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 its five-foot sandwiches a decade ago. But these days, other fast-food chains have revived the $5, hoping to win over customers who have cut back on their spending.
As many restaurant companies prepare to report their second-quarter results, investors are expecting to hear that diners are visiting their restaurants less frequently and that sales have slowed, with a few exceptions like Chipotle. Hoping to boost their results for the upcoming quarter, chains like McDonald’s, Taco Bell, Burger King and Wendy’s have unveiled or revived $5 meal deals.
McDonald’s said it is seeing increased traffic as a result, although Wall Street does not expect a significant increase in sales from the promotions.
Fast food typically performs better than the broader industry during economic downturns. But rising prices in 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 2011 survey said fast food was no longer a good deal. LendingTree survey said They cut back on fast food because it’s too expensive.
High menu prices have turned off many fast-food customers, including those in the lower income bracket who make up a large portion of the industry’s customer base. Recognizing the reaction of diners to fast food, companies like Brinker International’s Chili’s have used their marketing to highlight their relative value compared to the cost of a fast-food meal. In June, Darden Restaurant CEO Rick Cardenas said that casual-dining chains were taking some market share from the fast-food segment.
“It’s a war on the less affluent customer,” said Robert Byrne, senior director of consumer research at Technomic, a restaurant market research firm.
This shift in consumer behavior has also sent Wall Street into a tailspin. Shares of McDonald’s, Restaurant Brands International, the parent company of Burger King, and Wendy’s are down double digits this year. Shares of Yum Brands, the owner of Taco Bell, are down more than 1% in 2024. Meanwhile, the S&P 500 is up 14%.
“Investors feel that the second quarter is likely to be one of the months to forget – you will see a lot of big chains likely fail to meet consensus [estimates]KeyBanc analyst Eric Gonzalez told CNBC:
McDonald’s is expected to report its second-quarter earnings on Monday, while Wendy’s is scheduled to report its results on Wednesday. Restaurant Brands and Yum Brands are expected to report their quarterly earnings the following week.
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 on discounts and value meals in the first quarter, when consumers are trying to save money after the holiday season and stick to New Year’s resolutions. As temperatures rise, restaurant sales rise, and operators typically don’t need to rely on deals to attract customers.
But this summer is different. Fast-food chains need discounts to encourage customer traffic — and sales growth.
“The reality is that restaurants no longer have the space to add more prices to their menus,” Byrne said.
But value meals aren’t just about traffic growth.
“It’s also about turning the consumer who is looking for the deal into a higher-priced consumer by offering other add-ons or other things that they might do,” Byrne said. “The risk is that they don’t do that.”
Without convincing customers to add a milkshake or another main dish to their order, discounts eat into profits and become unsustainable in the long run. That’s a big concern for investors, who already suspect that chains won’t see the footfall they hope for.
“The value lists were rolled out by the end of the quarter. There is a fear that things will not improve, and there will be a race to the bottom,” Gonzalez said.
Subway’s five-foot-tall breakfast offers a cautionary tale of its own. While the deal was popular with customers, it was unpopular with operators, eating into their profits and exacerbating other problems with the brand, such as eroding sales due to its huge footprint. That led to restaurant closures, angry operators, and years of searching for a new way to lure customers back.
But investors aren’t the only ones who are skeptical of promotions — so are franchisees, who often oppose discounts because they hurt their profits.
Franchisees have also gained more power to resist parent companies’ dealmaking strategies in recent years. Many franchisees are now larger, with more restaurants and sometimes even private equity money.
At McDonald’s, franchisees banded together to form the National Franchisees Association in 2018, rebelling against the burger giant’s unpopular discounts and store renovation plans. Since then, the chain’s operators have increasingly resisted management’s plans.
McDonald’s initial $5 meal offer didn’t pass the test, so Coca-Cola threw in marketing dollars to make the deal more attractive to operators. Coca-Cola CEO James Quincey said on an earnings call Tuesday that the beverage giant has seen its out-of-home sales weaken in the U.S. as quick-service restaurants struggle. To boost demand, Coca-Cola is partnering with food-service customers to market shared meals and drinks, Quincey said.
McDonald’s on Monday extended its meal savings period four weeks after the initial deadline. Ninety-three percent of its restaurants voted in favor of the extension, executives wrote in a memo to the U.S. regulator seen by CNBC.
The promotion is bringing customers back to its restaurants, according to executives and foot traffic data. According to a report from Placer.ai, June 25, the day McDonald’s $5 meal launched, drew 8% more visits than the average Tuesday in 2024 so far. The pattern has repeated itself on subsequent days, with the chain surpassing its daily visitation average so far this year. Placer.ai also found that the 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 the $5 meal deal helped drive. The average response was 1.3%.
“These responses may suggest that the $5 meal deal should be viewed as an initiative that might help keep some customers from going elsewhere, rather than as a way to build significant sales,” Kalinowski wrote Wednesday in a research note about the survey results.
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