Subway began phasing out its foot-long $5 sandwiches a decade ago. However, other fast-food chains have recently revived the $5 price tag to attract customers who have cut back on spending.
As many restaurant companies prepare to report second-quarter results, investors expect to hear that customer visits have declined and sales have slowed, with a few exceptions like Chipotle. To boost next quarter’s results, chains like McDonald’s, Taco Bell, Burger King, and Wendy’s have introduced or reintroduced $5 meal deals.
McDonald’s expects traffic to increase due to these promotions, although Wall Street remains skeptical that they will significantly boost sales.
Fast food typically outperforms the broader industry during economic downturns. However, recent price increases have led many consumers to believe that fast food is no longer a bargain. More than 60% of respondents to a recent LendingTree survey said they have cut back on fast food because of high costs.
Rising menu prices have turned off many fast-food customers, including those with lower incomes, who make up a significant portion of the industry’s clientele. In response, operators like Brinker International Chili’s have used marketing to emphasize their value over fast food. Casual dining chains have begun to take market share from the fast-food industry, according to Darden Restaurants CEO Rick Cardenas.
“It’s a battle to win over less affluent customers,” said Robert Byrne, senior director of consumer research at Technomic, a restaurant market research firm.
This shift in consumer behavior has also unsettled Wall Street. Shares of McDonald’s, Burger King parent Restaurant Brands International, and Wendy’s have all fallen by double digits this year. Taco Bell owner Yum Brands is down more than 1% in 2024, while the S&P 500 is up 14%.
“The sentiment among investors is that the second quarter will likely be disappointing, with many large chains likely to miss consensus estimates,” KeyBanc analyst Eric Gonzalez told CNBC.
McDonald’s will report its second-quarter earnings on Monday, while Wendy’s will report its results on Wednesday. Restaurant Brands and Yum Brands will report their quarterly earnings the following week.
Can meal deals increase sales?
A sign advertises meal deals at a McDonald’s restaurant in Burbank, California, on July 22, 2024.
Mario Tama | Getty Images
Fast food chains typically focus on discounts and value meals in the first quarter, when consumers are trying to save money after the holidays and stick to New Year’s resolutions. As temperatures rise, restaurant sales also rise, usually negating the need for deals to attract customers.
This summer, however, is different. Fast food chains need discounts to increase traffic and sales.
“The fact is that restaurants are running out of room to charge higher prices on their menus,” Byrne said.
But fast food isn’t just about driving traffic.
“It’s also about converting the consumer who comes in for the deal into a higher-priced customer by introducing add-ons or other items,” Byrne said. “The risk is that they don’t do it.”
Without convincing customers to add a milkshake or other entrée to their order, discounts can eat into profits and become unsustainable in the long run. This is a significant concern for investors who are already skeptical about the traffic boost these promotions are expected to generate.
“The value menus were launched towards the end of the quarter. There’s just a fear that they’re not going to get better and that it’s going to be a race to the bottom,” Gonzalez said.
Subway’s 5-foot offerings are a cautionary tale. While popular, they have remained a staple for operators for far too long, eroding profits and exacerbating other brand problems, such as sales cannibalization. This has led to restaurant closures, disgruntled operators, and years of searching for new ways to attract customers.
Franchisee skepticism
It’s not just investors who are skeptical of promotions; affiliates are often reluctant to accept discounts because they hurt their profits.
In recent years, franchisees have gained more power to resist parent companies’ deal-making strategies. Many franchisees now operate multiple restaurants and sometimes even have the backing of private equity.
At McDonald’s, franchisees formed the National Owners Association in 2018, pushing back against the burger giant’s unpopular discounts and store renovation plans. Since then, chain executives have been more transparent about management’s plans.
McDonald’s initial proposal for a $5 meal was rejected, so Coca-Cola contributed marketing dollars to make the deal more attractive to operators. Coca-Cola CEO James Quincey said on Tuesday’s earnings conference call that the beverage giant has seen weaker out-of-home sales in the U.S., while fast-food restaurants are struggling. To boost demand, Coca-Cola is partnering with foodservice customers to market food-and-beverage combo meals, according to Quincey.
McDonald’s has extended its convenient meal promotion beyond 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 seen by CNBC.
The promotion is bringing customers back to its restaurants, according to executives and foot traffic data. June 25, the launch day of McDonald’s $5 meal, saw an 8% increase in visits compared to the 2024 Tuesday average, according to a report from Placer.ai. The pattern continued in subsequent days, as the chain surpassed its 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 incrementally increased by the $5 meal offer. The average response was 1.3%.
“These responses suggest that the $5 Meal Deal may be helping some customers avoid going elsewhere, rather than being a meaningful sales tool,” Kalinowski wrote in a research note Wednesday.