Fast Food Lost Its Value, Convenience Advantages

was quite a ride. Taco Bell is a super fun company. You know, the culture there was very empowering and we broke a lot of rules in the restaurant space and had a blast doing it.

a Dorito's Locos tacos and things like that. And by stratifying the consumer need states, it really enabled us to do a lot of deep ideation within each need state, which led to, you know, some pretty big innovations that really delivered against specific consumer needs, and it really we effectively drove actions ten years in a row, with the exception of a e Coali event and a a class action lawsuit which ended up being completely dismissed.

really around economic duress. You know, we were we were coming out of COVID and we started seeing inflation, and we thought, you know, there's a there's a big opportunity here to take almost like the University of Michigan consumer sentiment, you know, that level of understanding and then bridge that

with consumer attitude and visitation. Because I've been around a long time and we've been through peereriods of inflation and recession, and I've seen exactly what happens in the restaurant industry and by brand, we've seen it. So we thought it was a good opportunity to put this platform together. I

have two partners, Lynda Ashbrook and maher Minawala. We all worked together at Taco Bell and then between the three of us, we have over one hundred years of restaurant analytic and research experience just amongst the three of us. So we got together and built this platform and it's going really well so far. We've really uncovered a lot of interesting insight for a lot of brands.

and the service side was dead. And then once we opened up, the service side took off and the manufacturing side decline. But if you look at the restaurant industry in general, we are in a recession. Transactions are down about twenty percent over the last four years. So that sure sounds like a recession to me, right, So you know, try to disconnect it from the broader you know, recession for the country. We are in a restaurant recession, there's

no doubt. And even within fast casual and QSR and casual dining, you know, traffic is down, you know, two to four percent every year and just getting smaller. So that's that's a trend you cannot ignore, right, we are trying to ignore it. And everybody's taken a lot of price and we can talk about why they've been able to do that and why it's going to be much more difficult, but really we are shrinking as a industry in terms of number of visits.

accounts for about fifty percent of all restaurant revenues. Of all restaurants, about half of all revenue is generated by fast food, and almost three orders of all visits to restaurants are to fast food restaurants. So fast food is this huge segment, and they became that big for two primary reasons, for value and convenience. Those are the primary need states that fast food fulfills. You either don't have

the money or you don't have the time. So as the industry grew and ballooned in all these different chains, you know, starting way back when with an W and McDonald's, and you know even Taco Bell back in starting in nineteen sixty two, then burg King and all of these chains, they were fulfilling either a value or a convenience need. So if you look what's going on now is because of all the inflation that has taken place over the

last several years, restaurants. Fast food restaurants, they have a lot of labor and they had a lot of ingredient inputs that were inflating at a very high rate. Right, we come out of COVID and there wasn't enough labor, so labor at restaurants and hotels, so hospitality labor got very expensive. And the what did the companies do, Well, they just raised price. Right, their input costs or their food costs or way up as well, so they raised

raised price even more. So here you have this fast food industry, raised tons of price and yes, transactions were down some, but they were making more money. You know, they were able to basically take those price increases with impunity. Why because consumers were not price sensitive. We come out of COVID, nobody cared. People had lots of money, right, you know, five trillion dollars of stimulus money pays down

credit cards, people put it in the bank. They couldn't spend it on you know, things to do, so they bought everything on Amazon, or they bought houses. But they had a lot of excess savings and resources, so they didn't care when people came out of COVID. They just wanted to do what they wanted to do, and if restaurants were a lot more expensive. Sobit I have the money either on my credit card, you know the capacity of my credit card, or have the money in the bank.

Well that's no longer the case. If you look at what's happened the COVID money has been depleted for the most part, and credit card debt is at an all time high. It's like almost one point two trillion dollars

of credit card debt in this country. And so they've had to cut back and it really hit us January of this year, all of a sudden, you started seeing, you know, businesses were, you know, people are starting to put up negative same store sales growth, which means their transaction growth was significantly lower because everybody still were taking price. So it was a in reality, people just ran out of money and so they were forced to, you know,

make cutbacks. And by the way, restaurants are the number one way consumers cut back. If they're cutting back, it's restaurants spending the number one way.

like a traditional research scale. But affordability has been declining across Fast Casual and QSR since January, so it's been going down and it's even affordabilities lower in Q three than it was in Q two across almost every brand, I mean even big brands that are doing fairly well, their affordability and value for the money scores are continuing to deteriorate. But as it released to Fast Casual versus QSR, you have to think about why people were going to QSR.

