Consumers aren’t cutting back on fast food

Consumers have continued to pick up chicken nuggets, tacos, and coffee from some of the nation’s largest restaurant chains despite concerns that higher gas prices from the war with Iran would translate into eating out less.

Since the conflict in the Mideast began more than two months ago, investors and analysts have been wary that consumers, particularly lower-income families, could cut back on their spending at restaurants. The average price of a gallon of regular unleaded gasoline rose 35% during March, according to the AAA auto club.

But over the past couple of weeks, many restaurant chains, including McDonald’s, Burger King, Taco Bell, and Starbucks, reported strong sales in the first quarter of the year, suggesting that higher fuel costs did not immediately cause customers to pull back their spending.

Since the war with Iran began more than two months ago, investors and analysts have been increasingly concerned that consumers, particularly lower-income families, could cut back on their spending at restaurants. The average price of a gallon of regular unleaded gasoline rose 35% during March, according to the AAA auto club.

But McDonald’s solid results in the quarter echoed what several other large restaurant chains reported over the past week. Starbucks, Taco Bell and Burger King all reported strong sales in the first quarter of the year, suggesting that higher fuel costs did not cause customers to pull back their spending at restaurants.

Like other chains, McDonald’s has leaned heavily into its value meals to pull consumers through its doors. In April, McDonald’s expanded its value options with a new menu of items priced under $3 and a new $4 breakfast deal.

But some analysts caution the first-quarter results, which included only one month of higher fuel prices, may not reflect how consumers’ budgets are being strained as the war moves into its third month and as prices at the pump climb higher. On Thursday, the national average for gas was $4.56 per gallon, according to AAA.

“Gas prices will affect the fast-food core consumer by reducing their disposable income. It just takes some time to trickle down,” said Darren Tristano, chief executive of Foodservice Results, a Chicago-based research and consulting firm. “We’ll see more of that impact by the end of May than we have in the last couple of months.”

Some chains said they had already seen some consumers pulling back. Domino’s Pizza missed analysts’ estimates, with sales at U.S. stores open for at least a year rising only 0.9% in the quarter.

Pressure intensified particularly in March, “because of growing consumer uncertainty,” Russell Weiner, chief executive of Domino’s Pizza, said on a call with Wall Street analysts and investors in late April. “Consumer sentiment hit COVID-level lows, and ongoing inflation continued to impact purchase decisions.”

Executives at Brinker International, which owns Chili’s Grill & Bar, which has had 20 consecutive quarters of same-store sales growth, noted some customers were being prudent with alcohol and dessert purchases.

At McDonald’s, executives said that while value meal offerings continued to draw customers despite higher fuel prices, the spending outlook was cloudy because of the war.

“What’s obviously going on is the macro environment and consumer sentiment,” Chris Kempczinski, chief executive of McDonald’s, noted on a call early Thursday with Wall Street analysts and investors. “That’s not new news, but I think probably it’s fair to say that it’s certainly not improving and may be getting a little bit worse,” he said. “How that plays out in all of this, I think, is an open question.”

The question of what sort of link there is between gas prices and consumer spending at restaurants is the subject of debate among analysts. When restaurant data firm Black Box Intelligence examined restaurant traffic patterns and gas prices since 2017, it found that when prices exceeded $3.50 a gallon, consumers not only cut back but also traded down from sit-down dining to more fast-casual and fast-food chains.

But Peter Saleh, an analyst at investment banking firm BTIG, said in his 20 years of covering restaurants, he has seen little correlation between gas prices and restaurant traffic. “I think when gas prices climb and breach certain psychological thresholds, there could be a short-term pullback when consumers stop spending money everywhere on anything,” he said.

Instead, Saleh said signs from first-quarter earnings at many large restaurant chains suggested that the bifurcation in consumer spending between high- and low-income households is becoming more pronounced.

Chains that have a larger higher-income consumer base, like Starbucks, reported strong sales in the quarter. At the same time, restaurants that tend to draw more lower-income households were more of a mixed bag, as that group of customers continued to spend cautiously.

In the battle for the lower-income household dollar, fast-food chains are leaning into their value meal and snack propositions. Taco Bell, which is part of Yum! Brands reported its eighth consecutive quarter of same-store sales growth, largely because of its line of food offerings priced at $3 or less.

Likewise, McDonald’s expanded its value options in April with a new menu of items priced under $3 and a new $4 breakfast deal.

But many restaurant chains warned that continued higher fuel costs — as well as soaring beef prices — could squeeze profits and dampen consumer spending, especially among lower-income households.

Shares of Shake Shack, which also reported quarterly earnings Thursday, plunged 30% in early trading to about $68. Even though its same-store sales rose 4.6% in the quarter from a year earlier, the company reported a loss of $290,000, on a combination of higher beef prices and investments in technology, compared with a $4.2 million profit a year ago.

On calls with analysts and investors over the past two weeks, some restaurant chains warned that higher fuel prices because of the war in Iran will likely lead to increased inflationary pressures on the restaurants and consumers later in the year.

“Obviously, based on what we know today, I think we certainly think there’s potentially inflation on the way” toward the end of this year and into the beginning of next year, Ian Borden, chief financial officer of McDonald’s, said on the company’s call Thursday.

Borden said the company expected inflation on restaurant food and paper products to run in the “low- to single-digit range” for this year, adding that McDonald’s would be insulated from some of those increases because it had hedged a good amount of those expenses.

This article originally appeared in The New York Times.