Fast-food chains battle for low-income diners with summer value meals

Subway
started
phasing
out
its
$5
footlong
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
their
spending.

As
many

restaurant
companies
prepare
to
report
their
second-quarter
results,
investors
are
expecting
to
hear
that
diners
are
visiting
their
locations
less
frequently
and
that
sales
have
turned
sluggish,
with

few
exceptions
such
as


Chipotle.
In
the
hopes
of
lifting
their
results
for
next
quarter,
chains
such
as


McDonald’s,
Taco
Bell,
Burger
King
and


Wendy’s
have
unveiled
or
revived
meal
deals
with
a
$5
price
tag.

McDonald’s
said
it
is
seeing
traffic
increase
as
a
result,
although
Wall
Street
is
not
expecting
a
big
sales
bump
from
the
promotions.

Fast
food
typically
fares
better
than
the
broader
industry
during
economic
downturns.
But
the
last
several
years
of
price
hikes
have
led
many
consumers
to
conclude
that
fast
food
just
is
not
a
good
deal
anymore.
More
than
60%
of
respondents
to
a
recent

LendingTree
survey
said
they
have
cut
back
their
fast-food
spending
because
it
is
too
expensive.

Runaway
menu
prices
have
scared
off
many
fast-food
customers,
including
those
in
the
low-income
bracket
who
make
up
a
sizable
chunk
of
the
sector’s
customer
base.
Sensing
diners’
fast-food
backlash,
players
such
as


Brinker
International’s
Chili’s
have
used
their
marketing
to
highlight
their
own
value
relative
to
the
cost
of
a
fast-food
meal.
Casual-dining
chains
have
taken
some
market
share
from
the
fast-food
sector,


Darden
Restaurants
CEO
Rick
Cardenas
said
in
June.

“It’s
the
war
for
the
less
affluent
customer,”
said
Robert
Byrne,
senior
director
of
consumer
research
for
Technomic,
a
restaurant
market
research
firm.

That
change
in
consumer
behavior
has
also
scared
away
Wall
Street.
Shares
of
McDonald’s,
Burger
King
parent


Restaurant
Brands
International
and
Wendy’s
have
all
slid
by
double
digits
this
year.
Taco
Bell
owner


Yum
Brands
is
down
more
than
1%
in
2024.
Meanwhile,
the
S&P
500
is
up
14%.

“The
sense
among
investors
is
that
the
second
quarter
is
probably
going
to
be
one
to
forget
—
you’re
going
to
see
a
lot
of
large
chains
probably
miss
consensus
[estimates],”
KeyBanc
analyst
Eric
Gonzalez
told
CNBC.

McDonald’s
is
expected
to
report
its
second-quarter
earnings
on
Monday,
while
Wendy’s
is
slated
to
announce
its
results
on
Wednesday.
Restaurant
Brands
and
Yum
Brands
are
expected
to
report
their
quarterly
earnings
the
following
week.

Generally,
fast-food
chains
tend
to
focus
their
discounts
and
value
meals
on
the
first
quarter,
when
consumers
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
do
not
need
to
rely
on
deals
to
bring
in
customers.

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

“The
fact
is
that
restaurants
are
running
out
of
space
to
take
more
price
on
their
menus,”
Byrne
said.

 But
the
value
meals
are
not
only
about
growing
traffic.

“It’s
also
about
converting
the
consumer
who’s
coming
for
the
deal
to
a
higher-ticket
consumer
by
introducing
other
add-ons
or
other
things
that
they
might
do,”
Byrne
said.
“The
risk
is
that
they
don’t.”

Without
convincing
customers
to
add
a
milkshake
or
another
entrée
to
their
order,
the
discounts
ding
profits
and
become
unsustainable
in
the
long
run.
That
is
a
big
worry
for
investors
who
are
already
skeptical
that
chains
will
not
see
the
traffic
bump
they
are
hoping
for.

“The
value
menus
rolled
out
toward
the
end
of
the
quarter.
There’s
just
a
fear
that
it’s
not
going
to
get
any
better,
and
it’s
going
to
be
a
race
to
the
bottom,”
Gonzalez
said.

Subway’s
$5
footlong
presents
its
own
cautionary
tale.
Although
the
deal
was
popular
with
customers,
it
outstayed
its
welcome
with
operators,
eroding
their
profits
and
compounding
other
issues
with
the
brand,
such
as
sales
cannibalization
from
its
massive
footprint.
That
led
to
restaurant
closures,
angry
operators
and
years
of
searching
for
a
new
way
to
bring
back
customers.

Investors
are
not
the
only
ones
skeptical
about
the
promotions
—
so
are
franchisees,
who
often
push
back
against
discounts
because
they
hurt
their
profits.

Franchisees
have
also
gained
more
power
to
resist
parent
companies’
deal
strategies
in
recent
years.
Many
franchisees
are
larger
these
days,
with
more
restaurants
and
sometimes
even
private
equity
money.

At
McDonald’s,
franchisees
banded
together
to
form
the
National
Owners
Association
in
2018,
rebelling
against
the
burger
giant’s
unpopular
discounts
and
plans
for
store
renovations.
Since
then,
the
chain’s
operators
have
fought
back
more
against
management’s
plans.

An
initial
proposal
of
McDonald’s
$5

value
meal
did
not
pass
muster,
so


Coca-Cola
chipped
in
marketing
funds
to
make
the
deal
more
attractive
to
operators.
Coke
CEO

James
Quincey
said
on
Tuesday’s
earnings
call
that
the
beverage
giant
has
seen
weaker
away-from-home
sales
in
the
U.S.
as
quick-service
restaurants
struggle.
To
boost
demand,
Coke
is
partnering
with
food-service
customers
to
market
food
and
drink
combo
meals,
according
to
Quincey.

McDonald’s
on
Monday

extended
its
value
meal
past
its
initial
four-week
window.
Ninety-three
percent
of
its
restaurants
voted
in
favor
of
the
extension,
executives
wrote
in
a
memo
to
the
U.S.
system
viewed
by
CNBC.

The
promotion
is
bringing
customers
back
to
its
restaurants,
according
to
both
executives
and
foot
traffic
data.
June
25,
the
launch
day
of
McDonald’s
$5
meal,
drew
8%
more
visits
than
the
average
Tuesday
in
2024
so
far,
according
to
a
report
from
Placer.ai.
The
pattern
repeated
in
the
following
days
as
the
chain
exceeded
year-to-date
daily
visit
averages.
Placer.ai
also
found
that
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
were
helped
incrementally
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
may
help
prevent
some
customers
from
going
elsewhere,
as
opposed
to
a
big
sales
builder,”
Kalinowski
wrote
Wednesday
in
a
research
note
about
the
survey
results.