Fast food establishments originated as the cheap, quick alternative to a proper meal. Value customers earning under $45,000 annually were the target demographic until recently when inflationary pressures caused food prices to skyrocket. Minimum wage requirements, wage increases, and price gauging have all contributed to the rising costs and a drastic shift in the customer base. Fast food establishments are admitting that they are losing their value customer base amid record profits.
McDonald’s most recent earnings report surpasses EPS estimates by $0.12, with the stock rising over 11% in the past three months and 10.92% in the past year. The company admitted during its last earnings call that they are losing value customers as it is simply cheaper for consumers to cook at home. CEO Chris J. Kempczinski stated last year that the chain restaurant is now targeting middle- and higher-income consumers who, in turn, can no longer afford the higher-end establishments. “It’s clear that consumers continue to be more discriminating about what and where they spend,” he stated after the Q3 earnings announcement.
McDonald’s announced that prices are expected to rise 10% at a time when food prices are up 6.2%. CEO Kempczinski called this an opportunity for fast food to target new customers while providing bundled deals and smaller serving sizes to retain value customers, who are no longer needed as the main consumer base. The price of menu items varies by state, and a Big Mac combo could cost up to $18 in some areas.
The Economist established the Big Mac index in 1986 to establish a somewhat humorous gauge to determine purchasing power between nations. According to data from January 2024, Switzerland hosts the most expensive Big Macs in the world at around 8.17, compared to 5.87 in the EU and 5.69 in the US. Again, this is not meant to be a real gauge of PPP but an interesting comparison between nations.
Every fast food establishment, from Wendy’s, IHOP, Burger King, Chipotle, etc., is raising prices amid inflation, increased taxation, and minimum wage hikes. Yet the majority of establishments are posting record earnings each quarter and profiting big time on the middle class. Consumers are simply accepting high prices as the new norm and cannot differentiate price gouging from necessary increases due to inflation. The convenience of a meal on the go is now a luxury that the people who are preparing the food can no longer afford.