Dive Brief:

• Fast casual chains outperformed QSR chains during the fourth quarter of 2023, largely due to aggressive pricing actions by QSRs over the past 12 to 18 months, according to a TD Cowen report email to Restaurant Dive.
• Major fast casual chains, like Chipotle and Wingstop, exceeded analyst expectations for both same-store sales growth and EBITDA, while major QSR companies, like McDonald’s and Yum Brands, lagged behind projections.
• Fast food chains are more exposed to low-income consumers pulling back on discretionary spending due to increased menu prices, the analyst report said.

Dive Insight:

Consumers have become increasingly sensitive to pricing changes at fast food chains in recent quarters. Wendy’s mention of a dynamic pricing scheme last month was met with a public uproar that led the company to insist it was not contemplating, and had not contemplated, surge pricing. Low-income consumers have been decreasing their transaction size and trading down on menu items at McDonald’s, CEO Chris Kempczisnki said during the company’s Q4 earnings call. McDonald’s U.S. same-store sales were up 4.3% during Q4. On the other hand, Chipotle, which increased Q4 same-stores sales by 8.4%,  reported sales growth among all income cohorts last year, CEO Brian Niccol said during the chain’s February earnings call. 

Fast casual chains, which lagged behind QSR and casual dining chains on ticket growth, largely closed that gap and saw virtually the same scale ticket growth in January as casual dining — roughly 3%, according to the report, which cited Black Box Intelligence data. As of February, consumers’ value perception between QSRs and fast casual brands were converging, per TD Cowen data. 

TD Cowen notes that fast casual market valuations are also above the five-year average compared to QSRs, where valuations are below that five-year average. The report notes that QSRs have a much larger exposure to softening international markets than fast casuals.

An emphasis on value can also impact market valuations, TD Cowen found. McDonald’s has been moving toward emphasizing its value options in the below $3 category, which could impact sales growth. However, fast casual chains have been using promotions, such as Shake Shack’s free shakes with qualifying orders from 2 p.m. to 5 p.m., during low-volume periods or to offer add-ons. 

“From what we can tell, the pick-up in quick service value does not seem to be weighing on fast casual sales, a dynamic that we believe can continue at status quo promotional levels,” TD Cowen said.