Cash-strapped consumers are looking for cheap food options. Who will serve them?
American consumers are searching for cheap meals, and a battle is brewing over who will serve them.
More and more, companies that sell food are noticing that customers are looking for deals and value packages. Grocery stores are building off their value proposition versus eating out, while restaurants are introducing more value meals.
“While food inflation has impacted every meal occasion, inflation and food-away-from-home has been even higher than food-at-home inflation since 2019,” Kroger chief executive W. Rodney McMullen told analysts on an earnings call on Thursday. The grocery store chain reported better-than-expected earnings, in part because of a rise in private label sales and digital sales.
Companies like Kroger are navigating how to please a customer that’s been consistently gloomy. The University of Michigan consumer sentiment index showed consumer confidence slumped for the third month in a row as high prices and high interest rates weigh on their minds.
“Within our most budget-conscious households, we are starting to see positive momentum,” McMullen said. “Historic multi-year inflation across the economy, high interest rates, and reduced government benefits disproportionately affect these customers and are influencing their spending behaviors.”
Darden Restaurants, meanwhile, has resisted couponing or deep discounting amid a slowdown in sales at its Olive Garden and Longhorn Steakhouse locations. “We're not going to do things to buy sales, even with the increasing discounting our competitors are doing,” Darden chief executive Ricardo Cardenas told analysts on Thursday.
While the price of most products has swelled in the past few years, cooking a meal at home remains solidly cheaper than picking up. The cost of groceries has risen 1% in the past year while the cost of eating out is up 4%, according to the most recent Consumer Price Index released June 12.
Still, consumers are spending more on eating out, Goldman Sachs economists said in a June 12 research note. That coincides with “a step-up in value competition” among fast food chains.
“Strong pricing tailwinds are beginning to fade and value competition is stepping up as we come out of the post-pandemic inflation surge,” they wrote.
Yum! Brands Inc, which owns Taco Bell, reported in its most recent earnings filing on May 1 that its Cravings Value Menu (a selection of 10 items under $3) has grown in popularity. Popeyes, owned by Restaurant Brands International, has pushed several family meal promotions for under $30.
McDonald’s has also entered the battle. After raising its prices beyond recognition, the chain is set to release a $5 meal deal later this month.
“We’re committed to winning the value war,” Joe Erlinger, president of McDonald’s, told Bloomberg News.
Investors are cheering that news, with the stock up about 2% on Thursday afternoon. Even so, there are worrisome signs that this so-called “war” to secure market share among value-conscious consumers is a zero, or even negative, sum battle when it comes to the fast-food industry at large. One need look no further than one of McDonald’s competitors: Chipotle, where shares are down more than 6% in their worst day of the year.
