Fast food chains are betting on value this summer. Will it be enough to revive their struggling stocks?
Value is on the menu this summer.
Restaurant chains such as Taco Bell (YUM), McDonald’s (MCD), KFC and Burger King (QSR) have been leaning into sweet deals this summer in hopes of getting Americans to visit their restaurants more often and spend more when they do.
It’s an attempt to reverse the narrative that fast food has become too expensive. Sales at fast-food restaurants have finally begun to falter after chains raised prices in recent years to offset rising labor and raw material costs, deterring diners, especially low-income consumers.
This change was reflected in the impact on restaurant stocks this year. Shares of McDonald’s and Wendy’s (WEN) are both down 13% year to date, while shares of Burger King parent Restaurant Brands International are down 11.3%. and YUM! Brands only grew 1%.
Starbucks (SBUX), which markets itself as an affordable luxury, is now struggling to keep investors motivated, as it always does, with shares down 18% in 2024. The S&P 500 (^GSPC), meanwhile, is up nearly 15%.
Enter the world of cheap eats, which Wall Street pros say could boost foot traffic but squeeze margins.
Many will be watching closely throughout the month of July, which Evercore ISI analyst David Palmer called “a pivotal month for the fast-food industry,” for evidence that “the $5 meal deal is enough to accelerate industry sales.”
The limited-time value deal boils down to a simple proposition: When value strategies work, it’s because increased foot traffic offsets lower margins to bring in more dollars, the analyst said. Morningstar Sean Dunlop. Consumers adding more items to their checks also helps.
“It really comes down to… repeat visits after the fact,” RJ Hottovy, head of analytics research at Placer.ai, told Yahoo Finance. “You don’t make money on the value menu. You make money on the menu on the other products, the higher-end products, the desserts, the drinks that go with it.”
Consumers may welcome lower prices, but that doesn’t guarantee that fast food companies will benefit. And the proliferation of competitors in the field of value could lead to no clear winner.
“A war of values is not good for anyone,” Dunlop said. “This is also the typical reaction we see when industry traffic slows. … Everyone’s dominant strategy when traffic is down is to promote, discount and lean on value, but all actors lose if their peers also make this choice.”
The battle for values intensifies
On Thursday, Taco Bell became the latest quick-service restaurant to introduce a value offering. With a name that plays on the idea that fast food is now a luxury, the $7 Luxe Box menu includes a Chalupa Supreme taco, a beefy five-layer burrito, a double taco, chips and nacho cheese sauce, and a medium drink.
The company said the bundle offers a 55% discount on the total price of the items if purchased separately. And Nola Krieg, who is in charge of product development at Taco Bell, said the box echoes previous $5 box offerings the taco chain has had since the late 2000s.
“We saw an opportunity to offer consumers a hearty meal at a price that everyone can afford, which is $7,” Taco Bell CMO Taylor Montgomery told Yahoo Finance at Taco Bell headquarters. Montgomery suggested that other chains’ value offerings might not be as generous.
Taco Bell’s offering compares to other fast-food restaurants. McDonald’s $5 menu, which began Tuesday, includes a choice of a McDouble burger or McChicken sandwich plus four chicken McNuggets, small fries and a small soft drink.
Similarly, KFC’s $4.99 meal offers two pieces of chicken, a side of mashed potatoes and gravy, and a biscuit, while Burger King’s $5 Your Way Meal includes your choice of a chicken Jr., Whopper Jr. or bacon cheeseburger to accompany fries. , nuggets and a drink.
Wendy’s also upgraded its $5 Biggie Bag, a permanent offer introduced five years ago, by adding a free Frosty. And even Starbucks has a “pairing menu.” For $5 or $6, customers can get a small iced or hot coffee with a buttery croissant or breakfast sandwich.
And even if promotions are making a comeback, this tasty competition is not new in the industry.
In 2016, McDonald’s, Burger King and Wendy’s competed on price. McDonald’s offered its McPick menu for $2, Burger King offered a 5-for-$4 menu and Wendy’s offered a 4-for-$4 menu. All saw their sales increase by 3 to 5% in the first quarter of 2016.
Fast food is back in the spotlight
So, does it work this time? Preliminary results show that these agreements could well be concluded.
“Over the last couple of weeks in particular, we’ve started to see fast food restaurants come back to the center of attention for many consumers as these value menus have been rolled out,” Hottovy said, adding that this “value extreme is really resonating with consumers right now.”
Burger King is “definitely” seeing positive traction from its $5 promotion, Hottovy noted, while Wendy’s $5 Biggie Bag and Frosty giveaways also appear to be attracting customers.
Most of these promotions are limited in time, and time will tell whether they are beneficial for the fast food giants, especially as grocery stores and casual dining chains like Cava (CAVA), Chipotle (CMG) and Sweetgreen (SG) offer their customers competitive alternatives.
If the offers are not compelling enough to drive traffic, channels may be reluctant to renew them.
“It’s reasonable to expect that (if) franchisees don’t see an increase in profits, they will react and be unhappy about signing a subsequent promotion,” Danilo Gargiulo, an analyst at Bernstein, told Yahoo Finance.
Evercore’s Palmer believes the success of these deals depends on who can best communicate them to consumers.
“We believe the answer will come from the effectiveness of advertising: will it leverage McDonald’s $1 billion national ad budget?” he wrote. “Should McDonald’s manage to stabilize traffic with value in Q3, the steady flow of new products in 2H24 and 2025 should spark a substantial recovery for the brand.”
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @Brooke DiPalma or email him at bdipalma@yahoofinance.com.
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