Fast food feels more expensive than ever before, and people are sick of it. Here’s why.

Fast food feels more expensive than ever before, and people are sick of it. Here’s why.
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Fried chicken sandwich on bun with lettuce, pickle and sauce sitting in a pile of money
  • Fast-food prices have shot up since the start of the pandemic.
  • Analysts say fast-food prices feel particularly painful because they’re rising faster than grocery prices.
  • As well as commodity costs, restaurants have faced soaring wages.

Fast food isn’t as cheap as it used to be.

Gone are the days of McDonald’s dollar menu, Subway’s $5 footlongs, and NYC’s $1 slices.

Diners say fast food is getting too expensive and no longer represents value. Some say they’re placing smaller orders, turning to independent restaurants or cheap casual-dining chains, or just cooking more at home instead.

“At the end of the day, the consumer is fatigued” because of rising restaurant prices, Jim Sanderson, an analyst at Northcoast Research, told Business Insider.

Fast-food chains put up their menu prices during the pandemic in response to soaring food and labor costs. Analysts told BI that consumers feel like prices are still rising too fast because they’re comparing them to the slowing rate of grocery inflation.

Fast-food prices have been shooting up

Restaurant prices are determined by “two major categories” — food costs and labor costs, Citi analyst Jon Tower told BI.

In 2023, for example, for every $100 McDonald’s company-owned restaurants made in sales, about $31.12 was spent on food and paper, and about $29.60 was spent on payroll and employee benefits.

Prices of many of the ingredients used by fast-food chains, especially beef, soared during the pandemic because of factors including changes in demand and supply-chain problems.

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Restaurants also had to raise their wages to attract and retain staff as huge numbers quit in search of better wages, benefits, and working conditions during what was dubbed the “Great Resignation.” Average restaurant wages rocketed in 2021 in particular, data from the US Bureau of Labor Statistics shows.

"2022 was obviously characterized by very high inflation on the food side as well as labor, particularly after Russia invaded Ukraine,'" Sharon Zackfia, an analyst at William Blair, said. "And so we saw well above-average price increases start to filter into the restaurant space."

Fast-food chains put up their menu prices to reflect the higher food costs and payrolls. Price increases have varied massively by chain depending on factors such as the type of food, locations, and number of restaurants. Franchisees are largely able to set their own prices.

And though inflation of limited-service restaurant prices is much lower than it was a couple of years ago, it's still way higher than pre-pandemic, BLS data shows. Legislation in California that raised the minimum wage for fast-food workers to $20 an hour is pushing prices up further.

Grocery inflation is cooling

Fast food seems particularly expensive right now because grocery inflation is cooling much more rapidly, analysts BI spoke to said.

"What typically matters in the context of restaurants and restaurant traffic is the delta between grocery inflation and restaurant inflation," Danilo Gargiulo, an analyst at Bernstein, said.

Groceries, not rival restaurants, are the biggest competitor to fast-food chains, because people are trying to decide whether to eat at home or get fast food, Gargiulo said.

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At the peak of inflationary periods, prices of groceries rise at a much higher rate than fast food because food costs represent a much bigger part of grocery stores' expenditure than restaurants' spending. This happened during the pandemic, especially during 2022, when grocery prices shot up.

But the inverse is also true — grocery stores benefit much more than restaurants when food inflation cools. This has happened over the past year: grocery inflation has shot down dramatically, while prices at limited-service restaurants are still rising at rates well above pre-pandemic levels, as the chart below shows:

At grocery stores, where prices are determined mainly by food costs, "they've been able to quickly reflect lower food prices at the store level, whereas restaurants need to account for the fact that labor inflation continues to run ahead of food inflation," Tower, the Citi analyst, said.

Diners are getting fed up

Price increases during the pandemic were "actually well absorbed by consumers" because the vast majority of restaurants were upping their prices, Garguilo said.

But as overall inflation falls, "we would expect consumers to be … less tolerant of the big price increases that we've seen from the [restaurant] industry over the past few years," Bank of America analyst Sara Senatore told BI.

"It feels like what used to be cheap, not that long ago, is now expensive," Chad Frye, a cartoonist and illustrator based in California, told BI. He said he'd cut down his fast-food habit from four or five times a week to just twice.

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"I find that I do a lot more cooking at home now," he said. "It's much more economical."

Do you think fast food is too expensive? Email this reporter at [email protected].

Read the original article on Business Insider


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