The McDonald’s logo is displayed at a McDonald’s restaurant in Burbank, California on July 22, 2024.
Mario Tama | Good pictures
Subway began phasing out its $5 foot-long sandwiches a decade ago. But these days, other fast-food chains have revived the $5 price point, hoping to win over customers who have cut back on their spending.
As many restaurant companies prepare to report their second-quarter results, investors expect diners to frequent their locations and sales to slow, with some exceptions such as Chipotle. Chains such as McDonald’s, Taco Bell, Burger King and Wendy’s have released or revived meal deals with a $5 price tag, hoping to boost their results next quarter.
While Wall Street doesn’t expect a big sales bump from the ads, McDonald’s said it’s seeing an increase in traffic as a result.
During economic downturns, fast food generally fares better than the broader industry. But rising prices over the past several years have led many consumers to conclude that fast food is no longer a good deal. More than 60% of recent respondents A LendingTree survey reported They cut down on their fast food spending because it was too expensive.
Runaway menu prices have scared off many fast-food customers, including low-income earners who make up a significant portion of the industry’s customer base. Recognizing diners’ fast-food backlash, players like Brinker International’s Chili’s used their marketing to highlight their own value relative to the cost of fast-food meals. Casual-dining chains have taken some market share from the fast-food industry, Darden Restaurants CEO Rick Cardenas said in June.
“It’s a battle for the less affluent customer,” said Robert Byrne, senior director of consumer research for restaurant market research firm Technomic.
That shift in consumer behavior has also spooked Wall Street. Shares of McDonald’s, Burger King parent Restaurant Brands International and Wendy’s have all fallen by double digits this year. Taco Bell owner Yum Brands is down more than 1% in 2024. Meanwhile, the S&P 500 rose 14%.
“The feeling among investors is that the second quarter is going to be a forgettable one — you’re going to lose a lot of big chains out of consensus. [estimates],” KeyBanc analyst Eric Gonzalez told CNBC.
McDonald’s is expected to report its second-quarter earnings on Monday, while Wendy’s is set to announce its results on Wednesday. Restaurant Brands and Yum Brands are expected to report their quarterly earnings next week.
Promotes meal deals at a McDonald’s restaurant in Burbank, California on July 22, 2024.
Mario Tama | Good pictures
In general, fast food chains tend to focus their discounts and value meals on the first quarter, when customers 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 usually don’t have to rely on deals to bring in customers.
But this summer is different. Fast-food chains need discounts to fuel transportation and sales growth.
“The reality is that restaurants are running out of room to put higher prices on their menus,” Byrne said.
But Value Foods isn’t just about increasing traffic.
“It’s also about turning contract consumers into high-ticket consumers by introducing other add-ons or other things they can do,” Byrne said. “The danger is that they don’t.”
Without convincing customers to add a milkshake or another entrée to their order, discounts won’t be profitable and long-lasting. That’s a big concern for investors, who are already skeptical that the chains won’t see the traffic they expect.
“The value menus came out at the end of the quarter. The fear is that it’s not going to get any better, and it’s going to be a race to the bottom,” Gonzalez said.
A $5 foot stretch of tunnel offers its own cautionary tale. While the deal proved popular with customers, it was not well received by operators, eroding their profits and creating other problems with the brand. That led to restaurant closures, exasperated operators and years of searching for a new way to bring back customers.
Investors aren’t the only ones skeptical of incentives—owners also often push back against discounts because they hurt their profits.
In recent years franchisees have gained more power to resist contracting strategies of parent companies. Many of the owners these days are older, with more restaurants and sometimes private equity money.
At McDonald’s, owners banded together to form the National Owners Association in 2018, protesting against the burger giant’s unpopular discounts and plans for store renovations. Since then, the chain’s operators have further fought against the management’s plans.
McDonald’s initial proposal for a $5 meal didn’t pan out, so Coca-Cola chipped in marketing funds to make it more attractive to operators. Coke CEO James Quincey said on Tuesday’s earnings call that the beverage giant’s home sales in the U.S. were weak as quick-service restaurants struggled. According to Quincy, Coke is working with food service customers to market food and beverage combos to drive demand.
McDonald’s on Monday pushed its value meal past its initial four-week period. Ninety-three percent of its restaurants voted in favor of the extension, executives wrote in a memo to the U.S. organization seen by CNBC.
According to executives and call traffic data, this promotion is bringing customers back to its restaurants. McDonald’s $5 meal launch day, June 25, has seen 8% more visits than the average Tuesday so far in 2024, according to a report by Placer.ai. As daily attendance exceeded the year-to-date average, the pattern was repeated on the following days. Placer.ai also helped drive traffic to discounts Buffalo Wild Wings, Starbucks and Chili’s.
In his quarterly survey of more than 20 McDonald’s franchisees, Mark Kalinowski, an analyst at Kalinowski Equity Research, asked respondents what percentage of their sales had been helped by the $5 meal deal. The average response was 1.3%.
“These responses may view the $5 meal deal as an initiative that may deter some customers from going elsewhere, as opposed to a major sales builder,” Kalinowski wrote in a research note on Wednesday’s poll results.
