The McDonald’s logo is seen at a McDonald’s restaurant in Burbank, California, on July 22, 2024.
Mario Tama | Getty Images
Subway began phasing out $5 sandwiches a decade ago. But these days, other fast-food chains have revived the $5 price point, hoping to win back customers who have cut back on their spending.
As many restaurant companies prepare to report their second-quarter results, investors expect to hear that customers are visiting their locations less often and that sales have become sluggish, with a few exceptions such as Chipotle. In the hope of raising their results for the next quarter, chains such as McDonaldsTaco Bell, Burger King and Wendy’s have unveiled or revived $5 meal deals.
McDonald’s said it’s seeing traffic increase as a result, though Wall Street doesn’t expect much sales growth from the promotions.
Fast food typically outperforms the broader industry during economic downturns. But recent years of price hikes have led many consumers to conclude that fast food is no longer a good deal. More than 60% of respondents in a recent According to LendingTree research they have cut back on fast food because it is too expensive.
Low menu prices have scared off many fast-food customers, including those in the low-income bracket who make up a significant portion of the industry’s customer base. Ani Brinker International’s Chili’s has used their marketing to highlight their own value over the cost of a fast-food meal. Casual dining chains have taken some market share from the fast-food sector, Darden Restaurants CEO Rick Cardenas said in June.
“It’s the war for the less affluent customer,” said Robert Byrne, senior director of consumer research for Technomic, a restaurant market research firm.
This shift in consumer behavior has also spooked Wall Street. Shares in McDonald’s, parent of Burger King Brands International Restaurant and Wendy’s are down double digits this year. Owner of Taco Bell Yum Brands is down more than 1% in 2024. Meanwhile, the S&P 500 is up 14%.
“The feeling among investors is that the second quarter is likely to be one to forget – you’re going to see a lot of big chains that are likely to lose consensus [estimates]KeyBanc analyst Eric Gonzalez told CNBC.
McDonald’s is expected to report second-quarter earnings on Monday, while Wendy’s is expected to report results on Wednesday. Restaurant Brands and Yum Brands are expected to report quarterly earnings next week.
Can value meals fuel larger purchases?
A sign advertises meal deals at a McDonald’s restaurant in Burbank, California, on July 22, 2024.
Mario Tama | Getty Images
In general, fast-food chains tend to focus their sales and value meals in the first quarter, when consumers are trying to save their dollars after the holiday season and stick to New Year’s resolutions. As temperatures rise, so do restaurant sales, and operators typically don’t need to rely on specials to attract customers.
But this summer is different. Fast-food chains need discounts to fuel traffic — and sales growth.
“The fact is, restaurants are running out of money to get more prices on their menus,” Byrne said.
But value meals aren’t just about growing traffic.
“It’s also about converting the consumer who comes for the deal into a higher-ticket consumer by introducing other add-ons or other things they might do,” Byrne said. “The danger is that they don’t.”
Without persuading customers to add a milkshake or other fare to their order, discounts become unsustainable in the long run. That’s a big worry for investors who are already skeptical that the chains won’t see the traffic they expect.
“The value menus came out towards the end of the quarter. There’s just a fear that it’s not going to improve and it’s going to be a race to the bottom,” Gonzalez said.
Subway’s $5 presents its own cautionary tale. While the deal was popular with customers, it overstayed its welcome with operators, eroding their profits and exacerbating other issues with the brand, such as cannibalizing sales from its huge footprint. This led to restaurant closings, angry operators and years of searching for a new way to bring back customers.
Franchisee skepticism
Investors aren’t the only ones skeptical of deals — so are franchisees, who often push back against discounts because they hurt their bottom line.
Franchisees have also gained more power to resist parent companies’ transactional strategies in recent years. Many franchisees are bigger these days, with more restaurants and sometimes even private equity money.
At McDonald’s, franchisees banded together to form the National Owners Association in 2018, rebelling against the burger giant’s unpopular sales and plans for store renovations. Since then, the chain’s operators have pushed back more against management’s plans.
McDonald’s on Monday extended the value meal after the initial four-week period. Ninety-three percent of its restaurants voted in favor of the extension, executives wrote in a memo to the US system seen by CNBC.
The promotion is bringing customers back to its restaurants, according to both executive and foot traffic data. June 25, the launch day of McDonald’s $5 meal, attracted 8% more visits than the average Tuesday in 2024 so far, according to a report by Placer.ai. The pattern repeated itself in the following days, as the chain surpassed its year-to-date daily attendance averages. Placer.ai also found that discounts helped drive traffic to Buffalo Wild Wings, Starbucks and Chili’s.
In his quarterly survey of more than 20 McDonald’s franchisees, analyst Mark Kalinowski of Kalinowski Equity Research asked respondents what percentage of their sales were incrementally helped by the $5 meal deal. The average response was 1.3%.
“These responses may suggest that the $5 Meal Deal should be viewed as an initiative that may help deter some customers from going elsewhere, as opposed to a large sales maker,” Kalinowski wrote Wednesday in a research note on research results.
