Why Fast Food Prices Can Never Go High
With the ever increasing commodity costs, it can be surprising to see how fast food chains managed to keep their products affordable. Indeed fast food prices have never risen as fast as other commodities do. Well, fast food establishments are compelled to keep their prices low to stay competitive against their greatest rival: eating in.
Wendy’s hamburger segment for instance managed their downturn but the demand for their industry remained flat.
“We can’t deny the fact that buying fresh beef from your local butcher and grilling this in your own home is relatively much cheaper than eating out”; Todd Penegor; Wendy’s CEO said.
Though uncooked ground beef was 10.2% cheaper a year ago, reversal of the cost were made with the help of the cheaper corn provided for feeding the cattle. Also, poultry prices are cheaper up to 3% from last year.
Hence, cost of home consumption dropped to 0.2% in July while eating out increased its cost to 0.2%. This sets a trend that leads to unchartered territory.
For the past 24 months, fast food chains increased their prices up to 6.0%. On the contrary, foods at home are 0.7% cheaper compared to the prices two years ago. According to the Bureau of Labor Statistics, there has been a big gap between the two, with a more accelerated shift in the past year. Meals at home are 1.6% cheaper while fast foods are 2.9% more expensive.
“Fast food chains are struggling with the upward labor cost pressure and the cheap home meals. This can be bad for restaurant sales and traffic in the next quarters”, John Staszak, Argus Research analyser said.
“Although favorable commodity costs can work on our advantage, rising labor costs in the market can be hard for us. Hence, we find ourselves in a situation where we need to balance between price increase and our desire to keep a strong value proposition”, Kevin Ozan; McDonalds Chief Financial Officer said.” In the second quarter, there is an increase of 3% in menu prices”, he added.
With the rising labor costs, will a $15 minimum wage suffice for fast food employees? And with the lowered demands of fast foods in the market, a high minimum wage can be hard in this type of trade.
“In the second quarter, our sales declined to 3.7% as people shifted from us to supermarkets”, Jack in the Box reported. And other similar establishments shared the same sentiments. And the hardest part is that they can’t increase the prices of their commodities to make up for their loss, otherwise, this will only drive their customers away even more.