Senior Client Partner, Consumer
This Week in Leadership (July 19 - July 25)
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Consumers are getting hit with sticker shock nearly wherever they look. Home prices have skyrocketed. Used-car prices are at record highs. Airfares are soaring. Yet there’s one item where consumers might get a reprieve from 2021’s bout with inflation: fast-food chicken.
Quick-service restaurants are trying everything from overhauling supply chains, adding new menu items, and closing their dining rooms to keep their profit margins without having to pass along significant price increases to customers. In particular, restaurant leaders want to hold the line on menu items containing chicken, since wings and sandwiches have become increasingly popular with customers. The industry is providing an interesting test case of whether an organization can innovate its way through inflation. “There’s a tipping point on price where consumers will want to pull back,” says Sheila O’Grady, a Korn Ferry senior client partner and leader of the firm’s Restaurant sector. “And no one wants to make less money,”
There is the chicken-wing chain Wingstop, which is starting to buy whole birds and sell chicken thighs under the appropriate name Thighstop. And Restaurant Supply Chain Solutions, which handles food procurement for Yum! Brands, is looking across KFC, Taco Bell, and the other Yum chains to use all or most of an entire bird in order to bring down costs.
The inflation situation is a far cry from the challenges the industry faced, and in many surprising ways overcame, in 2020. In fact, many quick-service chains had a tremendously good year. Even as they closed their dining rooms, they expanded their drive-through, curbside-pickup, and delivery options. McDonald’s, for example, saw its same-store sales increase by more than 5% in the fourth quarter of 2020 compared to the same period in 2019. Executives said the operating cash flow of the average US restaurant reached an all-time high in 2020, even after factoring in pandemic-related costs.
But in 2021, restaurants are facing inflationary pressures on several fronts. First, there’s the chicken itself. When Popeyes introduced a highly popular chicken sandwich in 2019, it inspired multiple other chains to invent or redo their own chicken offerings. Chicken became one way for quick-serve restaurants to grow sales by double-digit percentages, O’Grady says. The higher demand pushed prices slightly higher in 2020 compared to 2019, but chicken prices have really flown higher in 2021. The price of whole chickens has soared nearly 40% since the end of 2020; wholesale prices for wings and other individual chicken pieces have risen at an even faster pace. That’s all on top of higher labor costs, as chains have been paying higher hourly rates to fill labor shortages.
Containing higher food costs has been on the minds of many restaurant executives for years, says Chris Von Der Ahe, a Korn Ferry managing partner and senior leader in the firm’s Consumer Markets practice. In some cases, companies have been partnering with meat suppliers to place processing centers closer to restaurant distribution hubs so the restaurant can cut down on transportation costs. At the same time, the firms are working with farms to essentially get chickens “built to spec,” says Von Der Ahe, so the bird is exactly the size the restaurants need.
Then there are the more improvised innovations, such as curbside pickup, which became popular during the pandemic. Many franchisees are also trying to keep a lid on costs by keeping their dining rooms closed, even though most health guidelines across the country would allow them to be open again.
Some prices, however, are moving so quickly that restaurants haven’t been able to do anything internally to offset the rising costs. Avocado prices, for instance, have risen so rapidly that many chains have been slowly raising the prices of menu items with that ingredient. There’s also a debate around how long this spate of food inflation will last. “Temporary” inflation could end in September, end in December, or proceed into 2022, says Mary Elizabeth Sadd, a Korn Ferry senior client partner who specializes in packaging firms. Regardless of how long it lasts, “It’s still a real cost,” she says.