The McDonald’s logo is displayed at a McDonald’s restaurant in Burbank, California on July 22, 2024.
Mario Tama | Getty Images
Subway began phasing out its $5 sandwiches a decade ago. But now other fast-food chains have revived the $5 price, hoping to woo customers who have been cutting back.
As many restaurant chains prepare to report second-quarter earnings, investors expect customers to visit their restaurants less frequently and sales to slow, with a few exceptions, such as Chipotle. In hopes of boosting their results for the next quarter, chains including McDonald’s, Taco Bell, Burger King and Wendy’s have unveiled or relaunched $5 meal deals.
McDonald’s said traffic is increasing as a result, although Wall Street doesn’t expect a big boost in sales from the promotions.
In tough economic times, fast food typically fares better than the rest of the industry. But price increases in recent 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 fast food because it is too expensive.
Exorbitant menu prices have driven away many fast-food customers, especially those in the lower-income bracket, who make up a significant portion of the industry’s customer base. Sensing the backlash from fast-food customers, players like Brinker International’s Chili’s have used their marketing to emphasize their own value relative to the cost of a fast-food meal. Fast-food chains have taken 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.
This shift in consumer behavior has also spooked Wall Street. Shares of McDonald’s, Restaurant Brands International, the parent company of Burger King, and Wendy’s have all fallen more than 10% this year. Taco Bell owner Yum Brands is down more than 1% in 2024. Meanwhile, the S&P 500 is up 14%.
“The sentiment among investors is that the second quarter is probably going to be a quarter to forget – you’ll see a lot of the big chains probably miss consensus (estimates),” KeyBanc analyst Eric Gonzalez told CNBC.
McDonald’s is scheduled to report its second-quarter results on Monday, while Wendy’s is scheduled to report results on Wednesday. Restaurant Brands and Yum Brands are scheduled to report quarterly results the following week.
A sign advertises meal deals at a McDonald’s restaurant in Burbank, California, on July 22, 2024.
Mario Tama | Getty Images
Typically, fast-food chains tend to focus their discounts and meal deals on the first quarter, when consumers are trying to save money after the holiday season and keep their New Year’s resolutions. As temperatures rise, restaurant sales increase, and operators typically don’t need to rely on deals to attract customers.
But this summer is different. Fast food chains need discounts to drive traffic and sales growth.
“The fact is that restaurants are running out of room to raise their menu prices,” Byrne said.
But value meals aren’t just about driving traffic.
“It’s also about converting the consumer who comes to take advantage of the offer into a more demanding consumer by offering them other options or other things they could do,” Byrne said. “The risk is that they won’t do it.”
If customers aren’t convinced to add a milkshake or other entrée to their order, the discounts eat into profits and become unsustainable in the long run. That’s a major worry for investors who are already skeptical that chains won’t see the traffic boost they’re hoping for.
“The cheap menus were launched towards the end of the quarter. There’s just a concern that things aren’t going to improve and we’re going to see a race to the bottom,” Gonzalez said.
Subway’s 5-foot-long model is a classic cautionary tale. While the deal was popular with customers, it stuck with operators, eroding their profits and compounding other brand problems, like sales cannibalization due to its massive footprint. It led to restaurant closures, angry operators and years of searching for a new way to keep customers coming back.
Investors aren’t the only ones skeptical of these promotions. Franchisees are, too, who often oppose discounts because they hurt their profits.
Franchisees have also gained more power in recent years to resist the takeover strategies of parent companies. Today, many franchisees are larger, have more restaurants and sometimes even private equity.
At McDonald’s, franchisees banded together to form the National Owners Association in 2018, rebelling against the burger giant’s unpopular discounts and store renovation plans. Since then, the chain’s operators have become increasingly resistant to management’s plans.
An initial proposal for a $5 McDonald’s meal didn’t go through, so Coca-Cola has been pouring marketing dollars into making the deal more attractive to operators. Coca-Cola CEO James Quincey said on Tuesday’s earnings call that the beverage giant has seen a decline in U.S. out-of-home sales due to struggles at quick-service restaurants. To boost demand, Coca-Cola is partnering with restaurant customers to market food-and-drink combo meals, Quincey said.
McDonald’s on Monday extended the validity of its discounted meal program beyond the initial four-week period, with 93% of its restaurants voting in favor of the extension, executives wrote in a memo to the U.S. system seen by CNBC.
The promotion is bringing customers back to its restaurants, according to executive and traffic data. June 25, the day McDonald’s $5 meal launched, attracted 8% more visits than the average Tuesday in 2024 so far, according to a report from Placer.ai. The pattern has repeated itself on subsequent days, with the chain outpacing year-to-date daily visit averages. 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 had been improved by the $5 meal deal. The average response was 1.3%.
“These responses may suggest that the $5 meal deal should be viewed as an initiative that could help keep some customers from going elsewhere, as opposed to a significant sales generator,” Kalinowski wrote Wednesday in a research note on the survey results.