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Food Prices Are Hitting Record Highs, but QSR Franchisors Say Customers Are Still Eager To Eat Out

A pent-up consumer demand and federal stimulus activity have resulted in strong Q2 sales, which may be helping offset rising supply chain, menu prices and labor costs.

Restaurant traffic is still on the rise despite record-breaking food prices, a labor shortage and the threat of new COVID-19 cases. The QSR segment experienced a 15% gain in visits during Q2 2021 compared to Q2 2020, according to The NPD Group, and is down just 5% versus Q2 2019. Total Q2 full-service visits are up by 60% year-over-year, though they remain down by 17% from the same period in 2019.

These increased visits — which is likely a result of pent-up demand and federal stimulus money — have given restaurants the opportunity to pass rising costs from labor and inflation on to consumers, according to research from Fitch Ratings

Wholesale costs for meat and poultry have gone up more than 20% since the start of the year, government data shows, while U.S. producer prices for processed poultry in May hit a record high. To counterbalance these increased food costs and boost sales as Americans return to pre-pandemic habits this year, many chains, including KFC and McDonald’s, have been substituting discounted "value" meals for pricier options. 

Additionally, franchisors have been leveraging the local expertise of franchisees to make price increases that won’t scare away customers. During KFC parent company Yum! Brands' Q2 call, CFO Chris Turner said, "We are also confident in the pricing power of our brands and partner closely with our franchisees as they make strategic pricing decisions in their respective markets to deal with cost pressures."

Yum! Brands CEO David Gibbs added that franchisees use data to slowly boost costs over time so they "don't get too far ahead of the consumer."

Prices for food away from home climbed 0.8% in July 2021, its largest monthly increase since February 1981, according to data from the U.S. Bureau of Labor Statistics. Year-over-year consumer prices rose 5.4% in June, with limited-service meals up 6.1% over that time period. 

Despite these price increases, consumer spending at restaurants still jumped 32% in the April, May and June quarter versus the  quarter last year, and flat over the same quarter in 2019, according to NPD.

Rising food prices may also be a result of increased labor costs. Following the pandemic, businesses across nearly every industry have been struggling to find employees, and the restaurant industry in particular is experiencing its highest quit rate ever. As business owners look for ways to incentivize new employees to join their team, compensation costs within the accommodation and foodservice industry were up 6.2% for the 12-month period ending June 2021, according to the Bureau of Labor Statistics National Compensation Survey

The Fitch research also notes that increased operating efficiency may be helping protect restaurant’s profitability. Many operators revamped their labor models, simplified menus and implemented self-serve kiosks during lockdowns. Looking ahead, these operational efficiencies may prove to be helpful if pent-up consumer demand starts to wane. 

Overall, the restaurant industry has proven it can offset increased food prices for the time being, but with growing concern over the Delta variant and resurfacing safety restrictions, the future remains uncertain.