Office Managing Partner, Chicago, Sector Leader, Travel, Hospitality & Leisure Practice
The $40 Burrito: Has Fast Food Reached the Tipping Point?
This past weekend, one selfless Korn Ferry writer made the difficult decision to enjoy delicious fast food with her eight-year-old son. The menu: two burritos, two beverages, two desserts. The bill: $41. The prevailing emotion: Sticker shock.
Fast-food companies around the world are feeling the squeeze of inflation —including rising supply-chain costs — leaving once-safely-affordable menus no longer, well, affordable. Name-brand chains are responding by removing items from value menus, shrinking portion sizes, offering fewer choices, and yes, raising prices. Those prices were already up 6% last year, the biggest increase in nearly 40 years. Meanwhile, a slew of delivery startups are facing huge losses, indicating that delivery costs also will soon rise. “Companies that rely on value as their value proposition will have issues retaining customer loyalty if prices continue to rise,” says Radhika Papandreou, sector leader in the Travel, Hospitality & Leisure at Korn Ferry.
To be sure, not all fast-food companies are struggling. One mall-based chain says that customers haven’t batted an eye at its price increases. But firms with a marketing image based on price are edging closer to a tipping point. Many are tinkering with serving sizes and price points to find the line at which customers continue to find the product desirable and the price affordable.
“There’s always a tipping point with the customer,” says Sheila O’Grady, who leads the restaurant practice at Korn Ferry. Go over it, and customers will go elsewhere. “The companies addressing it most effectively are being very strategic about pricing and menu,” she says, in some cases bringing in experts on consumer insight and pricing to advise them on identifying that tipping point.
Experts says other sectors facing similar concerns may be able to learn from the industry’s response so far. Some fast-food chains, for example, are looking beyond menus for ways to decrease costs. The hot word is automation. “Companies are really thinking about using technology to help lessen the erosion of their profit margins,” says Papandreou. This can include everything from food-preparation by robot to implementations of labor management technologies.
Some of the fastest sales increases in the food service industry, experts say, are coming from companies focused on the consumer experience. “Don’t try to compete with Amazon or Instacart on delivery — you’re never going to win,” says Dan Kaplan, a senior client partner at Korn Ferry. “Instead, reinvent the business in a way that puts the customer first.”
Zach Peikon, a principal in the Chief Marketing Officers practice at Korn Ferry, says customers are particularly hungry for positive experiences after years of COVID safety guidelines and low staffing, both of which exposed many to poor service. “The customer experience is still undervalued in a lot of companies,” he says. “At the end of the day, people want to have a quality burger. If they have a good experience getting it, they’re likely to go back.”