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 turned to sweet deals this summer in hopes of enticing Americans to visit their restaurants more often and spend more when they do.

It’s an attempt to reverse the trend that fast food has become too expensive. Sales at fast-food restaurants eventually began to falter after chains raised prices in recent years to offset rising labor and raw material costs, which discouraged customers, especially low-income consumers.

That shift has been 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 are up just 1%.

Starbucks (SBUX), which bills itself as an affordable luxury, is now struggling to entice investors, which it still is, 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 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 offer boils down to a simple proposition: When value strategies work, it’s because increased foot traffic offsets lower margins to generate more revenue, said Morningstar analyst Sean Dunlop. The fact that consumers are adding more items to their bill is also a benefit.

“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 other items on the menu, the higher-end items, the desserts, the drinks that go with it.”

While consumers may welcome lower prices, that doesn’t guarantee that fast food companies will benefit. And the proliferation of value competitors could mean there’s no clear winner.

“A price war is not good for anyone,” Dunlop said. “It’s also the typical reaction we see when traffic in the industry slows. … Everyone’s dominant strategy when traffic is down is to promote, cut prices and focus on value, but everyone loses if their peers do that as well.”

The battle of values ​​intensifies

On Thursday, Taco Bell was the latest restaurant to offer a discounted deal. 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 five-layer beef burrito, a double-decker taco, chips and nacho cheese sauce, and a medium drink.

The story continues

The company said the bundle offers a 55% discount on the full 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 offered 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 includes two pieces of chicken, a side of mashed potatoes and gravy, and a biscuit, while Burger King’s $5 meal includes a choice of a Chicken Jr., Whopper Jr., or bacon cheeseburger to go with fries, chicken nuggets, and a drink.

Wendy’s also upgraded its $5 Biggie Bag, a standing offer introduced five years ago, by adding a free Frosty. And even Starbucks offers 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 though promotions are making a comeback, this tasty competition is nothing new in the industry.

In 2016, McDonald’s, Burger King and Wendy’s competed on price. McDonald’s offered its $2 McPick menu, Burger King offered a 5 for $4 menu and Wendy’s offered a 4 for $4 menu. All saw sales increase by 3 to 5 percent in the first quarter of 2016.

Fast food is back in the spotlight

So, does it work this time? Preliminary results show that these deals may well get done.

“Over the last couple of weeks in particular, we’ve started to see fast food restaurants come back into the spotlight for many consumers as these value menus have rolled out,” Hottovy said, adding that this “extreme value 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 free Frosty 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 attractive enough to drive traffic, chains may be reluctant to renew them.

“It’s reasonable to expect that (if) franchisees don’t see an increase in their profits, they’re going to back out and they’re going to be unhappy about signing a … subsequent promotion,” Bernstein analyst Danilo Gargiulo 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 lies in the effectiveness of advertising: will it leverage McDonald’s $1 billion national ad budget?” he wrote. “If McDonald’s can stabilize traffic with value in the third quarter, the steady flow of new products in the second half of 2024 and into 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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