People are going to QSR again for value inconvenience, and QSR is no longer of very good value. I mean, you know, not to pick on McDonald's, but you know a basic you know, big mac combo meal. It's like, you know, between twelve and fourteen dollars. That's a lot.

And the real issue is the cost of sales. The average cost of sales across fast food restaurants today is somewhere in the neighborhood of you know, twenty three to twenty seven percent, which means if I'm a consumer and I go and spend a dollar at a fast food restaurant, I'm only getting about twenty five cents worth of food. Right, And I remember I was going to fast food. I built it into my routine because I got a lot

of food for the money. Right. It may not as been as good as fast casual or casual dining, but it was a lot cheaper and it was a lot faster. Right. Well, it's not very cheap anymore. So if you think about fast casual, it might be a little bit more expensive in terms of price point, and by the way, that's not always the case, but it might be a little higher in terms of price point. But consumers will say, they do the math. It's what you get for what

you pay. So while it might cost just a little bit more, their perception of quality is much higher in fast casual, and the service experience is generally better fast casual. So again, what you get for what you pay. And now all of a sudden, fast food no longer has an advantage over a fast casual, right, So there's that value dynamic. Now let's think about something else. Let's talk

about the convenience side of things. The number one asset that fast food restaurants typically have is a drive through. Drive through is the ultimate in America culture, where everybody's in their car driving around, going to work, you know, driving on vacation, doing errands. Having a drive through was a very important asset still is still is an important asset. But now people have mobile apps and mobile apps. You know, you can order from any restaurant and they will bring

the food to you. So if you think about like this perfect storm of you know, post COVID, now a lot of people are still working from their homes, they are not driving as many miles, So all of a sudden, you have, you know, the mobile device. That secular trend of mobile is kind of in some ways neutralizing the advantage that traditional fast food restaurants had over fast casual. It makes sense, and you can access value through those mobile apps as well.

through traffics down ten. So if you're a if you're a fast food concept and you're writing a strat plan for a fast food company, and you show that you are materially losing value and you're losing business in the drive through, which I then interpret as we're losing our convenience advantage, value and convenience. That's not a good trend for that that segment.

I'll see you when I get home whenever. Right, And so that was a really important you know, link to our social interactions, right cars, and then of course eating as well, it always is. Eating has always been part of you know, how we socialize as humans. But but if you're if you're a Gen Z and even millennials to some extent, many were not in a big hurry

to get their driver's license. And look at with with you know, the Internet, which didn't exist when I was a kid, but you know social media platforms that that you get a lot of interaction there, you get a lot of self worth there, things that were not important. One the extras and the Boomers were really young, but the Millennials and the Gen zs, it really is about social media and being an influencer and creating content. You don't really need a car. Right, If you don't need

a car, then you're not using to drive through. So generationally it is also not a good trend for the fast food segment overall. It really helps, i said, neutralize

the advantage that fast food had over fast casual. And if you look at some of the really popular brands with gen Z right now and millennials, they're the Chipotles, they are the wingstops, raising cane Zaxby's brands like that which are doing very well, and even Starbucks to some extent, and we could talk about that a little bit later, but they also have a relatively younger consumer base, very close to Taco Bells actually, but not as young as

Chipotle does. But they have a young consumer base. And again think about the historically how wrong the Starbucks mobile app is and their ability to bring in younger users, especially over the last several years.

