Brands Feel the Pinch Now, But an Uptick Could Be in the Works
Quick-service restaurant franchises probably shuddered collectively to see that McDonald’s, the granddaddy of them all with 39,000-plus locations, posted a disappointing second quarter. Several other fast-food franchises are closing some locations, with one familiar name apparently on life support. So that prompts the question: Is the fast-food industry growing or declining?
A May Lending Tree survey underscores the challenges: 78% of survey respondents agreed, “Fast food has gotten more expensive, and I now view it as a luxury.” Yes, inflation has caused headwinds in the $387.5 billion U.S. fast-food market (per Ibisworld) and may ding a rosy projection in the International Franchise Association’s 2024 Economic Outlook, which forecast 2.2% growth in quick-service restaurant franchises.
Inflation Puts Damper on Traffic
Chalk it up to Economics 101, with consumers opting for cheaper meals. That shift stung McDonald’s, which reported its first global sales drop in 13 quarters, a downturn of 1% overall at stores open a year or more, Reuters reported. Those buying habits are likely to continue for a while; McDonald’s cautioned that same-store sales would remain depressed for the next few quarters, according to the Associated Press.
“Consumers still recognize us as the value leader versus our key competitors, but it’s clear that our value leadership gap has recently shrunk,” AP quoted McDonald’s Chairman, President and CEO Chris Kempczinski as telling investors during a July 29 a conference call. “We are working to fix that with pace.”
McDonald’s isn’t alone – it’s a case in point. Foot traffic at U.S. fast-food restaurants as a whole fell 2% in the first half of the year compared to the same period a year ago, AP reported, citing market research company Circana. David Portalatin, a food industry adviser with Circana, expects high inflation and rising consumer debt will depress traffic for the next five months.
‘Downward Trend’
Piling onto the gloom, The Takeout foodie website gave a rundown on “the downward trend… creeping into the fast-food industry.” In June, The Takeout reported these recent closures:
- An Arby’s in Lehigh Valley, Pa., went away in March. Last year the brand, known for its roast beef sandwiches, shut down a Santa Maria, Calif., restaurant that had operated for more than 30 years.
- Bojangles closed five restaurants late last year and early this year.
- Boston Market, once numbering more than 1,200 sites, now has a few dozen. In March, brand owner Jay Pandya said 50 stores remained open, although some sources give the total as 27.
- Burger King pulled the plug on nearly 300 stores in 2023 and will close a few more underperforming sites this year, CEO Josh Kobza said.
- Dairy Queen in March closed a New Ulm, Minn., site that was more than 70 years old. A Wisconsin DQ shut down in 2023, and one burger stand in San Antonio and another in Batesville, Ind., also have ceased operations.
- Hardee’s shuttered sites in Tennessee, Missouri and Illinois in 2024. Last year it closed franchise locations in a few states, including Georgia, Montana and South Carolina.
- KFC said goodbye to four stores, three in the Chicago area plus one in Poughkeepsie, N.Y.
- Papa John’s pizza will shut 43 underperforming United Kingdom locations.
- A multi-unit Popeyes franchisee in Georgia planned to close three Peach State restaurants that were operating in the red.
- Wendy’s said it would shutter more than 100 sites this year, with 27 of them gone by early June. (Wendy’s also opened 35 new locations during the first quarter of 2024.)
Now for Better News…
So what’s a fast-food franchise to do? Burger King, Jack in the Box McDonald’s, Sonic and Wendy’s wooed consumers with value meal deals this summer. And these brands have reported those deals delivered bumps in traffic.
Franchises also can take comfort in humanity’s insatiable love of fast food, with World Population Review saying the United States leads the globe in its appetite for burgers, fries and other standard fare. The average American spends $1,200 a year at quick-service restaurants, World Population Review reported, and 37% of Americans eat fast food on a daily basis. According to market research specialist Gitnux, 84% of Americans eat fast food at least once weekly. Old habits tend to live on.
Looking Ahead
One more reason for optimism: After months of raising interest rates to combat inflation, the Federal Reserve seems poised to cut them in September, The Wall Street Journal reported on July 31. A Fed rate reduction should bring down consumers’ major borrowing costs – for instance, car and home loans – as well as credit card interest rates. When consumers have more cash in their pockets, fast-food brands should bounce back.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, already sees a brighter forecast for McDonald’s, the current poster child for sluggish fast-food sales. “Even though things [traffic] are soft now, they should be getting better in the back half of the year … with better value on the menu,” he told Reuters.
So back to the question, “Is the fast-food industry growing or declining?” The answer could be, “It’s probably just in a temporary dip. No need to panic.”
