For years, restaurant executives had a confident message for investors: We’re raising prices, and customers don’t care.
Well, now diners do — and fast food chains, especially, are rapidly changing course.
Frustrated diners are complaining online about how expensive fast food has become. Low-income consumers in particular are dining out less often, and spending less when they do. For some fast food restaurants, that means slowing sales and less foot traffic.
To win people back, these chains are returning to a strategy they tried to leave behind: Discounts.
KFC recently introduced a value menu with meals starting at $4.99. Burger King is bringing back a $5 meal. Even McDonald’s, which had been adept at raising prices without losing sales, is asking its franchise operators to embrace a $5 meal. Taco Bell, Jack in the Box, Wendy’s and others have been highlighting their own budget items in recent months, and adding more.
Restaurant chains in recent years have highlighted their value, making the case to customers that they’re getting a deal, even when prices go up. But it’s been a long time since they used discounted meals as a strategy to drive traffic, noted Peter Saleh, restaurant analyst at BTIG.
“We haven’t had discounting, or promotions, really since pre-pandemic,” he said, marking “the longest period, I think, we’ve ever gone … without this type of level of promotions.”
Price promotions are a gamble (or, as one analyst described them during a recent Wendy’s earnings call, akin to “a street fight.”) Discounts eat into margins, and are only effective if they significantly boost customer traffic. That’s not so easy to do, especially when competitors are also dropping prices and vying for a shrinking customer base.
“There is a battle to try and hang on to market share,” Saleh said. So, restaurants are going all in on deals — for now.
During an April 30 analyst call, McDonald’s CEO Chris Kempczinski laid out the stakes for the burger chain:
“It’s imperative that we continue to keep affordability at the forefront for our customers,” he said. “We literally wrote the playbook on value, and we are committed to upholding our leadership within the industry.”
However, McDonald’s had already fallen behind. Wendy’s, which has a $5 menu, has been periodically offering $3 breakfast deals since at least last year. KFC launched its value menu earlier that month. Burger King’s franchisees had in April already agreed to bring back the chain’s $5 Your Way Meal, though it is not yet available.
Kempczinski told analysts that while competitors had nationwide meal bundles, McDonald’s did not. “The opportunity for us in the US, I think, is to get more aligned as a system around a strong national value proposition,” he said.
A few weeks after that call, The Wall Street Journal reported that McDonald’s was planning to run a $5 meal promotion for about a month starting at the end of June. A May statement from the National Owners Association, a group for McDonald’s franchise operators, indicated that operators were deciding whether to adopt the promotion, which would include chicken nuggets, fries, a soft drink and either a McDouble hamburger or McChicken sandwich for $5. An NOA representative declined this week to comment on the status of the vote.
Restaurants are being careful to limit their promotions to a set period of time — nobody wants an endless-shrimp-style debacle. But even so, the price wars could get ugly.
“We believe this represents a tipping point in the [quick service restaurant] industry’s intensified push on value that we worry will extend beyond the promotion’s scheduled run as competitors look to protect share,” Cowen analyst Andrew Charles wrote in a note, referencing the McDonald’s deal.
Indeed, Burger King is rushing out its meal deal before McDonald’s, according to Bloomberg. Burger King’s $5 meal will include a sandwich plus nuggets, fries and a drink, and the promotion will last for several months, Bloomberg reported. A Burger King spokesperson confirmed to CNN that it plans to offer a $5 meal, without sharing more details.
The move by McDonald’s “reminds us of McDonald’s 2018 experience when a national value menu was last the center of attention,” Charles added in his note. That year, McDonald’s launched a revamped version of its dollar menu, with $1, $2 and $3 items. That offering “was not successful,” in boosting traffic or grabbing market share, he said.
A race to the bottom is “always the danger,” when it comes to cutting prices, said David Henkes, a senior principal at Technomic, a food industry research and consulting firm. “Margin and profitability is going to be the challenge for 2024,” he added. “These value meals in the short term are only going to exacerbate that.”
So, executives are proceeding with caution.
Burger King “want[s] to avoid some of the deeper discounting” that took place in the past, said Josh Kobza, CEO of Burger King parent company Restaurant Brands International, during an April analyst call.
Companies can limit the financial impact of these deals by letting them expire after a few months, Henkes said. They can also make them available through digital channels, which at least give restaurants valuable data about their customers.
And more deals don’t mean that menu prices are dropping, or even staying the same.
“I think we’re back to an environment of more normal price increases,” of roughly 2-3% said BTIG’s Saleh. “The actual menu price will not be coming down.”
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