they're killing it. Yeah, traffic's been down, but their revenues are hitting all time highs. Their unit level economics are unbelievable. Their franchisees for most of the major chains, we're making more money than they've ever made. Right. They got their financing at historically low rates, so they could lever up like crazy and expand, right, and the average performance out there is hiding what's really going on. And what I mean by that is we're seeing earnings per share those

things moving up, margins going up. But that's all being masked because consumers were not price sensitive. They were artificially demand was artificially high given the price level of what's going out there. Now we're starting to see a reality of it, especially starting in January of twenty twenty four, traffic going down. Companies posting very very low digit single same store saying or negative same store sales, which means

their traffic is meaningfully lower. The need to start pushing on you know, value, you know, and we're seeing that obviously, right, you know McDonald's doing their five dollars meal deals. We can talk about you know, my outlook on that, because I'm kind of bearish on it actually, But you know, this is really the pivot point twenty twenty four. You know, all the things that were masked in twenty twenty really twenty one, twenty two, and twenty three are really now

coming to a pivot point in twenty twenty four. And I believe in twenty twenty five will be a difficult year in the restaurant space for many brands.

popular chicken sandwiches are not in there. So it's kind of a it's a it's more like a nod to value as opposed to really resolving the value problem that McDonald's has. McDonald's has a significant value for the money problem. Significant Like, they took a lot of pricing and again they made a ton of money. But now what's happening is their visitation is going down. So doing a five dollars meal deal is to me a you know, it's what they want to do and what they need to

do are two different things. They want to for value but not have any impact of margins. But that's not what they need to do. What they need to do is give more food for the money their cost of sales. And again I don't know the specifics for that brand. Again, McDonald's a great brand. I'm not in any way taking away the profitability or the you know how big an Americana it is, but their cost of sales is too low.

Consumers want more food for the money, right, So the five dollars meal deal is a nod now our insight platform, we saw that in Q two that McDonald's three month reach, so the percent of consumers that have been in McDonald's in the past three months, we saw that go up in Q Q. Yeah, Q two versus Q two year ago just a little bit, but now we're seeing it lower than prior year, right, And we're looking at their affordability and value for the money scores and they have

not materially changed that five dollars meal deal did not materially change consumer's net perceptions of affordability or value for McDonald's, right. So that brings me to the next point, which is how else do brands offer value out there? And that is really through their mobile app. So you can if you download the McDonald's mobile app, you can get some pretty decent deals on it. Right, you buy a six

piece McNugget, you get one free. All right, Yeah, it's you know, it's five and a quarter, but you get twelve for five and a quarter, So that's that's not a bad deal. Right. Here's the problem. McDonald's largest age cohort is over forty five, and by the way and growing, the percentage of past month McDonald users that are over forty five is significantly higher than the percentage of their

past month users that are under forty five. So let me translate, McDonald's is more about gen X and boomers than they are about Gen Z and millennials. Right, and guess who uses mobile apps? Gen Z and millennials at a significantly higher rate than Gen X and boomers significantly higher. So McDonald's largest cohort is gen X and boomers. Right. They aren't really getting access to value to the mobile

app because they don't use it as much. So again, I think what McDonald's is going to need to do is they're going to have to make a material investment in their cost of sales in order to legitimately bring back transparent and accessible value to the masses because they are not there now. I mean an average a medium French fry in the McDonald's near my house there, they're almost five dollars for a medium French fry. It's crazy, right,

I mean, people just aren't going to do it. I mean they do it, but so really that's my that's my takeaway at McDonald's I think, I think again, going back to that insight, what what their operators need to do and what they want to do are two different things. They need to give more food for the money to the masses in an accessible way, and they're trying to

get around it by reducing the breake. Even their five dollars meal deal is their second tier sandwiches, right MC chicken or a mcdoubell, which is not the ones that people really want. I mean, they'll lead them right, and then they get you know, their small fry and small drink and if you look at their combos, that's not what they sell. So there is a there is a compromise to get to the five dollar price point.

to get around it, really focus it. I'll tell you a quick story. It's I was on the executive team meet at the executive team meeting, and I asked a question. I used to give the state of the business update every Monday morning, and I remember I asked the executive team a question. I said, guess what happened today? And I said, well, today is a very important day because this was back in I want to say two thousand and one or two, or maybe two thousand and three.

