Fast food chains are going for value this summer. Will this 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 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 those of YUM! Brands rose only 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 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 menu on the other products, the higher-end products, the desserts, the drinks that go with it.”

While consumers may be happy with the lower prices, it’s not guaranteed to be a good deal for fast-food companies. And more value competitors may not ultimately result in a clear winner.

“A price war is not good for anyone,” Dunlop said. “This is also the typical reaction we see when traffic in the area slows down. … Everyone’s dominant strategy when traffic is down is to promote, undercut, and go for value, but all players lose if their peers also make this choice. »

The battle for 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.

“What we found is an opportunity to offer consumers a bountiful meal at a price that everyone can afford, which is $7,” Taco Bell Chief Marketing Officer Taylor Montgomery told Yahoo Finance at HQ. from Taco Bell. Montgomery suggested that the value of other chains’ offerings may not be as hearty.

Taco Bell’s offering compares to others offered in fast food. McDonald’s $5 menu, which debuted Tuesday, includes the choice of a McDouble burger or McChicken sandwich in addition to a four-piece 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 improved the deal for its $5 Biggie Bag, an ongoing deal introduced five years ago, by offering 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.

Over the “last couple of weeks in particular, we’ve started to see (quick-service restaurants) come back into the spotlight for a lot of consumers as these value menus have rolled out,” Hottovy said, adding that this “extreme value is really resonating with consumers right away.”

Burger King is “definitely” seeing positive traction from its $5 promotion, Hottovy noted, while Wendy’s Biggie Bag and $5 Frosty freebies also appear to be attracting customers.

Most of these promotions are time-limited, and time will tell if they are beneficial to 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, channels 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 says the success of these deals depends on who can best communicate them to consumers.

“We think the answer will come from the effectiveness of the advertising: will it leverage McDonald’s billion-dollar national advertising budget?” he wrote. “If McDonald’s can stabilize traffic with value in the third quarter, the steady flow of new products in 2H24 and 2025 should trigger a substantial recovery for the brand.”

—

Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @Brooke DiPalma or email him at bdipalma@yahoofinance.com.

Click here for an in-depth analysis of the latest stock market news and events moving stock prices

Read the latest financial and business news from Yahoo Finance