Fast food stocks: They are meant to be recession proof, so why have they left investors disappointed ever since the pandemic?

Fast food stocks are meant to be recession-proof, at least in theory. When consumers tighten their belts, they look for ‘value for money’.

As inflation peaked at 4-decade highs and remains stubbornly outside central banks’ target rate, you’d think fast food stocks would perform well. But this has not been the case. Why? And will things improve, or should investors write them off to do anything except be their pallbearers at their funerals to let them down one more time?

What are the Best ASX Stocks to invest in right now?

Check our buy/sell tips

Fast food stocks have felt the pinch too

To make a long story short, fast food stocks have been underperforming because they’ve been suffering from inflation just as much as their customers – arguably even more so. The whole reason investors believed fast food stocks should be recession-proof is because many did well in the GFC (i.e. it is often cited McDonalds did better during the GFC than in the immediate years prior).

And while that isn’t totally incorrect, the current situation is a different scenario. Most Western economies (except New Zealand) did not face a retreat in growth. But inflation has led to increased costs. Fast food stocks face a dilemma. Either keep prices as they are and watch profit margins fall or hike prices and risk losing customers. Some call this a ‘traffic vs ticket’ trade off. Some companies did one or the other, some did both; but many paid the price.

Even for consumers who leave their ‘caves’, companies need to invest in their experience too in investing in experiences (i.e. renovating stores, loyalty programs, digital ordering). These investments may pay off in the long-term but are a short-term cost.

It is a Catch 22: Fast food stocks cannot attract customers without investing in the consumer experience, but it is difficult to invest in the consumer experience (i.e. online ordering experiences, loyalty programs and refurbished stores) without attracting customers (or at least knowledge that it has a good hope of doing so investors can be confident enough to give the company their money), but consumers won’t come without any investment. Consumers want value for money.

2025 has been particularly bad for ASX fast food stocks

In 2022, it was easy to just think that it was temporary and things would improve. But things did not and have arguably gotten worse. McDonalds (NYSE:MCD) saw a 3.6% drop in US same-store sales in Q1 of 2025, the steepest decline since 2020. Why? Because of heightened consumer anxiety and inflation pressures.

The poster child for fast food struggles on the ASX is Dominos (ASX:DMP) which has shrunk over 80% since mid-2021 and the only legitimate cause for optimism was a brief rumour that Bain could buy it out. The reason is not only sluggish growth, but also upfront investments that have not netted the return anticipated, especially in Japan. Its boss Mark van Dyck departed after barely 7 months.

In FY21, DMP made a $184m profit off $2.2bn revenue, derived from $3.7bn in sales. 4 years later, yes its revenue is higher at $2.3bn but sales are barely higher and it made a $116m underlying profit and a $3.7m statutory loss. Not good, given it has a lot more stores. You can see the point that it is not getting the bottom line return on investments it anticipated.

Let’s turn to Guzman y Gomez (ASX:GYG) which was a hot IPO, doubling after listing but retreated. Look at the headline figures in its FY25 results and you may think GYG investors hadn’t been the Specsavers because it boasted nearly $1.2bn in sales (up 23%), $65.1m EBITDA (up 46%) and a $14.5m profit (up 152%). It paid its maiden dividend and opened 39 new restaurants in the prior 12 months.

But investors were dissatisfied because comparable sales growth was only half of consensus estimates (7.6% vs 3.7%). Hang on, didn’t sales grow by 23%? Yes, but that includes new stores that did not exist in the year before. Also, did you see GYG’s profit margin? It was a whopping…1.2%.

Things not much better in the US

Returning to the USA, you can see this is not an Australian problem. Chipotle fell 20% in a week after poor September quarter earnings and slashed guidance as a consequence. Spending from 25-35 year olds was falling, as they were treating discretionary purchases as more discretionary than ever.

CEO Scott Boatwright noted unemployment, resumption of loan repayments and slower real wage growth were laggards. Recently listed Cava also cut sales outlook and its CEO Brett Schulman said the same thing. We start with these 2 because GYG used these two to justify the high multiples it paid.

One fast food stock with recent cause for optimism was Yum! Brands that appears to be on the cusp of making money…from announcing a strategic review from the business in which it all but said it wanted to sell Pizza Hut. CEO Chris Turner explicitly said ‘full value’ from Pizza Hut,’ may be better executed outside of Yum! Brands’. Shares in Yum surged 6.5% in a day.

Of course, if Papa Johns is any guide, any ‘falling through’ of a deal could hurt the stock. This pizza chain is in a similar position with revenues barely budging (i.e. growth was only 0.3% in the most recent quarter) and it is barely profitable).

Investors had hope that it’d be taken over from Irth Capital Management which made two offers with the second beind US$4 per share (i.e. >5%) higher than the first. However, in early November 2025 Apollo withdrew the bid. Sources say the withdrawal was due to deteriorating conditions: slowing consumer spending, headwinds in the quick-service restaurant industry, and concerns about the company’s performance. The stock plunged ~20% on the news of the bid being pulled

Was fast food even a good business to be in anyway?

Not really, in all honesty. You have to consider that Fast-food chains tend to operate on slim margins at the individual restaurant level. Labour, food commodities, energy, rent are the biggest costs, and they rose significantly post-COVID. Moreover, even though food delivery has fallen from all-time highs during the pandemic, many have kept the habit.

Now, we will acknowledge that some fast‐food chains can have healthy margins, especially when heavily franchised (lower capex for company), operating efficient drive-thru/digital models, scaling well. McDonalds is often cited as a good stock in the sector because of its specific franchising model (needing upfront investment from franchisees and having stores in areas where real estate is cheap) and the tough terms for franchisees. But even then, the business is not a “free money” machine; margin pressures are real.

We will say that fast food chains that are mostly franchised often have higher margins and less capital intensity (they collect royalties, rent) compared to owning and operating many stores themselves. Drive-thru or high-volume formats tend to have better margins than dine-in or low-volume formats. Consider that Yum Brands! does have a net margin in the teens and operating margin in the 30s. But, that’s for the franchise model and excludes company‐store overheads.

Ultimately, fast food is not a business where you’re making a lot of money from a few customers who pay a lot. This is a business where you make money by serving a lot of people who you don’t make a lot of money out of.

How much money (i.e. profit) do you think Maccas is making from someone paying A$1 from a soft-serve? And what about Dominos from its My Domino’s Box that offers a pizza and two sides for A$10 each? We don’t imagine that much.

Fast food stocks are not a good buy right now

Fast food stocks will likely be facing the trade-off between lower sales and lower margins for some time to come. As a consequence, we think investors should avoid this sector for now.

The best sectors to invest in during periods of high inflation are companies that are always price makers – companies whose consumers will have to accept higher prices of the relevant good or service.

Fast food stocks are not in this boat right now.