Is the world giving up on fast food? Or is it just becoming unaffordable?

The global fast food industry, long considered a staple of convenience and affordability, is facing a significant shift as consumers increasingly reevaluate their dining choices. Recent reports highlight a downward trend in sales and changing consumer behaviors, particularly at industry giant McDonald’s, signalling potential challenges for the sector.

In the second quarter, McDonald’s reported a notable decline in global sales, marking its first drop since 2020. In the US, same-store sales between April and June fell by nearly 1 per cent, while globally, the decline was around 1 per cent.

This downturn coincides with a broader trend of reduced foot traffic at fast food establishments as inflation-weary consumers opt for more economical alternatives.

According to McDonald’s CEO Chris Kempczinski, rising costs of food, labour, and paper – up by as much as 40 per cent in some markets – have necessitated price increases, which, in turn, have deterred some customers.

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The shift towards grocery shopping over dining out has been evident. Sean Dunlop, a Morningstar equity analyst, noted, “This shortfall was driven by sluggish traffic, with consumers shifting a larger share of meal occasions toward grocery stores.”

Similarly, Wedbush restaurants analyst Nick Setyan told CBS News, “When prices are cheaper at grocery stores, low-income households go there. When McDonald’s is cheaper, they go to McDonald’s.”

What are fast-food chains doing to increase their sales?

To counteract the decline, McDonald’s and other fast food chains have attempted to appeal to budget-conscious consumers with value meal promotions. McDonald’s launched a $5 meal deal in the US, following similar moves by Burger King and Wendy’s.

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Despite these efforts, the execution was criticised for lacking coordination. “McDonald’s hasn’t been able to communicate value as well as other restaurants, from a pure coordination standpoint with franchisees,” AB Bernstein restaurant analyst Danilo Gargiulo told Bloomberg.

The fast food giant’s struggle to maintain its “value leadership” is evident. Kempczinski conceded during an earnings call, “Our value leadership gap has recently shrunk,” acknowledging that some consumers no longer perceive McDonald’s as the best deal available.

Despite the introduction of the $5 meal deal, which exceeded initial sales expectations, McDonald’s still faces the challenge of convincing customers of its affordability.

Is the trend global?

The issues facing McDonald’s are not confined to the US. In Europe, McDonald’s has seen a decline in market share, particularly in France, prompting the introduction of a €4 Happy Meal to attract families.

In China, the company reported a drop in same-store sales, though it maintains its market share amid weak consumer sentiment. Furthermore, political factors have impacted sales, with the Israel-Hamas conflict contributing to a downturn in the Middle East.

In response to these challenges, McDonald’s has focused on innovation and strategic growth areas. The company has highlighted chicken, which now rivals beef sales, and is testing a new burger, the Big Arch.

“The hallmark of a great company is its ability to perform in good times and in bad,” said Kempczinski, expressing confidence in the company’s long-term strategy despite current headwinds.

Is fast food being perceived as luxury?

Amid rising costs, a growing number of consumers view fast food as a luxury. A recent survey by LendingTree revealed that 78 per cent of Americans now consider fast food to be an expensive option, with 63 per cent agreeing it should be cheaper than home-cooked meals.

Notably, 75 per cent of respondents stated that this is not currently the case. The survey highlighted that fast food price hikes have outpaced inflation, with a 41 per cent increase in costs since 2017 compared to a 35.9 per cent rise in the consumer price index.

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This perception is particularly prevalent among lower-income households and young families, who traditionally rely on fast food for convenience. As columnist Dan O’Donnell from the free market think tank the MacIver Institute, wrote in a blog post, “Fast food patrons are generally lower-income earners – many with young children – who rely on a quick, affordable meal before soccer practice or a band concert.”

With inputs from agencies