Poor Americans are being left behind in the post-recession comeback, and it is creating a huge problem for fast-food chains like McDonald's and Wendy's (WEN)
- While consumer confidence is on the rise, Wendy's CEO says that lower-income Americans are "not participating in the real wage growth" to the extent that the rest of the United States is.
- Lower-income Americans' continued financial struggles create challenges for fast-food chains, which rely on budget-conscious shoppers.
- Increasingly, chains such as Wendy's and McDonald's are forced to depend on deals to win over customers.
While Americans are spending more and consumer confidence is on the rise, not everyone is experiencing the same degree of prosperity and growth.
And, it's creating a conundrum for fast-food chains.
"About 40 percent of our consumers are $45,000 and under from an income bracket," Wendy's CEO Todd Penegor told CNBC this week. "And they're not participating in the real wage growth to the extent of the rest of the consumer base."
While median US income is on the rise, top earners' growth is significantly outpacing the increase in earnings for lower-income households. In 2017, the top 5% of households saw average income rise to 8.7% higher than pre-recession levels. Among the bottom fifth of the population, average income grew but remained 2.7% below pre-recession figures.
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These circumstances have been decades in the making. Since 1967, the top 5% of of households have seen income increase by nearly $200,000, or 112%, according to the Center for American Progress. Meanwhile, the bottom 20% has seen an increase of just $2,900 in the same period.
This creates both problems and opportunities for the fast-food business.
Penegor said that the challenges of marketing to low-income customers have resulted in the the abundance of deals that have swept the fast-food industry in recent months. In 2018, Wendy's expanded its 4-for-$4 bundle deal, Taco Bell doubled down on its $1 menu, and McDonald's debuted its new $1 $2 $3 menu.
"Deal customers, who are people that love fast food, but they will go to several different outlets based on who's got the best deal," McDonald's CFO Kevin Orzan said in a call with investors in July. "I think that's the area where we haven't been as competitive as we've needed to be because some of our competition has stepped up on their deal side."
Customers say "good value" is the top reason they would visit a fast-food chain more often, according to a UBS Evidence Lab survey shared with investors in March.
According to the survey, the emphasis on value is one of necessity. Having "less free spending money lately" and chains being "too expensive" were the top two factors that customers cited for eating at a particular chain less often.
In 2018, the fast-food industry depends on winning over low-income Americans with the lowest prices possible. That can often mean razor-thin profit margins. For fast-food chains like Wendy's to thrive, America's poorest households need to become part of the economic comeback the nation's richest are experiencing.
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