McDonald’s and Chipotle say customers trade lower, and visit less when inflation hits budgets

McDonald’s and Chipotle Mexican Grill say inflation-stressed customers are choosing cheaper menu items and visiting their restaurants more often, indicating trends that could hit the broader restaurant industry.

The two companies were among the first restaurant chains to report second-quarter results. Wingstop, Starbucks and Yum Brands, owner of Taco Bell, are set to release their earnings reports over the next week.

Starting around mid-May, Chipotle said Tuesday that lower-income customers are visiting his restaurants less frequently, slowing traffic. Earlier in the day, McDonald’s executives also said that some low-income customers have switched to the value menu or opted out of combo meals to save money. But McDonald’s executives added that the chain is also benefiting from declining customers from full-service or fast-food restaurants.

The restaurant companies’ suspension comes on the heels of Walmart slashing its earnings forecast, citing rising food and gas prices putting pressure on consumers’ wallets. High prices for necessities have reduced shoppers’ desire to buy items like clothes and electronics — or to dine at restaurants and order food delivery.

On average, restaurant menu prices increased 7% in the three months ending in May compared to the same period last year, according to the NPD Group. Over the same period, the market research firm said, consumers from households with incomes of less than $75,000 reduced their visits to fast food by 6%.

Restaurant CEOs, including McDonald’s Chris Kempinski, have cited the gap in rising grocery prices and restaurant meals as an advantage for restaurants. Food prices at home have increased 12.2% over the past 12 months, while food prices away from home have increased by only 7.7%, according to the Bureau of Labor Statistics’ Consumer Price Index.

“I don’t know what the impact of that will be, but we certainly anticipate that there are some benefits that we’re seeing as part of that,” Kempczynski told analysts Tuesday during the company’s conference call.

Historically, fast food chains have done well during economic downturns as diners switch to cheaper options without giving up eating out altogether.

McDonald’s is among the top restaurants benefiting from lower consumer circulation, according to BMO Capital Markets analyst Andrew Strelczyk. Executives touted the chain’s value proposition compared to competitors, even as the company and franchisees raised prices.

As an unofficial chain, Chipotle says most of its customers aren’t pricing sensitive.

“The low-income consumer has definitely fallen back on the buying pace,” CEO Brian Nicholl said on the company’s conference call. “Fortunately for Chipotle, you know, the majority of our customers are consumers of high family income.”

The burrito chain said it was confident it could drive up menu prices without scaring its core customers. It plans to raise prices by about 4% in August to cover rising costs for tortillas, avocados and packaging.

Chipotle stock was up 11% in morning trading on Wednesday after news of another round of price hikes and outpaced earnings. McDonald’s shares fell less than 1% after Deutsche Bank cut the stock, citing its valuation relative to its fast food peers.

By the end of the year, BTIG analyst Peter Saleh predicts that Chipotle’s menu prices will be about 20% higher than they were two years ago. The chain’s competitors have raised prices by similar or even higher levels, according to a survey conducted by the company.

“The results of our price survey indicate that Chipotle continues to have pricing power it can rely on to support margins in this inflationary environment,” Saleh wrote.

For the second quarter, Chipotle reported same-store sales growth of 10.1%, below Wall Street expectations of 10.9%. The increase was largely the result of previous price increases, which offset a decrease in customer traffic.

Some analysts questioned how much more Chipotle could raise prices. Cowen analyst Andrew Charles wrote in a note that the planned increases this summer could further erode traffic, particularly given the uncertain economic environment noted by company executives.

Ian Kretzberg Contribute to writing this story.

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