- With restaurant sales declining, Burger King, McDonald’s and Wendy’s are all responding to price-weary consumers with budget-friendly menus.
- Some fast food industry experts call these value meal deals unprofitable “loss leaders.”
- Franchisees say the new promotions provide relief to customers squeezed by inflation, although margins may shrink if they fail to entice customers to buy additional tickets or gain market share from competitors.
A customer views a digital menu at the drive-thru outside a McDonald’s restaurant in Peru, Illinois.
Daniel Acker | Bloomberg | Getty Images
Fast food restaurants are pandering to consumers’ inflation-weary wallets by restoring bargain prices to their menus – for a limited time. McDonald’s is offering a $5 value menu this month. Wendy’s offers a $3 breakfast. Burger King is adding value-added offerings that it says will be offered “for several months.”
There’s a reason why value meals only return on a limited basis, says Shubhranshu Singh, associate professor of marketing at Johns Hopkins Carey Business School, who has studied the economics of value meals in fast food. In a world where homeownership has also been hit hard by inflation, this is an “at cost” deal at best and a waste of money at worst.
“This $5 meal is not an item that can be an integral part of the menu; the cost has increased so much that if franchisees sell meals worth $5, they will lose money on every customer who buys them,” Singh said. .
Indeed, although a national association of McDonald’s franchisees welcomed the news, it said companies needed to invest more to make it a permanent item on the menu.
At McDonald’s, options include a McChicken or McDouble, four-piece chicken nuggets, fries and a drink. The Wendy’s deal includes a bacon or sausage sandwich, egg, Swiss cheese and croissant, plus a small order of crispy seasoned potatoes (drink not included). Burger King offers one of three sandwiches or nuggets, plus fries and a drink.
What restaurants simply need is for diners to add more to orders.
“They want customers to get the value meal and then buy more. The idea is not that the consumer buys a value meal and leaves,” Singh said. “If consumers do that, selling that value meal will be a really bad idea.”
In major markets like California, where the minimum wage for fast food workers is now $20 – and where inflationary pressures on ingredients and packaging persist – restaurants’ only hope of making profits Profit on a value meal is if a customer buys the meal and also adds an apple pie or other items with higher margins.
“How can they serve $5 meals on that minimum wage and still make a profit? That’s now impossible unless consumers buy something else,” Singh said.
Scott Rodrick, owner of 18 McDonald’s in Northern California, recently told CNBC that it has been “a roller coaster ride” since the new minimum wage took effect on April 1. “The impact of this inflation on the customer is the clearest and most current concern I have. as a franchisee today,” he said. “It has impacted margins.”
Margins are lower for franchisees due to royalties paid monthly to the company’s headquarters, often in the range of four to five percent.
A “break even” menu proposition, with free sauce on top
Nick Snowberger, owner of 16 McDonald’s restaurants in Montana and Wyoming, says focusing solely on the price of a particular menu is irrelevant.
“I focus on the holistic value, the total experience: the hospitality, the speed, the accuracy, the cleanliness of the restaurant,” said Snowberger, who noted that more than 95 percent of McDonald’s franchisees voted in favor of the $5 package.
Quality meals are about breaking even in terms of profit, Snowberger said, but it’s good for the customer. “This is an opportunity to do business at a cost to our customers that is as competitive and attractive as we have had in a long time.”
He also tries to offer a lifeline to customers in other ways, using the latitude and independence he has as a franchise owner.
“We have made the decision to no longer charge for extra sauces, we will give them to you for free. If an order is wrong we will correct it and we will accept all coupons as well as competitor coupons,” Snowberger said. said. These are his locally tailored decisions, as well as his support of high school sports, local fairs and booster clubs.
The cost of doing business has “exploded,” he said, with increases in everything from meat to lettuce, fuel, labor, condiments and wages. But he added: “We’re not upset about the value menu, but I don’t speak for those who have higher cost pressures than me.”
McDonald’s declined to comment on the impact of value-added meals on franchisees’ profits.
Franchisee focuses on frozen Coca-Cola and higher-margin menu items
Shoukat Dhanani, CEO of the Houston-based Dhanani Group, which owns and operates 510 Burger King restaurants in eight states, says cheap meals aren’t a losing proposition, even for franchisees.
“We are making less margin than usual. But we are not losing money,” Dhanani said. “They’re coming less; we want people to come more; everyone feels the traffic slowing down,” he said.
His company also operates 170 Popeyes restaurants, but says chicken chains have yet to feel the pricing pressure to add a value-added meal.
Burger King franchisees, like McDonald’s, can vote on new product concepts. “When a promotion comes up like this, we vote on it; if it passes, we roll it out. We have a say,” Dhanani said.
Despite the pricing pressures consumers are feeling now, Dhanani says the situation was worse for fast food restaurants in 2022, when inflationary pressure hit them hardest, from labor pressure to prices of raw materials. It’s the consumer who is now reaching their breaking point, he said.
“Due to rising inflation, wages and insurance, we have to increase our prices accordingly to stay in business. When we pass on this increase, many consumers experience a shock,” Dhanani said.
He expects the value menu to be a success, even if the margins are smaller. Dessert drinks like Burger King’s Iced Coke and Iced Strawberry Lemonade have the highest profit margins.
At McDonald’s, franchisees have had experience selling meal plans for several years, often for $4 or less. “We try to remain a value proposition as much as possible,” Snowberger said. “But I can also tell you with 100 percent certainty that when you come, I want to try to sell you more. We always hope to sell additional items, pies, cookies, shakes or bacon on your burger.”
Advertiser “error” at a loss compared to market share gain
Big fast-food chains aren’t the only ones trying to appease exhausted customers while keeping franchise operators happy.
Craig Dunaway, chief operating officer of Penn Station East Coast Subs, which operates 320 restaurants in 15 states, says the value concept tried by larger competitors is a loss leader and generally a bad business idea.
“As a franchisor, what we sell is a return on investment. If your franchisee doesn’t make money, they won’t grow, so introducing loss leader products is a mistake for franchisors “, did he declare. Only one Penn Station East Coast Subs location is company-owned; the rest is made up of deductibles.
Value menus are a way to attract consumers and hope they change their minds, but Penn Station allows franchisees to set their prices, while the company sets suggested prices and doesn’t delve into territory loss leader products.
“If Penn Station tried the price game, we would lose,” Dunaway said, noting that the chain absorbs some of the higher costs rather than continually raising prices. At the same time, it is trying to develop new products at competitive prices, such as a half-sandwich for $4.99 on a 9-grain bread tested this summer.
But Rodrick says there’s another way to win with value: increasing market share in an era of declining traffic. He said recent data shows fewer customers in restaurants and those who do come are spending less than before. “The competitive space is heating up extraordinarily and we plan to be at the forefront of providing some relief to customers affected by inflation. … Sometimes, as a franchisee like me, you need to invest in the margin,” Rodrick said.
Although local franchisees have done a good job of value campaigns in their markets, he added that McDonald’s “national value communication” has “eluded us lately.”
Although Rodrick described the profit pressure his company faces in California as “extraordinary” — in addition to wages, it includes a massive increase in insurance costs in the state — “I can just lament the impact or be aggressive about increasing market share,” he told CNBC.
No matter how much a franchisee may sacrifice in terms of margins, the value of meals attracts customers.
Randi Maerz, a nurse in Keokuk, Iowa, recently skipped the McDonald’s breakfast burrito and was lured to Wendy’s to try the $3 breakfast menu.
“I didn’t want to pay $5 for two burritos at McDonald’s, and one just isn’t very filling,” she said.