matthew Goodman, an analyst at M Science, an alternative data research and analytics firm. “What we’ve seen over the last six-plus months is restaurants putting pressure on prices.”
This comes at a time when the hypercompetitive fast food market is booming.
Chains like McDonald’s, Chipotle and Wingstop have been big winners from the pandemic as consumers, stuck at home and tired of cooking multiple meals for their families, have increasingly turned to them for convenient solutions. But over the past year, as the cost of ingredients rose and the average hourly wage rose 16% to $16.10 in November from a year earlier, according to government data, restaurants have began to quietly increase their prices.
But charging customers more for a burger or burrito is a delicate art. For many restaurants, this involves complex algorithms and test markets. They need to strike a balance between raising prices enough to cover expenses and not scaring off customers. Also, there is no one-size-fits-all approach. Chains operated by franchisees generally allow individual owners to decide prices. And national chains, like Chipotle and Shake Shack, charge different prices in different parts of the country.
When Carrols Restaurant Group, which operates more than 1,000 Burger Kings, raised prices in the second half of last year, customer numbers actually improved from the third to fourth quarters. “Over time, we generally haven’t seen a lot of consumer pushback” on the higher prices, Carrols chief executive Daniel T. Accordino told analysts at a conference in early January.
Menu prices are expected to continue to climb this year. Many restaurants say they are still paying higher wages to attract employees and expect food prices to rise.
“We expect unprecedented increases in our food basket costs relative to 2021,” Ritch Allison, chief executive of Domino’s Pizza, told Wall Street analysts at a conference this month. While Domino’s hasn’t raised its prices, it is changing its promotions — offering the $7.99 pizza deal only to customers ordering online and reducing the number of chicken wings in some promotions to eight-for-10 — in order to maintain profit margins.
Despite higher food and labor costs, some restaurants are seeing sales and profits rebound beyond pre-pandemic levels.
When McDonald’s reports earnings this month, Wall Street analysts expect its revenue to have hit a five-year high of more than $23 billion, an increase of $2 billion from 2019. Net income is expected to reach $7 billion, up from $6 billion in 2019. Other chains like Cracker Barrel and Darden Restaurants, which own Olive Garden and Longhorn Steakhouse, have resumed paying dividends or stock buybacks in cash after suspending these activities at the start of the pandemic to conserve cash.
And next month, when Chipotle reports 2021 results, analysts expect revenue to top $7.5 billion, a 34% jump from 2019. Net income is expected to nearly double from at pre-pandemic levels. In the third quarter, the company repurchased nearly $100 million of its stock. Chipotle declined to make an executive available for an interview, citing the quiet period before its earnings release.
As Chipotle executives blamed higher labor costs for a 4% increase in menu item prices this summer, the company was looking for ways to increase profitability.
One way was to charge higher prices for delivery. Delivery orders through providers like DoorDash and Uber Eats have skyrocketed for Chipotle and other fast-food chains during the pandemic. But the same goes for the commission fees that Chipotle paid to sellers. So in the fall of 2020, it began running tests to see what would happen if it raised the prices of burritos, guacamole and chips that customers ordered for delivery, executives told Wall analysts. Street during an earnings call. This basically meant that the customer covered Chipotle’s side of the delivery charges.
The company found that customers were willing to pay for the convenience of delivery. Now customers who order Chipotle for delivery pay about 21% more than if they ordered and picked up the food from stores, according to analysis by Gordon Haskett Research Advisors analyst Jeff Farmer.
“I would say our ultimate goal, so that would be long-term, maybe medium-term, is to fully protect our margins,” Chipotle chief financial officer Jack Hartung said in a call with analysts at Chipotle. Wall Street. falls. “When you compare our prices to other restaurant companies for quality of food, quantity of food, quality and convenience of experience, we offer great value. So we think we have room to fully protect the margin.
That doesn’t mean customers are thrilled with the added costs.
This month, Jacob Herlin, a data scientist in Lakewood, Colorado, placed an order: a steak and guacamole burrito for $11.95, a Coca-Cola for $3, and fries and guacamole, which were free with a birthday coupon. The total was $14.95, before taxes.
But when he clicked to have the food delivered, the price of the burrito soared to $14.45 and the soda to $3.65, bringing the total to $18.10 before taxes, 21% more than before. he had picked up the food himself.
There was more. Mr. Herlin was charged a delivery charge of $1 and an additional “service charge” of $2.32, bringing the total meal delivered to $23.20. He tipped the driver an additional $3.
Mr Herlin said he didn’t mind paying for the delivery and wanted the drivers to be paid a living wage. But he said Chipotle wasn’t upfront with customers about the additional costs.
“They basically hide the fee in two different ways, via this base price increase and via the hidden ‘service fee,'” Mr. Herlin said in an email. “I would much rather if they had the same price and were just honest about the $5 delivery charge.”