McDonald’s, Wendy’s, Burger King Compete to Target Low-Income Restaurants

Subway began phasing out its $5 footlong sandwich a decade ago, but now other fast-food chains are bringing back the $5 price point to entice shoppers who are spending less.

As many restaurant companies prepare to report second-quarter earnings, investors are expecting fewer diners and weaker sales. Chiplet. To boost next quarter’s performance, the following chain stores: McDonald’sTaco Bell, Burger King, etc. Wendy’s Announced or revived the $5 meal deal.

McDonald’s said the promotion had led to an increase in visitors, but Wall Street doesn’t expect it to lead to a significant increase in sales.

Fast food generally performs better than the broader industry during recessions. But the 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 to a recent LendingTree survey said they have cut back on fast food because it is too expensive.

The skyrocketing menu prices are scaring off many fast food customers, including those on low incomes, who make up a significant portion of the sector’s customer base. Sensing the backlash from diners toward fast food, the following companies are Brinker International Chili’s used marketing to emphasize its value for money over fast-food meals. Casual dining chains have taken some market share in the fast-food sector, Daden Restaurant CEO Rick Cardenas said in June:

“This is a battle for the economically strapped customer,” said Robert Byrne, senior director of consumer research at restaurant market research firm Technomic.

Such changes in consumer behavior have spooked Wall Street. Shares of McDonald’s, Burger King’s parent company Restaurant Brands International And Wendy’s is down double digits this year. Taco Bell owner Yam Brand It is expected to fall by more than 1% in 2024, while the S&P 500 is expected to rise by 14%.

“There is a lot of consensus among investors that Q2 is going to be a quarter to remember, with a lot of the big chains likely to miss the consensus (estimates),” KeyBanc analyst Eric Gonzalez told CNBC.

McDonald’s reported worse-than-expected second-quarter results on Monday, but only just days before the end of the period, it introduced value meals. Wendy’s is scheduled to report on Wednesday. Restaurant Brands and Yum Brands are expected to report quarterly results next week.

Typically, fast-food chains tend to focus on discounts and value meals in the first quarter of the year, when consumers are trying to save money and stick to their New Year’s resolutions after the holidays. As temperatures rise, restaurant sales also increase, and operators generally don’t have to rely on discounts to attract customers.

But this summer is different. Fast-food chains need discounts to drive traffic and sales growth.

“The truth is, restaurants are running out of room to raise their menu prices,” Byrne said.

But a worthwhile meal isn’t limited to increased traffic.

“It’s also about converting consumers who come in for a transaction into higher-ticket consumers by introducing them to other add-ons or other things they can do,” Byrne said. “The risk is they don’t do that.”

Discounts can be detrimental to revenue and unsustainable in the long run if they don’t convince customers to add a milkshake or other main dish to their order. This is a major concern for investors who are already skeptical that chains won’t see the traffic increases they expect.

“The value menu came out at the end of the quarter. There was a fear that it wouldn’t get any better and it would be a race to the bottom,” Gonzalez said.

Subway’s $5 footlongs offer a cautionary tale of their own. The deal was popular with customers, but it was unpopular with operators, eating into profits and exacerbating other problems for the brand, such as the massive footfall that led to restaurant closures, angry operators, and years of searching for new ways to bring customers back.

Investors aren’t the only ones skeptical of promotions. Franchisees are also often against discounts, citing the risk that they will reduce their profits.

Franchisees have gained more power in recent years to resist parent company dealmaking tactics. Many franchises these days are larger, have more restaurants, and sometimes even have private equity funding.

McDonald’s franchisees formed the National Owners Association in 2018 to protest the burger giant’s unpopular discounts and store renovation plans. Since then, chain operators have increasingly resisted management’s plans.

McDonald’s $5 meal proposal didn’t pass. Coca Cola It has been funding marketing to make the deal more attractive to operators. Coke CEO James Quincey said in an earnings call Tuesday that the beverage giant has seen weaker travel sales in the United States as fast-food restaurants struggle. Coke is working with foodservice customers to market food and drink combo meals to drive demand, Quincey said.

On Monday, McDonald’s extended its Value Meal program for an initial four weeks. According to a memo sent to U.S. systems seen by CNBC, 93% of McDonald’s restaurants voted in favor of the extension.

According to executive and visitor data, the promotion is bringing customers back to restaurants. According to a report from Placer.ai, the launch day of McDonald’s $5 meal, June 25, has attracted 8% more visitors so far than the average Tuesday in 2024. The pattern repeated the following day, as the chain surpassed its average daily visitor count this year. Placer.ai also found that the discount helped drive traffic to Buffalo Wild Wings, Starbucks, and Chili’s.

Mark Kalinowski, an analyst with Kalinowski Equity Research, conducted quarterly surveys of more than 20 McDonald’s franchisees, asking respondents what percentage of their sales they thought $5 meal deals increased. The average response rate was 1.3%.

“These responses may suggest that $5 meal discounts should be viewed as an initiative that helps prevent some customers from going elsewhere, rather than a major sales driver,” Kalinowski wrote in a research note about the survey results Wednesday.