As summer heats up, fast food chains are launching aggressive promotions on discounted meals to attract budget-conscious customers. The latest trend is that big players like McDonald’s, Taco Bell, Burger King and Wendy’s are relaunching the $5 price to regain traffic and boost sales amid economic uncertainty.
The return of the $5 meal
A decade ago, Subway began phasing out its popular $5 sandwiches. Now, other fast-food giants are bringing back the $5 meal deal to lure back customers who have cut back on spending. The move comes after many restaurant companies reported a notable decline in customer visits and weak sales in their second-quarter earnings. Chipotle remains a rare exception, showing resilience amid the broader industry slowdown.
Despite the efforts to attract more customers, Wall Street remains skeptical. McDonald’s, for example, has seen a surge in traffic thanks to its $5 promotions, but analysts don’t expect a significant increase in sales from those deals.
Economic pressures and changing consumer behavior
Historically, fast food has outperformed other sectors during economic downturns. However, the recent trend toward higher prices has led many consumers to view fast food as less of a value. A LendingTree survey found that more than 60% of respondents have cut back on fast food spending due to high costs. This shift has particularly affected lower-income customers, a key demographic for fast food chains.
In response, casual dining establishments like Chili’s have marketed their offerings as more affordable alternatives to fast food. This strategy has helped casual dining chains capture some of the fast food market. This shift in consumer behavior is reflected in increased patronage of these establishments, according to Darden Restaurants CEO Rick Cardenas.
Reactions from investors and franchisees
The decline in fast-food traffic hasn’t gone unnoticed by investors. Shares of McDonald’s, Burger King parent Restaurant Brands International and Wendy’s have doubled this year. Taco Bell owner Yum Brands has also seen a slight decline, while the S&P 500 is up 14% in 2024.
Franchisees, who often bear the brunt of promotional costs, are also wary of new discounted meal deals. Many have resisted such initiatives, fearing they would erode profits. McDonald’s franchisees, for example, formed the National Owners Association in 2018 to oppose the company’s price-cutting strategies.
Can value meals drive bigger purchases?
Fast food chains typically offer discounts and meal deals in the first quarter to attract budget-conscious consumers after the holidays. However, this summer, the need for discounts has extended into the warmer months to drive traffic and sales growth.
The goal is to increase foot traffic and convert bargain hunters into buyers of more expensive products through additional purchases. Without this conversion, discounts risk becoming unsustainable and further eating into profits.
The edifying tale of the metro
Subway’s 5-foot-long deal, once a favorite with customers, ultimately led to eroding profits and operational difficulties, leading to restaurant closures and disgruntled franchisees. The story is a cautionary tale for today’s fast-food chains that rely heavily on value-priced meals to drive sales.
Market Outlook and Future Earnings Reports
McDonald’s is scheduled to report second-quarter results on Monday, followed by Wendy’s on Wednesday. Restaurant Brands and Yum Brands will report quarterly results the following week. Analysts expect disappointing results, reflecting broader industry woes.
Conclusion
The fast-food industry is competing fiercely to attract low-income customers with value-priced summer meals. As economic pressures mount, these promotions are aimed at stabilizing traffic and sales. However, the long-term viability of such strategies remains uncertain, raising concerns among investors and franchisees.