I said, today is a day the text messaging surpassed phone calls as the most common way of communicating. And I said, how many of you in this room know how to send a text message? And there are I think we had seven people on the you know, the executive team and like to raise their hand. So, without calling out any names, I said, so, you guys are running this company which is basically a millennial skewing brand.

Most of our employees are millennials, and you don't know how to communicate and the number one way that millennials communicate, I said, I am changing my objective this year to one thing, and that's to help to drive a millennial mindset through this entire corporate office, which we call the Restaurant Sports Center, as well as you know, the broader organization, and and we did lots of things to make that happen, and the whole, the whole you know, corporate office got

behind it, and we really did well. I mean, Taco Bell was very early in the social media, very early. We you know, they saw the power of it, and we had lots of young, hot shot marketing guys that are you know, one or two years out of graduate school MBAs, and those guys really got behind it. And again a lot of those people are leading some big organizations now as marketers.

very young they are. I don't have the numbers in front of me, but something like between seventy and eighty percent of their past month users are gen zs or millennials right way up there. Raising Cain is another one. Chipotle has a very very high percentage of their customer base that is under forty five. That's kind of the proxy we use for gen Z and millennials, whereas the more traditional QSRs. McDonald's definitely skews much older. Burger King

excus much older. Wendy's is much older, not as old as Burger King and McDonald's, but they do now at Taco Bell again, they're about fifty to fifty, right. Starbucks and Taco Bell are about fifty to fifty, so half of their users are under forty five, and half of the users are over forty five, so it really can. I'm not saying it's it's not the only factor, but

it is an important factor. And I didn't quite answer your question before around what's going on with gen Z's but they are significantly more hopeful about the future and significantly less concerned about their financial situation. And when you put that together, they don't cut back as much on spend as especially like the boomers. The boomers cut back the most millennials or the extras, and the boomers cut back the most. Millennials are starting to need to because

they are still in you know, important earning years. Yeah, but our platform shows very clearly by brand, which ones, which brands are skewing lower generation, and what's going on with their level of financial concern and it matters.

they move through. You know, the restaurants is there's a lot more choices now than they used to be, right, and I'll tell you it's there's a lot of exciting stuff out there. Chicken, right, Chicken is big right now, look at again some of the most top performing brands is you know, Wingstop not raising canes, axe Be's even Chipotle when they when they ran chicken ol pastor that

was kind of their their Q two numbers. You know, that broadly appealing, you know, with different sauces and Wingstop you know a lot about the sauces and the dipping. You can take a you know, a protein like chicken and bring a lot of flavor to it. Right. That's you know, that's in addition to you know, the Popeyes of the world, when the chicken sandwiches became these you know, the whole chicken breast fried, I mean blowing outside the bun, you know, so big and will even fit in the bun.

And and then you know, younger consumers, you know, you hear that they are a little more down on steak and cows because of you know the environment and you know,

carbon dioxide and things like that. Thing I guess, but it makes sense, right if you look at the kind of the secular trends that are going, and the secular trends are you know, you know, the millennials are the biggest generation ever through but there's always a new one coming mobile application, right, That is a secular trend mobile adoption, and then you just kind of overlay that with what's

the landscape in the restaurant space. These traditional qs rs have these older, you know, customer bases that are less flexible. They may be more loyal, but you know, they don't want another app on their phone. Some do, but most don't, and it's creating a tech barrier for growth. So you know, I'm having worked on a lot of marketing calendars and

a lot of product developments. One of the things that you want to do in the restaurant space is give consumers more reasons to come to your brand more often. And the way you can do that is you can do it through value. That's one way, but also innovation, right, taste innovation, flavor innovation, and those brands that bring a lot of flavor innovation are doing better overall all else equal.

That's one of the that's one of the strengths that Taco Bell has is they are they are very strong product innovators, and you know, sometimes it's very similar to the last project product that they launched. But overall, if you can upset that purchase cycle and get someone to come in three days sooner than they normally would and their purchase cadence, it really makes a difference. And Taco Bell did better than almost all major QSRs and Q two.

