A McDonald’s logo is displayed at a McDonald’s restaurant on July 22, 2024 in Burbank, California.
Mario Tama | Getty Images
A decade ago, Subway began phasing out its $5 long sandwiches. But now, other fast-food chains have returned to the $5 price point, hoping to win over customers who are cutting back on spending.
As many restaurant companies prepare to report second-quarter results, investors can expect to hear that diners are visiting their stores less frequently and sales are softening, with few exceptions, such as Chipotle. To improve next quarter’s performance, such as McDonald’sTaco Bell, Burger King and Wendy’s Introduced or reinstated meal deals with $5 price tags.
McDonald’s said its customer traffic increased as a result of the promotion, even though Wall Street did not expect significant sales growth.
During economic downturns, the quick-service restaurant industry typically performs better than the overall industry. But price increases 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 have recently LendingTree survey says They spend less on fast food because fast food is too expensive.
Out-of-control menu prices scare away many fast-food customers, including low-income people who make up a sizable portion of the industry’s customer base. Sensing strong resistance from diners to fast food, such as brinks international corp. Chili’s uses marketing to emphasize its value relative to the cost of fast food. Casual dining chains have taken some market share from the fast food industry, Darden Restaurant CEO Rick Cardenas said in June.
“This is a war on less affluent customers,” said Robert Byrne, senior director of consumer research at Technomic, a restaurant market research firm.
Changes in consumer behavior are also scaring Wall Street away. Shares of McDonald’s, the parent company of Burger King International restaurant brand Wendy’s has seen double-digit sales declines this year. Taco Bell Boss Yum Brands By 2024, the index will fall by more than 1%.
KeyBanc analyst Eric Gonzalez told CNBC: “The feeling among investors is that the second quarter is probably going to be a forgettable quarter — you’re going to see a lot of big chains that may not be able to reach consensus[estimates].
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 drive bigger purchases?
A sign advertising meal deals at a McDonald’s restaurant in Burbank, California, on July 22, 2024.
Mario Tama | Getty Images
Generally speaking, fast food chains tend to focus their discounts and value meals on the first quarter as consumers try to save money and stick to New Year’s resolutions after the holidays. As temperatures rise, so do restaurant sales, and operators typically don’t need to rely on deals to attract customers.
But this summer is different. Fast-food chains need discounts to spur traffic and sales.
“The reality is that restaurants don’t have enough room to raise menu prices anymore,” Byrne said.
But value meals aren’t just about growing foot traffic.
“It’s also about converting consumers who come in for the deal into high-price consumers by introducing other add-ons or other things they might do,” Byrne said. “The risk is that they don’t do that.”
If customers can’t be persuaded to add a milkshake or other entree to their order, discounts reduce profits and become unsustainable in the long run. That’s a big concern for investors, who already suspect the chain won’t see the traffic growth they’d hoped for.
“The value menu is coming out at the end of the season. There’s a concern that things aren’t going to get better, that it’s going to be a race to the bottom,” Gonzalez said.
The $5-long subway also has its own warning. While the deal was popular with customers, it was unpopular with operators, eating into their profits and exacerbating the brand’s other problems, such as sales cannibalization due to its massive footprint. That led to restaurant closings, angry operators and years of searching for new ways to attract customers.
franchisee suspicion
Investors aren’t the only ones skeptical of promotions, so are franchisees, who often resist discounts because they hurt their profits.
In recent years, franchisees have also gained greater power to resist parent companies’ trading tactics. Today, many franchisees are larger, own more restaurants, and sometimes even have private equity funding.
At McDonald’s, franchisees banded together to form the National Owners Association in 2018 to oppose the burger giant’s unpopular discounting and store renovation plans. Since then, the chain’s operators have pushed back even more against management’s plans.
McDonald’s on Monday extended its value meal period to an initial four weeks. In a memo to the US system seen by CNBC, executives wrote that 93% of restaurants voted in favor of the extension.
According to executives and traffic data, the promotion is bringing customers back to the restaurant. According to a report from Placer.ai, June 25, the launch day of McDonald’s $5 meals, attracted 8% more visits than the average Tuesday so far in 2024. The pattern repeated itself over the next few days as the chain surpassed its year-to-date daily visit average. Placer.ai also found that discounts helped drive traffic to Buffalo Wild Wings, Starbucks and Chili’s.
Kalinowski Equity Research analyst Mark Kalinowski asked respondents in a quarterly survey of more than 20 McDonald’s franchisees what percentage of their sales were driven by $5 meal deals. The average response rate was 1.3%.
“These responses may suggest that the $5 meal deal should be viewed as an initiative that may help dissuade some customers from going elsewhere,” Kalinowski wrote in a research note Wednesday about the findings. Rather than being a big sales promoter.
About The Author
