The Fast-Food Industry's Big Mistake

Doc's note: For decades, if you wanted a cheap, filling meal, you'd head to your favorite fast-food joint. But today, the fast-food industry is experiencing an identity crisis...

Marc Chaikin – founder of our corporate affiliate Chaikin Analytics – explains what's happening with fast-food prices and what you should be looking out for, as an investor...

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We all feel it...

Consumers are frustrated with high prices.

And when folks eat out, they don't feel they're getting their money's worth.

As I recently explained to Chaikin PowerFeed readers, it's a big trend that has hit the U.S. restaurant industry.

Just look at America's fast-food king – McDonald's (MCD).

Like Chipotle, McDonald's suffered its own social media crisis last summer. Someone posted a picture of a company menu in Connecticut on social platform X. It showed the price of a Big Mac combo meal at nearly $18...

McDonald's fought back quickly. The company called the location's price an "exception." It also noted that the average price for a Big Mac meal came in at $9.29.

The online outrage died down quickly. But McDonald's still felt the pinch from consumers cutting back...

Fast-Food Prices Are a Real Problem Now That Sales Have Taken a Hit

In July, the company's quarterly results showed a 1% drop in U.S. sales. That marked the first decline since 2020. CEO Chris Kempczinski summed things up by saying that "the consumer... is being very discriminating."

Starbucks (SBUX) saw the shift in consumer behavior even earlier...

The coffee giant has been struggling with declining traffic for more than a year. The company missed sales and profit targets repeatedly in 2024. And on January 28, it posted its fourth consecutive quarter of declining sales.

You probably know what's going on... even if you only eat out occasionally.

Yes, we're all tired of inflation. And most folks realize that restaurants are struggling with rising costs.

But when customers are paying more, they won't put up with getting less than they're used to.

Portion sizes are one example. Food quality is another. Even little details like condiments and extra napkins become important when we're paying higher prices.

More than ever, folks want to feel like they're getting a decent value.

Fast-Food Price Increases Soared Past Inflation

Last year, the folks at FinanceBuzz went through 10 years of price data for a dozen fast-food chains...

They found that prices have jumped about 60% on average. McDonald's was the worst of the group – with a 100% average increase in prices. At 39%, Subway and Starbucks tied for the lowest surge.

Below, you can see the breakdown for all 12 chains...

Notably, inflation was roughly 31% over the previous decade.

That means that fast-food prices surged at nearly double the rate of inflation since 2014.

These numbers also explain the results of a 2024 survey by consumer-finance company LendingTree...

It found that 78% of Americans view fast food as a luxury.

That's an incredible number.

Fast food is supposed to be a cheap meal option. We know we shouldn't eat it often. But sometimes, a greasy burger and fries hit the spot when you don't have time for a proper meal.

But things seem to have changed...

Fast-food prices have exploded in recent years. And now, 3 out of every 4 Americans think of it as an expensive treat – rather than a cheap alternative when you're on the go.

In Response, Consumers Are Eating Out Less

The LendingTree survey also showed that 65% of people said they're shocked by how expensive fast food has become. And 62% say they're eating out less often due to rising prices.

Folks, I'm probably not telling you anything you don't already know. But the numbers are pretty shocking. And they prove that fast-food prices are out of control.

More importantly, rising prices have triggered a "value war" in the restaurant space...

Put simply, folks realize they're getting charged too much. And they've become super-conscious about the value they're getting for their money.

Restaurants know they have a problem. But it's not an easy fix...

After its $18 Big Mac fiasco, McDonald's quickly rolled out a $5 meal deal. And on a conference call, executives admitted that poor "value execution" contributed to last year's sales decline.

Last month, quarterly results from McDonald's showed a 1.4% decline in U.S. sales. In the press release, the company mentioned its focus on providing customers with "outstanding value."

McDonald's is holding up better than a lot of competitors...

As I mentioned earlier, Starbucks' sales have been stuck in a tailspin for four quarters.

Folks, this is a crisis for the fast-food industry. It's changing consumer behavior.

And I recommend you watch it closely.

Good investing,

Marc Chaikin

Editor's note: Marc using his Power Gauge system to discover the best opportunities out there. During the market bottom in 2020, this system flagged nine 20%-plus winners – all with holding periods of less than 90 days.

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