Many fast-food chains, from McDonald’s to Taco Bell, are offering $5 meal deals in an attempt to win back customers. High menu prices have alienated lower-income shoppers, and discounts may be their only way to win them back. But investors are skeptical that value deals can generate big sales gains without hurting profits.
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On July 22, 2024, the McDonald’s logo was displayed at a McDonald’s restaurant in Burbank, California.
Subway began phasing out its $5 one-foot sandwiches a decade ago, but other fast-food chains have recently brought back the $5 price point in an effort to win back customers who have cut back on their spending.
As many restaurant companies prepare to report second-quarter earnings, investors are anticipating reports that, with a few exceptions such as Chipotle, sales are sluggish as customers visit restaurants less frequently. Chains including McDonald’s, Taco Bell, Burger King and Wendy’s have rolled out or reinstated $5 meal deals in an effort to boost performance in the next quarter.
McDonald’s said it’s seen increased traffic as a result, but Wall Street isn’t expecting a big boost in sales from the promotion.
Fast food typically outperforms the broader industry during economic downturns, but rising prices over the past few years have led many consumers to conclude that fast food is no longer a good deal: More than 60% of respondents to a recent LendingTree survey said they have cut back on their spending on fast food because it’s too expensive.
Rising menu prices have scared off many customers, including lower-income families who make up a large portion of the fast-food industry’s customer base. Sensing a customer backlash against fast food, companies such as Brinker International Inc.’s Chiliz have used marketing to highlight their value compared with the cost of a fast-food meal. Casual-dining chains are taking some market share from the fast-food industry, Darden Restaurants CEO Rick Cardenas said in June.
“It’s a war for the less affluent customer,” said Robert Byrne, senior director of consumer research at Technomic, a restaurant market research firm.
These shifts in consumer behavior have also scared Wall Street away. Shares of McDonald’s, Burger King parent Restaurant Brands International, and Wendy’s are all down double digits this year. Shares of Taco Bell parent Yum Brands are down more than 1% for 2024. Meanwhile, the S&P 500 is up 14%.
“There is a widespread belief among investors that the second quarter will be one to forget, with many of the larger chains expected to miss the consensus.” [estimates]”KeyBanc analyst Eric Gonzalez told CNBC.
McDonald’s is scheduled to report second-quarter results on Monday, Wendy’s on Wednesday, and Restaurant Brands and Yum Brands are due to report quarterly results the following week.
Could value meals encourage bigger purchases?
Fast-food chains typically offer a barrage of discounts and great deals in the first quarter, when consumers are trying to save money after the holidays and stick to their New Year’s resolutions. As the weather warms up, restaurant sales also increase, so operators don’t usually need to rely on specials to draw customers.
But this summer is different: fast-food chains need discounts to drive foot traffic and boost sales.
“The reality is that restaurants are running out of room to put more prices on their menus,” Byrne said.
But value menus aren’t just about increasing foot traffic.
“It’s also about introducing other add-ons and what they’re trying to do to convert the value-seeking consumer into a higher-priced consumer,” Byrne said. “The risk is that they don’t do that.”
Without the ability to convince customers to order milkshakes and other entrees, discounting could eat into profits and become unsustainable in the long run — a major concern for investors already skeptical that the chains will see the increased foot traffic they hope for.
“There were some great deals rolled out towards the end of the quarter. The concern is that things aren’t going to get any better and it’s going to become a race to the bottom,” Gonzalez said.
Subway’s $5 footlongs are a cautionary tale in themselves: The deal was well-received by customers but outstayed its welcome for operators, hurting their profits and exacerbating other problems with the brand, including cannibalizing sales from its vast store footprint. The result was restaurant closures and angry operators who spent years searching for new ways to win back customers.
Franchisee skepticism
Investors aren’t the only ones skeptical of such promotions: Franchisees often oppose discounts, citing them as hurting their profits.
In recent years, franchisees have also become more resistant to the deal-making strategies of their parent companies. They have become bigger, have more locations and many are backed by private equity.
At McDonald’s, franchisees banded together to form the National Owners Association in 2018 to push back against the burger giant’s unpopular price cuts and store remodeling plans. Since then, the chain’s operators have further pushed back against management’s plans.
McDonald’s initial proposal for a $5 value meal wasn’t approved, so Coca-Cola has been pouring marketing money into trying to make the deal more attractive to operators. Coca-Cola CEO James Quincey said on an earnings call Tuesday that the beverage giant is seeing dine-out sales slack in the U.S. as fast-food restaurants struggle. To spur demand, Quincey said, Coca-Cola is partnering with food-service clients to sell combo meal sets that include food and drink.
McDonald’s on Monday extended the duration of its Value Set beyond the initial four weeks, and in a memo to its U.S. system seen by CNBC, McDonald’s executives wrote that 93% of restaurants voted in favor of the extension.
The promotion is driving customers back to stores, according to both executives and foot traffic data. McDonald’s $5 menu launch date, June 25, drew 8% more traffic than the average Tuesday so far in 2024, according to a Placer.ai report. The pattern has repeated since then, with the chain topping its average daily traffic so far this year. Placer.ai also found that the discounts contributed to increased traffic to Buffalo Wild Wings, Starbucks and Chili’s.
In a quarterly survey of more than 20 McDonald’s franchisees, analyst Mark Kalinowski of Kalinowski Equity Research asked respondents what percentage of sales the $5 meal sets increased, and the average answer was 1.3 percent.
“These responses may suggest that the $5 Meal Deal should be viewed as an initiative that may help keep some customers from going to other stores, rather than one designed to generate big sales,” Kalinowski wrote in a research note on the survey results on Wednesday.