They put up a plus five same store sales, which was, you know, better than all the other major brands. It wasn't Chipotle numbers or Winstock numbers all right, but it was still pretty good. They're a smart group over there there. They know what they're doing, and they have good franchisees. They work together, and that's a you know, that's a challenge for McDonald's because their their franchise relationship from everything

I've read, can be a little contentious at times. And you know, the decision for them to extend the five dollars meal deals through I think they said through December at the end of the year, to me is symptomatic that they probably got a response, right, you know, their earnings are coming out. I don't know when they release the first week in November, I'm guessing. I'm sure they got a response. But again, as a as a marketing

strategy guy, I'm looking at the consumer data. I don't see any improvement in value for the money, and I just know how consumers respond to value and they're going to have to step up their game if they want to have a material reversal in what's going on with traffic. Long term.

they take it off. You know, I don't know about your your mobile device, but I mean I probably have fifteen or twenty more apps on there than I had, you know, eighteen months ago. You know, it's like, you know, how many pages you have to scroll through to find that you know the app you're looking for, and then heaven forbid, somebody changes the color of the app you're used to and now you can't find it at all, right, But yeah, Jeff, definitely, I don't know the number, but

younger consumers definitely going to have more apps. But you know, they are probably more fickle as it comes to how many apps they're going to have, So keeping you know, people engaged with that app is important. And I you know, when I talk to the executives at these brands, everybody understands that app users give much higher brand association scores for brands. So for example, again we'll just to give

McDonald's some some favorable light here. If you're a McDonald's app user, right, you are going to give McDonald's much better scores on value for the money, right, quality of food, all those things, and you go more frequently. So people that always use the app go by far the most frequent to all these brands. Now, is it that people who go to these brands often the most often download the app, or is it that if you have the app,

you go more frequently? It's both, right, is the dog wagon the tail or the tail wagon the dog It's both. It's got to be both. But I'll tell you know, innovation in your app is going to be you know the gen z and millennial battleground. Right, it's there are some really good apps out there. Domino's has a great app, right, Chipotle has a great app, Starbucks has a great app. Like, those are the gold standards, and they have by far

the highest level of app adoption. You casual dining is is you know, coming coming from behind, you know, a lot lower adoption, but you don't need it as much generally. But again as a as a strategy, you know, increasing mobile app adoption is something you can't ignore. You just can't ignore it.

away from home are restaurants? Right? Since twenty seventeen. Since January first, twenty seventeen, I track all this stuff. Restaurant inflation. Prices in restaurants is up forty percent since January of twenty seventeen. Groceries are up thirty percent. Well, that's a ten point difference. And by the way, that's been going on now for two years. That restaurant inflation continues to outpace really more than too well really really you know

seven But there are different periods of time. But if you look at it, and right now every month that goes by, restaurants are getting more expensive relative to grocery prices, right and again, restaurants are you know, they you know, they have to hire people to make it, so they have to buy the food, and then of course they have to pay for you know, the asset they have, you know, utilities they have, all these other things, and labor costs. Labor costs are actually have settled down a

lot in restaurants and hospit mentality. Wage inflation in restaurants and hotels is the same as the overall population. So that's good for restaurants and that they're not going to have to take a higher level of pricing to offset their labor compared to everybody else. But every month that goes by, groceries are getting relatively cheaper than eating out.

That is not a good trend, right, So the you know, to me, the obvious reality is if you have a basically a consumer base that's in recession, your demand is down. We know there's a value for the money problem. We know there's affordability problem. And you think about all the profits that were made over the last three or four years.

Restaurants have made a lot of money by being able to take all this price which has very high flow through right with very little consumer you know pushback, right, In other words, traffic's down a little, but sales are up a lot, Right, You're gonna have to make some investments back and cost of sales, right, even if it means and again for publicly traded companies, yeah, you can innovate, thanks, find a way to automate take labor out of the restaurant,

and and all the smart brands are doing that. But this is a reality. And again I was looking at Q three data right before this podcast, our Q three data, and again all the affordability and value for the money scores for all the major fast casual and fast food brands continue to slip. So that's that's a tough trend to acknowledge.