The K-shaped economy is still a problem for restaurants
The economy is not getting any less K-shaped.
A new report this week from the consulting firm Revenue Management Solutions (RMS) found continued sharp differences in the dining habits of higher-income and lower-income consumers.
Forty-eight percent of consumers earning more than $100,000 say they’re spending a bigger share of their income than last year on dining out and are ordering takeout more often. That’s up 15% year over year.
The same percentage of consumers making $50,000 or less say they’ve cut back on casual-dining eateries and coffee shops, which is up 10% over the past year.
That adds to ongoing indications of wide differences in consumer spending habits between lower- and higher-income consumers. The National Restaurant Association has found that, while 80% of consumers have visited a restaurant over the past week, higher-income consumers were far more likely to say they did than lower-income consumers, with a gap of around 20 percentage points.
Generally speaking, higher-income consumers are always likely to say they’re dining out more often than lower-income consumers, for the simple reason that higher-income consumers have more money to spend. And restaurants are relatively easy to cut back upon when times are tough.
But the ongoing weakness among lower-income diners has created problems, particularly at fast-food chains. As we wrote earlier this week, McDonald’s CEO Chris Kempczinski said that executives expect a flat traffic environment for the foreseeable future.
In reality, traffic would have to improve to get to flat. According to RMS, traffic in August was down 3.5% compared with the past year. Average price was up 2.6% in the month, meaning typical fast-food chains lost business.
The fast-food sector needs a healthy dose of traffic to maintain their business models, which are designed to sell low-priced food to a large number of consumers. The sector is huge, with more than 187,000 restaurants that last year generated $294 billion in total sales, according to Technomic.
A sector that big needs a healthy contribution from lower-income diners, which constitute about half the population, and which tend to use fast-food chains with greater frequency than higher-income diners.
Inflation led restaurants to raise prices, which in many respects priced these consumers out of the level of visits they’d made in the past. The result is what our Technomic colleague Rich Shank calls “an affordability crisis.”
Chains have thrown roughly everything they’ve had at the problem. They’ve introduced record numbers of limited-time offers, established new lines of business, and are fighting a value war as intense as anything seen in the past two decades. They have more ordering channels and are improving both operations and food quality. None of it appears to be working.
In the meantime, franchisees are filing for bankruptcy, supposedly successful chains are closing stores, and chains keep changing CEOs hoping to find the right solution to their traffic problem.
But the simple fact is, lower-income consumers are struggling to navigate an economy in which everything costs more. And until something changes to ease prices or give them more spending power, this environment is here to stay.
