This week, the Bureau of Labor Statistics (BLS) announced that the Consumer Price Index (CPI), a primary inflation gauge, increased 0.4% during February 2024. Over the last 12-months, it is 3.2% higher. My first reaction was to wonder where the people collecting the data are buying their groceries. My second was to remember eating out at restaurants is even more expensive.
A couple of weeks ago, I wrote about how prices at McDonald’s would seem to be at something of an inflection point. Admittedly, I am not an expert on the company. However, recent news stories about $18 Big Mac meals would suggest a trip to the Golden Arches is getting too pricey for many Americans.
As you can imagine, upper-scale burger joints like Five Guys are even pricier. One consumer’s (@WallStreetSilv) receipt recently went viral. How does $21.91 strike you for a burger, fries and a soda at a fast food restaurant? Shoot, five guys eating at Five Guys would drop right at $110 for lunch. No booze included.
Not surprisingly, it seems like a lot of these places are closing their doors.
The closest fast food district to my house is in an area known as Eastwood/Irondale. While they are technically two different areas, they sort of blend together, and not necessarily in a good way. In any evident, a drive through the area showed a McDonald’s had closed, so had a Krystal’s, and a local hot dog chain known as Sneaky Pete’s had also recently shuttered.
I won’t bore you with a complete list of closures in the Birmingham metro area. Suffice it to say, there are more empty restaurants now than there were a couple of years ago. If recent bankruptcy announcements from major franchisees are any indication, more are on their way.
But why is this happening? Why now?
First things first, everything is more expensive than it was, from food to labor. However, the perceived value of, say, that Big Mac combo hasn’t risen in tandem. That is a real problem for restaurant owners. Further, burger joints aren’t just competing against other burger joints. No, they have to compete against every other establishment which is trying to put food in your stomach.
In other words, there are a lot of alternatives for the hungry traveler coming off the interstate or the harried parent who is trying to get dinner on the table. Burger King and Wendy’s aren’t McDonald’s only competition. So is Chick-Fil-A, Arby’s, Taco Bell, KFC, Subway, Pizza Hut, Dairy Queen, Panda Express, Panera Bread and a host of others.
In order to keep all of these places profitable and growing, they need to have more Americans eating more fast food more frequently. Any hiccup in that first sentence presents real problems. Let me just say $18 Big Mac combos and $22 for one at Five Guys are just that, real problems.
You see, with a few notable exceptions, most of these places have been in a race to the bottom for years. They have extra value meals. Unlimited free soda refills. So-called Happy Hours for their slushes and selected food items. Extra value meals. $5 foot-long sandwiches. A deal on this and a special on that.
While each individual promotion might move the short-term revenue needle, the longer-term message to consumers is: “you shouldn’t have to pay very much for our food.”
In essence, much of the fast food industry has decided to compete on price, as opposed to product. So, what happens to consumer demand when the cheap alternative goes up in price?
You don’t need to be a rocket scientist to answer that question.
There are simply too many outlets producing essentially the same stuff at roughly the same price points. Further, all of these places are competing not just with each other, but also with the cost of making, say, a ham & cheese sandwich at the house. Grill it and call it a ‘croque monsieur’ if you would like.
This has a point, sort of.
The persistently higher prices of things like beef and labor are going to wreak havoc to the fast food industry. Some well-known brands, which I won’t mention here, are in very real danger of vanishing in the not-so-distant future. Others will shrink so significantly, you might not know where one is any longer.
Obviously, this will have a detrimental impact on employment in an income bracket which can ill-afford to lose opportunities of any kind. Even more obviously, this will make a bad problem worse, and could lead to larger societal problems moving forward.
While you might think it a pretty huge leap to equate an $18 burger value meals with societal discord, history suggests economic disenfranchisement often contributes to, let’s call it, anti-social behavior. As such, if overpriced, average and not-so-fast food turns offs consumers and costs jobs, then, yes, I will draw a correlation between high-priced Big Macs and larger social problems.
Admittedly, the correlation might not be 1.00. However, I would be willing to bet you a Big Zax Snak Meal and a side order of fried pickles it will still be positive.
So, now you know where my mind wanders when I read about hotter than expected inflation, as it did this past week. I think of potential problems in the fast food industry. Their negative impact on jobs and the resulting economic disenfranchisement among a wide swath of American people.
However, people, the Pollyanna that I am, I always come back around to something positive. In this case, it was fried chicken and pickles. Because, I mean, after all, who doesn’t like fried chicken?
Have a great weekend.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this any every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.