Restaurants Boost Traffic With Value Meals

August 13, 2024

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Fast food is usually synonymous with affordability and value, but over the past years, food inflation pushed prices too high for diners. Three in four Americans would eat fast food at least once a week, but now 62% say they’re eating it less due to rising prices, according to a survey from LendingTree, an online lending marketplace.

This sentiment didn’t fare well for restaurants, as their stocks underperformed the S&P 500 by around 10% on average in June as lowering consumer demand weighs on their top line, Goldman Sachs Research analysts noted.

In response to dampening demand, fast food chains have been offering value food items and meals through summer, waging a competitive war on value in their attempt to win back diners after years of food inflation.

Fast food meal prices hiked faster than wages

While headline inflation has been slowing to 3% year over year in June, limited-service meals rose 4.3% over the same period, according to the US Bureau of Labor Statistics (BLS) data. Drilling down, fast food meal prices have increased more than 41% since January 2017, Bureau of Economic Analysis (BEA) data showed. This far outpaces the 35.9% increase in non-manager wages over the same period per BLS.

This is reflected in consumer sentiments – 78% now see fast food as a luxury, especially for those with lower income, parents with young children, Gen Zers, and women, according to LendingTree’s survey.

However, restaurants are also facing a set of challenges from wage inflation partly driven by minimum worker wage hikes to increased consumer price sensitivity – and they may have reached the limit of how much consumers are willing to spend. Goldman Sachs Research analysts found consumers’ willingness to pay more has been relatively stable on a quarter over quarter basis, but they have been declining when compared to a year ago.

Willingness to pay more remained relatively stable quarter over quarter and year over year, although fast casual average trended down modestly

Source: Goldman Sachs Survey of 2000 Consumers, Goldman Sachs Global Investment Research

Recognizing this, the fast food industry ramped up efforts to offer more value meals, triggering an industry-wide competition for value. Many major restaurant companies have found the sweet spot – the $5 menu – where they offer promotional free food items with minimum purchases, value meal sets, beverage pairing menu, and more.

Will fast food value meals and promotional offers continue?

Early data seem to show that the value meal strategy is successfully boosting traffic in restaurants, according to Goldman Sachs Research analysts, but investors are skeptical whether this strategy could sustain traffic growth and increase sales in the coming earnings reporting quarters.

The good news for consumers is our analysts expect the value messaging and promotional offers will continue to ramp up further into 2024, as restaurants compete for traffic and seek to offer more value to influence spending.

They also noted that consumers are increasingly using mobile apps to engage with loyalty programs, a sign that consumers may be looking for more value when it comes to ordering food. In fact, consumer use of mobile apps for loyalty programs has been increasing consistently since 2019, according to a recent Goldman Sachs Research survey.

More than 60% of the surveyed consumers said that loyalty programs are important to their purchase habits, while skipping the line for convenience and speed of services is the second most important reason for using mobile apps.

Our analysts believe restaurants incorporating loyalty programs into their operations could help attract and retain customers.

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