Fast food is expensive. Applebee’s and Chili’s are moving in

Fast food is expensive. Applebee’s and Chili’s are moving in

McDonald’s and other fast food chains charge more. So much so that you might want to consider going for a slightly slower burger. Or at least, that’s what Applebee’s wants you to think.

“You can get our burger for $9.99,” John Peyton, CEO of Applebee’s parent company Dine Brands, told CNN in an interview. With that, “why would you take a $10 burger … that you can eat in a bag out of your car?”

If Peyton’s sales resonate with customers, it could help convince diners to eat at a sit-down restaurant, something they might see as indulgence.

For a while, restaurant customers traded down — swapping expensive food for cheaper, but still eating out. Now, some are responding to higher menu prices by trading out entirely: Instead of choosing restaurants or cheaper meals, they eat more at home and spend less when they go out.

This means restaurants have to fight for these cost-conscious consumers. And now, it’s not just burger chains against burger chains.

Because fast-food outlets have raised prices in recent years, eateries like Applebee’s can run promotions that cost almost the same as a fast-food lunch — giving them an opportunity to try to steal those customers.
The overlap offers “new opportunities,” according to Peyton. Lunch at McDonald’s now costs about the same as lunch at Applebee’s, where you can sit at a table and have your food delivered by a server. Showing that is the new way to bid for customers.

Applebee’s, which has seen sales decline as lower-income customers pull back, is offering deals and hoping the prices will speak for themselves. Chili’s, on the other hand, makes the comparison more obvious.

For them, and the fast food chains they now compete with, the stakes are high.

A smaller pie
Price increases over the years have contributed to a drop in traffic, prompting restaurants to vie for fewer customers, according to Henkes.

“It’s a smaller pie today than it was a year ago,” he said. “You’re competing for a smaller share of the market. So it’s more competitive.”

Fast food prices, in particular, have risen. “Fast food has become very expensive,” Henkes said. “Certainly, compared to where it was 12 to 18 months ago, and also compared to the sit-down restaurants now.”

In the 12 months to March, not adjusted for seasonal changes, prices for fast food and fast-casual restaurants rose 5%, according to data from the Bureau of Labor Statistics. During that period full-service menu prices rose 3.2%, and retail prices rose 1.2%.

A few years ago, McDonald’s said that it could raise prices without losing too many customers. But now, it is struggling with low-income customers.

CEO Chris Kempczinski said during a February analyst call that “the battleground is definitely with those lower-income consumers.” The following month, CFO Ian Borden admitted during another analyst call that “it’s a challenging consumer environment.”

The chain is working on a $5 menu to win over those customers, according to Bloomberg.

Things don’t get any better at Applebee’s.

Sales at US Applebee’s locations open at least a year declined 4.6% in the first quarter. During that period, customers making $50,000 a year or less visited less often, and spent less when they did, Peyton said, adding that demographic made up about 45% of Applebee’s customers.

“For several quarters… we’ve been asking ourselves, when are we going to see the impact of inflation, and the economy in general, and interest rates, on our guests,” he said. “We really started to see it in the first quarter.”

He added that “we think it’s going to be a battle for wallet share and market share all year.”

Fast food as foil
With fast food prices high, sit-down restaurants can make a case for themselves.

People have taken their fast food price gripes to social media, some complaining about the price of McDonald’s burgers and fries. Chili has paid attention.

“Our social media team has been watching the conversation that consumers are frustrated with fast food prices,” said Kevin Hochman, Chili’s president and CEO of its parent company, Brinker International, during an April analyst call. In response, Chili decided to broadcast ads that “use fast food as a foil,” he said.

The chain said in an April press release that it was adding the new burger — which it described as having “double the beef of a Big Mac and a taste fast food lovers will recognize” — to its ‘3 for me’ value menu. For $10.99, customers get a burger plus an app and drink.

On X, Chili’s asks if Chili’s is better than fast food, and promises a reward to those who answer yes. Chili’s also ran a video ad comparing its food favorably to fast food burgers.

But it may not be that simple. Getting people to go to Chili’s instead of McDonald’s may be difficult, said David Henkes, senior principal at Technomic, a food industry research and consulting firm.

One problem for chains like Chili’s and Applebee’s is that they aren’t as competitive on price as they are on time.

“People go to a sit-down restaurant, in general, for a different occasion, than they go to a fast-food restaurant,” he said. You might expect to spend an hour at Chili’s or Applebee’s, and breeze through McDonald’s.

However, campaigns like Chili’s can help convey to customers that food is relatively cheap these days.

“Planting that seed that, ‘Hey, we’re a good value,’ I think is a good message to have,” Henkes said.

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