A sign advertises meal deals at a McDonald’s restaurant in Burbank, California, on July 22, 2024.
Mario Tama | Getty Images
Restaurant CEOs have become obsessed with the word “value” in explaining to investors why their sales lagged this quarter while sharing plans to revive traffic in the coming months.
On McDonald’s quarterly conference call last month, executives said the word “value” nearly 80 times, underscoring the fast-food giant’s biggest priority.
And McDonald’s isn’t alone. Other leaders in restaurant companies from the owner of Taco Bell Yum Brands at the pizza chain Papa John they also used the word dozens of times in their latest conference calls.
“The word ‘value’ has received a lot of airtime in recent months,” said Josh Kobza, CEO of parent company Burger King. Brands International Restauranthe said Thursday.
There is a reason for this emphasis. Prices for food away from home have increased 27.2% since June 2019, according to the Bureau of Labor Statistics. In response, restaurant traffic has fallen and sales have lagged as consumers spend less money eating out, no longer convinced it’s a good deal.
Many chains hope to bring back customers through discounts and promotions, such as the $5 meal deals found at McDonald’s, Burger King and Taco Bell.
“In this current economic cycle, consumers have become more conscious of managing their overall fare and are showing a preference for brands that offer compelling value,” Papa John’s chief financial officer Ravi Thanawala said on the company’s call Thursday.
Reputation for value
McDonald’s Chris Kempczinski talks about fresh beef expansion at a McDonald’s event in Oak Brook, Illinois.
Richa Naidu | Reuters
Many restaurant executives recognized that their chains were inadequate.
For example, McDonald’s CEO Chris Kempczinski said his company’s reputation for value has declined recently. In the second quarter, The burger giant said its US same-store sales fell 0.7% year over year.
“There were also factors within our control that contributed to our underperformance, primarily our value execution,” Kempczinski said on the company’s July 29 conference call. “For 70 years, McDonald’s has defined value in our industry, and we’re taking meaningful actions around the world to assert our leadership.”
McDonald’s Meal Deal launched just days before the end of the second quarter, but the value meal attracted low-income consumers and exceeded expectations, executives said. The chain is extending the promotion until August in most markets and is working with franchisees on a longer-term discount strategy.
Meanwhile, unlike McDonald’s and many other restaurants, Chipotle Mexican Grill reported strong same-store sales growth and traffic growth for the latest quarter. But the burrito chain is still focusing on value as it faces backlash from some customers who claim the company has shrunk portion sizes.
Brian Niccol, CEO of Chipotle Mexican Grill;
Adam Jeffery | CNBC
While CEO Brian Niccol denied any corporate plans to make burrito bowls smaller, he said the chain will re-emphasize generous portions with its employees. After all, those large portions have helped Chipotle earn its reputation for value.
“The good news is that we’re already starting to see our actions reflected positively in our consumer ratings, and our value proposition remains very strong,” Niccol said on the company’s July 24 call.
It’s not just fast food executives who focus on value.
Dine Brandswhich owns Applebee’s and IHOP, is also seeing lower-income consumers pull back spending, CEO John Peyton told CNBC.
Customers making less than $75,000 a year don’t visit Dine’s restaurants as often as they used to, and if they do, they stick to the value menu. Both Applebee’s and IHOP reported surprise same-store sales fell this quarter.
“It’s definitely going to be a tough second half of the year and it’s a fight for market share for our increasingly value-based customer,” Peyton said.
Shareholder value
Burger King restaurant area in Peoria, Ill.
Daniel Acker | Bloomberg | Getty Images
Companies don’t just think about delivering customer value – they also think about shareholder value. Restaurant stocks have come under pressure this year as investors worry about the health of the industry. Shares of McDonald’s and Restaurant Brands are down 10% year-to-date, while StarbucksThe stock fell 21%. THE S&P 500 has increased by 11% during this period.
Concerns about the chains’ financial health aren’t limited to the top line. They’re also about profits, especially as companies lean toward discounts. While cheap deals may attract customers, they can hurt restaurants’ profitability, drag on profits and hurt franchisees’ financial health.
And so-called value wars — where chains try to outbid each other with deals — are heightening those concerns as investors fear a race to the bottom.
Although this concern has yet to bear fruit, it is still early days. For now, it seems that discussions of value and discounts are bringing some customers back.
For example, Burger King was one of the first chains to introduce a $5 meal this summer. Its U.S. same-store sales were roughly flat for the quarter, but executives said the deal is attracting customers. Burger King now plans to offer it in October.
When its competitors followed suit with their own $5 off offers, the Restaurant Brands chain saw no clear impact on its business.
“There’s really some upside to the focus on value across the industry,” Restaurant Brands’ Kobza told CNBC. “I think it has the potential to improve the category’s perception of value for money with our visitors as more people talk about the incredible value our sector offers. I think that really helps everyone.”
