Scaled Limited-Service Restaurant Brands Are Best Positioned for the Current Environment

Given the current inflationary environment, the fact that food prices have been soaring over the past year is hardly surprising—the Bureau of Labor Statistics’ Consumer Price Index report for September 2022 showed year-over-year food inflation up 11.2%. However, the cost of purchasing food at grocery stores has spiked far more significantly than the cost of dining at a limited-service restaurant, attracting budget-conscious consumers and creating a shield for limited-service restaurant operators to increase menu prices to offset significant food cost and labor inflation.

The numbers are compelling: As of September 2022, the cost of grocery store food purchases had jumped by 13% since August 2021, according to the U.S. Department of Agriculture. Meanwhile, limited-service restaurant prices rose by just 7.1% during the same period. That’s a wide enough inflationary gap to make a case for the value proposition of eateries that offer a fast, easy, and inexpensive option for getting food without fuss.

Consumer Appetite for Bargain Dining

Perennially pressed for time and still recuperating from a lengthy period cloistered by COVID-19, many consumers are hungry for a return to restaurants. At the same time, concern about broad-scale inflation pushing up expenses is driving a trend toward frugality as consumers look for ways to bring their budgets back in line. Sitting right at the sweet spot of those two competing consumer desires are limited-service restaurants, which serve meals while keeping service to a minimum.

Research suggests that while some consumers are responding to higher inflation and corresponding price hikes by eating out less, a significant percentage are choosing to move down the value chain of dining spots rather than give up the practice. Some 30% of participants in "The Why? Behind the Dine," a recent consumer survey conducted by marketing firm Acosta, reported opting for less expensive restaurants, a trend that bodes well for limited-service restaurants.

What’s more, limited-service restaurants have a track record of outperforming other segments in times of financial stress. During the Great Recession, $1 billion-plus quick-service restaurants and fast-casual brands saw same store sales increases in 2008, 2009, 2010, and 2011 of 2%, 1%, 2%, and 3%, respectively, suggesting that consumers turn to the category in belt-tightening times.

"Historically, limited-service restaurants have demonstrated that they have the pricing power, operational excellence, and economies of scale in marketing and purchasing ability to successfully navigate business cycles," said Craig Wolf, Group Head for Consumer and Retail Corporate Banking at Fifth Third Bank. "We believe the segment is well positioned to adapt to today’s environment of a strained lower-income consumer, commodity inflation, supply chain and labor challenges, rising interest rates, and an economic slowdown."

Limited-service establishments—where customers typically order and pay in advance at a counter and guest-server interaction ends when the food is provided—generally fall into one of two categories:

• Fast-food restaurants (McDonald’s, Taco Bell, Wendy’s, etc.) that emphasize providing food quickly and inexpensively.
• Fast-casual restaurants (Chipotle Mexican Grill, Panera Bread), which are a step up from fast food, typically offering made-to-order meals for a slight premium.

Both types of limited-service restaurants are also increasingly distinguishing themselves through their adoption of consumer-friendly technology, from apps for digital ordering and meal pickup to self-service kiosks and partnerships with third-party delivery services such as Uber Eats, DoorDash, and GrubHub. In many cases, leveraging the power of customer-facing technology enables them to reduce staffing needs, while improving efficiency and providing customers with a more personalized experience.

To facilitate contactless transactions, for example, many restaurants have dedicated or third-party apps that allow customers to view the menus and place and pay for orders, and that also alert the restaurant when patrons arrive on-site. Some boast additional features, such as tracking loyalty reward points and storing favorite orders for easy repeat purchases, that add convenience for their customers.

Finding Paths to Retaining Profitability

Rising costs of ingredients, coupled with challenges hiring employees, have led to higher prices across the restaurant industry, as operators seek to pass those operating cost increases down to customers. Limited-service restaurants are no exception, with nearly every major restaurant brand taking pricing actions over the past year, with many raising prices as much as 8%-10% year-over-year. Many restaurants also sought to address inflation and labor cost pressures through other measures, including running specials that steer consumers toward higher-profitability menu items and revamping their menu items to improve operator profitability on the value-oriented items.

What the Future Holds

On the consumer side, rising prices for everything from gas to rent, market volatility, and financial pressure have led to less frequent restaurant visits, but demand for limited-service meals has proven relatively resilient, as it has in past business cycles. According to Miller Pulse data, 2022 weekly same store sales have been tracking positive for both Quick Service Restaurants and Fast Casual Restaurants since April 2022, with notable momentum as gas prices have come down following their June peak.

Young, tech-savvy consumers in particular gravitate toward inexpensive venues that succeed at streamlining the process of ordering food with technology. For example, 69% of Generation Z consumers, who were born between 1997 and 2012 and participated in a survey for the National Restaurant Association’s 2022 State of the Restaurant Industry report, expressed interest in ordering through voice-enabled platforms like Amazon’s Alexa or the iPhone’s voice assistant Siri.

In addition, the report suggests that demand for less pricey dining options will continue to climb, with 51% of adult respondents reporting that they are not eating at restaurants as often as they would like, according to the survey. In fact, dining out and having food delivered are a priority for the majority of consumers surveyed, with 54% describing it as "essential to the way they live." The number is even higher among younger generations, at 72% of millennials, who were born between 1981 and 1996, and 66% of Gen Z adults.

Looking ahead, increasing consumer demand for food without fuss, coupled with advancements that allow technology to provide it, suggest an ongoing potential for restaurants able to provide easy, economical dining options. By continuing to embrace innovation and focus on meeting changing consumer needs, limited-service restaurants with scaled national brands are best positioned to navigate this challenging economy.

You can find out more information about how Fifth Third Bank can help with your food and beverage financing needs here.