Fast Food Stocks Indicating Consumers Are Tapped Out

The debate over whether stocks mirror the US economy has persisted for years. Politicians of both stripes tout the equities arena when there is a stampede of bulls and argue that it confirms their sound economic policies. But is Wall Street a mirror of the broader economy? The Dow Jones Industrial Average and the Nasdaq Composite Index were rocketing when the pandemic shuttered businesses and left millions unemployed. Indeed, there was a divergence between the economy and the stock market. That said, earnings reports and corporate guidance have recently offered some insights into where economic conditions could be heading.

Stocks Flashing Red

So far this year, the leading benchmark indexes have posted record highs as investors brace for the Federal Reserve slashing interest rates. But while armchair traders and institutional investors are booming in the current environment of stocks, some of America's biggest brands and largest corporations are warning that their customers are suffocating under the weight of sticky and stubborn inflation. For some firms, sales are up, fueled by higher prices rather than frequent visits.

Starbucks shares took a beating after the coffee titan reported a surprise decline in same-store sales to kick off 2024. KFC and Pizza Hut reported similar losses. Meat producer Tyson Foods told analysts that cumulative price pressures have produced "a more cautious, price-sensitive consumer." McDonald's warns of a "street-fighting mentality" in the fast-food business as consumers grapple with "elevated prices in their day-to-day spending." And these worries could be weighing on stocks exposed to cost-conscious shoppers.

“Clearly everybody’s fighting for fewer consumers or consumers that are certainly visiting less frequently, and we’ve got to make sure we’ve got that street-fighting mentality to win, irregardless [sic] of the context around us,” McDonald’s CFO Ian Borden said on the company’s April 30 conference call.

Meanwhile, credit card giants say spending trends are "relatively strong." Payment entities, such as PayPal, are observing solid transaction volumes. The travel business purported that consumers are not trading down their accommodations, taking shorter vacations, or curtailing their holiday spending.

So, what is happening? Bank of America’s Savita Subramanian observed that “consumer cracks are emerging." The data suggests that these challenges are most pronounced among low-income shoppers while the affluent thrive. On the other hand, it could be as simple as "doom spending," according to a November 2023 Intuit Credit Karma study, which revealed more than a quarter of Americans are spending money amid economic woes and geopolitical upheaval.

Fast Food Is Expensive

Only a few years ago, hungry patrons could visit the local McDonald’s or Burger King and buy a meal for a couple of dollars. The quality may not have been excellent, but these franchises served a purpose: to quickly feed cash-strapped consumers with cheap food. Today, consumers are aware that fast food is too expensive, evident by the wave of social media grievances and slowing foot traffic. Believe it or not, fast-food establishments are often costlier than dine-in restaurants.

The consumer price index (CPI) report confirms this trend. From 2019 to 2023, the limited-service meals and snacks category has climbed nearly 28%. By comparison, the full-service meals and snacks component rose close to 24%. The overall CPI has surged about 20% in that same span. The culprits? Higher minimum wage laws have been one of the top contributors. Broader labor costs have jumped as companies struggle to fill positions, leading many to automate their locations. Rising input cost pressures, from paper wrappers to food ingredients, have also exacerbated the situation. Suffice it to say, these brands are passing those higher costs on to the customer.

Customers should not anticipate any relief. When an inflation bomb goes off, prices reset and will remain this way permanently. A $20 Big Mac combo will not suddenly return to pre-pandemic levels. This is the new normal. As a result, something will have to give, and that could mean a young professional will reduce the number of trips to Starbucks for a morning trenta ice double-blended coffee that contains 11 pumps vanilla, nine pumps hazelnut, seven pumps caramel, five pumps skinny mocha, and a splash of oat.

Consumers Turning Sour Again

From November to March, consumer confidence had been improving. For instance, the University of Michigan's Consumer Sentiment Index rocketed to a nearly three-year high to finish off the first quarter. In April, these trends began to reverse. In addition to UMich's much-anticipated index, The Conference Board's Consumer Confidence Index retreated amid frustrations about inflation, concerns regarding the labor market, and worries surrounding business conditions.

"According to April’s write-in responses, elevated price levels, especially for food and gas, dominated consumer’s concerns, with politics and global conflicts as distant runners-up. Average 12-month inflation expectations remained stable at 5.3 percent despite concerns about food and energy prices," said Dana M. Peterson, the chief economist at the Conference Board.

If consumers stop buying fatty and unhealthy fast-food meals altogether, be it because of inflation or decimated bank accounts, this could spell doom for stocks, the labor market, and an economy that depends on two-thirds consumption to grow. Well, at least the public health will improve!