9/30/2011

Fast Food: An Economic Staple?

It’s been interesting to watch businesses enter the market during the economic recession and now as the economy begins to recover. The timing of new fast food restaurant locations has been especially intriguing. Consider, St. George, Utah, for example. In the past several months, major restaurant chains such as McDonalds, Pizza hut, and Hungry Howey’s, among others, have all expanded current stores and opened multiple new locations. According to an article written by Andrea Holecek this is no surprise and not a new development. When things started slowing down for many businesses in 2009, as Holecek writes, “burger business” industry leaders McDonald’s, Wendy’s and Burger King all saw consistent increases in revenue. While fast food suppliers rarely refer to their products as “junk”, one might assume that the label of “inferior” might sting even more. We know, as the text defines, that demand for an inferior product “is negatively related to changes in buyer’s income” (Page 29). In other words, when money is short we look for less-expensive alternatives. The numbers don’t lie and demand for fast food has increased as average American income has decreased.

However, the two concepts – lower income and higher demand for fast food – are seemingly juxtaposed one with another. The average person would assume that, as income decreases, consumers would be reluctant to spend since discretionary income is limited. Still, fast food sales continue to grow even in our current economic state. What is it that draws us to fast food? Price is an obvious determinant, but how much can our attraction to burger joints and pizza parlors be attributed to factors such as advertising, durability, weather, and location as the text suggests?

10 comments:

Jack said...
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Jack said...
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Jack said...
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Jack said...
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Jack said...

I think that fast food is a substitute to restaurants such as Olive Garden, Texas Roadhouse and others. I believe that people enjoy going out to eat on dates or as a family. But instead of going to more expensive restaurants people are going to fast food instead. Not to mention fast food can be a substitute to making a meal at home as well.
In this article New York Times it talks about how restaurants are struggling throughout the United States. They are constantly changing there menus to provide value meals and specials that people can afford. They have to constantly change there specials so that they can get some of the fast food business.
It's interesting that fast food is and inferior good and other restaurants are a normal good. Meaning as income decreases so does the demand for that good.

Dr. Tufte said...

-1 on Jack for a spelling error.

I have noticed the same thing around Cedar City over the last several months.

I wonder about 2 other factors. First, how much of this is motivated by people who have lost careers and are trying to create new ones in franchising. Second, how much of this is the deep pockets of the parent corporations being willing to grab some locations while they're cheap, and subsidize the business located on them until the economy improves?

FWIW: What is it with you St. George people and Texas Roadhouse? That place has been mentioned more in this blog over the last month than anywhere else I've been exposed to ;)

Aaron said...

I really like your second point: buying/expanding when the market is low. It might seem strange, but I am convinced that contractors in Southern Utah are addicted to building commercial properties! Obviously that's not true, but everywhere you look there are vacant commercial spaces for sale or lease. Back to the my pizza topic... Papa John's Pizza, formerly located on North River Road in St. George, is now located on 1000 East Tabernacle. Why the move? Bigger, newer store... $3000.00 less per month for rent! You're exactly right when you say that large corporations are taking advantage of a low market.

Concerning Texas Road House: overrated. The ribs aren't bad but the rest of their menu is nothing less than mediocre. Troy's BBQ (may she rest in peace) was head-over-heals better! There are hand fulls of other great places to eat in St. George than TRH. For example, "One Hot Grill" located on the round-about on Main Street and Tabernacle. (No, I'm not tied to the business. They just have awesome food.) Whoever runs that place could likely be one of those you referred to - someone starting a new career while the economy is down. It takes a great product to break through and stick and I think these guys have something good.

Dr. Tufte said...

I am going to let Aaron slide on misspelling handfuls; because it was fun but not really necessary to add a response about Texas Roadhouse to the first paragraph.

I tend to agree that contractors overbuild commercial properties. I'm not sure why that is, but it definitely is not a local phenomenon. I do wonder if it is a regional preference in zoning, since I do think there is less of this in the northeast and midwest.

While on this topic, I'm also confused by the economics of owning strip malls. When I see retail space that is unoccupied, I apply what I know about the shutdown rule. If the owner could cover the fixed costs of a unit by renting it, they should, because any extra will help defray some of the variable costs of ownership. The fact that there are large numbers of vacant retail spaces makes me thing that those fixed costs must be very high relative to the potential rental price. To me, this just doesn't seem right.

Windwalker said...

Dr. Tufte, most assuredly does not want to hear more about the Texas Roadhouse in St. George, especially a year later, but oh well. Plus, it sounds very good right now. My ex-wife and I loved it because it's noisy and we could take the kids there and not worry as much about bothering others around us while at the same time having a decent meal.
Also, strip malls are a lot about the egos of the developers. They love to see their names on the project and their designs and dreams come to life. These projects are great in good times, but equally devastating in down times as the debt that must be serviced does not go away and can be "negotiated" as the commercial tenants often assume they can "do to" the landlord.

Dr. Tufte said...

Hmmm.

What bugs me is that the microeconomics is that if you can get a price that will cover your variable costs and leave some left over to cover your fixed costs, you ought to take it.

My casual impression is that this does not happen with strip malls in southwestern Utah. To me that suggests that money is being left on the table.