By the Numbers: Breaking Down Q1 at QSRs

Numbers tell a story, and for QSRs the first-quarter numbers were tough, according to RMS. The story is that traffic was down 3.5 percent compared to Q1 2023, though sales were (barely) positive, at a 0.8 percent YOY increase. Average check is up YOY (+4.5 percent) as is Average Price, at +4.0 percent YOY. The rate of price increases has stabilized after nearly a year of declines, which could be attributed to minimum wage laws in California, among other factors.

Speaking of California, the state ranks third in overall burger price in the US (including full and quick service). A few  highlights from RMS’ price map for last month: 

• The average price of a burger in California is $7.16, compared to the US average of $6.49
• An average chicken sandwich costs $6.23 compared to the $5.71 average
• The average pizza costs $18.07 compared to the US average of $15.47

When looking at dayparts, dinner was the winner.

• Dinner traffic decreased by -1.4 percent compared to Q1 2023.
• Breakfast traffic is down -2.2 percent YOY but up slightly compared to last quarter (Q4 2023).
• Lunch QSR traffic continues to slide. Traffic in Q1 2024 decreased -5.3 percent YOY and is down two percentage points from last quarter. 

More details on Q1 performance are here. To delve more into the data, Modern Restaurant Management (MRM) magazine reached out to Richard Delvallée,  RMS VP of Consulting. 

The eyes of the industry are on California with the minimum wage increase—what is the initial data showing and what data points will be the ones to watch in the coming months?

 Our QSR trends reports indicate that since May 2023, California sales have grown less than the sales across the US overall. Average check growth and basket size (how many items customers buy per visit) are comparable, indicating that customers in California are managing their checks by buying more value items. Hence, overall fast-food sales trends in California are deflated compared to the rest of the US.

Regarding California, what data points will be the ones to watch in the coming months? 

We recommend that brands operating in California monitor average check trends, particularly quantity-per-transaction (QPT). Net sales could be significantly affected if customers continue to downsize their meal orders.

Also, we recommend brands closely monitor competitors. In California and across their whole systems, brands should examine whether prices are too high compared to the state average and adjust to stay competitive. We rolled out new tools last year to help brands in this competitive environment. RMS’ Competitor Price Intelligence platform monitors monthly average state prices for burgers, chicken sandwiches, and pizzas, which are free on our website.  

Regarding pricing, QSR customers from numerous brands have been complaining about price increases. 

Our data confirms what you’re hearing. However, we are observing differences in price tolerance by segment (QSR v. Fast Casual v. Fine Dining). This could affect traffic. In our latest consumer survey, 28 percent of respondents said that they had ordered less often from QSRs in the past month. Survey respondents also reported spending less of their disposable income on restaurants – almost 2 in 5 reported spending less compared to last year. And 56 percent of those spending less are doing so by ordering less frequently from restaurants. 

These recent perceptions are confounding already-decreased traffic, which has yet to return to pre-pandemic levels. Quick-service restaurant (QSR) traffic was down nearly 20 percent in the first half of 2023 compared to the same period of 2019. Decreased traffic and increasing technology, labor and food costs make today’s QSR environment challenging. 

What can brands do to counteract?

We anticipate negative traffic trends to continue. 

Don’t stop making incremental price increases. 

We’ve seen that QSR brands often react to declining traffic by maintaining menu prices or decreasing prices across the board. However, we encourage brands to remain strategic with pricing. By leveraging data-driven insights, brands can implement strategies such as location-based pricing or gradual incremental increases, effectively avoiding customer sticker shock. Our latest AI-powered pricing engine, Price Studio, enables users to create and assess multiple pricing scenarios, providing insights into revenue, traffic and cost impacts before implementation.

Don’t increase prices too quickly or steeply. 

On the other hand, it is tempting to increase prices to keep up with rising costs. In either case, brands should proceed cautiously and ensure that any price increases are reasonable and acceptable to guests. 

Do: 

●      Engineer your menu to optimize profitability and upselling opportunities. We recommend streamlining your menus/menu display by strategically drawing attention to items that drive profitability. For instance, in the drive-thru, a brand could limit the number of items displayed and feature only high-demand, easier-to-assemble, or higher-margin items to boost profits. Digital menus and menu boards make this process much easier than in the past. 

●      Adjust hours of operation to manage operational costs or drive traffic to profitable channels, such as drive-thru. 

●      Leverage loyalty programs and restaurant apps for promotional strategies. We’ve seen that checks ordered through a restaurant app can be 15–25 percent higher than in-store or drive-thru checks. And special in-app offers are among the top traffic drivers for frequent users. 

●      Implement differential pricing – or charging the right price in the right location at the right time. Consider introducing price bands or different price points for the same product in individual restaurant locations. We also recommend carefully considering competitors’ pricing using tools such as RMS’ Price Maps and its AI-powered Competitor Price Intelligence for guidance. 

●      Focus on the value equation through bundle promotions. We see a return to value-oriented menus due to their success in increasing average check. We recommend the following when creating a value menu or bundle promotions: 

o   Conducting thorough testing to prevent existing guests from trading down

o   Planning an “exit strategy” or price increase strategy as economic conditions evolve

o   Offering compelling deals to capture consumers' attention who frequently switch between competing brands.

●      Lower prices. Reducing prices can help attract new customers and encourage existing ones to visit more often, but pairing these reductions with effective marketing initiatives is crucial. Price cuts made without accompanying extensive marketing efforts usually go unnoticed by consumers, particularly if they've stopped visiting a restaurant due to high prices. 

Analyzing past data on pricing, can you somewhat predict where pricing is headed?

Costs are continuing to rise. Commodity inflation stabilized in 2023, but a recent Producer Price Index suggests the possibility of future commodity increases, particularly with eggs. Meanwhile, labor costs and other factors continue to drive operator expenses upward. 

This trend supports ongoing industry price increases, potentially at higher rates, depending on individual circumstances/needs. But, as we said before, brands must proceed cautiously, utilizing the increasing amount of data at their fingertips. 

Is pricing the only reason traffic might be down? Are there other factors like weather, etc?

Yes, other factors are at play. Looking at our recent QSR Q1 2024 performance report, the significant traffic drop could be attributed to cold weather in January in many parts of the country that were not accustomed to it. January traffic was down 4.5 percent YOY. By February, traffic was still negative YOY (-2.1 percent) but significantly better. 

When looking at Q1, we also saw some brands competing against their own strong Q1 2023 traffic, primarily due to well-performing promotions.