McDonald's, Wendy's and Burger King compete for low-income customers

Subway began phasing out its $5 sandwiches ten years ago, but other fast-food chains have since revived the $5 price tag in hopes of winning over customers who’ve in the reduction of on spending.

As many restaurant corporations prepare to release their second-quarter results, investors expect that diners will visit their establishments less continuously and that sales have been sluggish, with just a few exceptions reminiscent of ChipotleHoping to enhance their results for the following quarter, chains like MC DonaldsTaco Bell, Burger King and Wendy’s have introduced or revived menu offerings with a $5 price tag.

McDonald's reported a rise in customer traffic because of this, but Wall Street doesn’t expect the promotions to supply a serious boost to sales.

Fast food typically performs higher than the industry as a complete during times of economic recession. But price increases in recent times have led many consumers to conclude that fast food is solely not business anymore. More than 60% of respondents to a recent According to a survey by LendingTree They have in the reduction of on spending on fast food since it is just too expensive.

The skyrocketing prices on menus have scared away many fast-food customers, including those within the lower income bracket, who make up a significant slice of the sector’s customer base. Companies reminiscent of Brinker International Chili's has used its marketing to emphasise its own value relative to the price of a fast-food meal. Casual dining chains have taken market share from the fast-food sector, Restaurants Darden said CEO Rick Cardenas in June.

“It's a war for the less affluent customers,” says Robert Byrne, senior director of consumer research at Technomic, a restaurant research firm.

This change in consumer behavior has also spooked Wall Street. Shares of McDonald's, the parent company of Burger King Restaurant Brands International and Wendy's have all declined by double digits this yr. Taco Bell owner Yum Brands will fall by greater than 1% in 2024. The S&P 500 is now up 14%.

“Investors believe the second quarter will likely be one to forget – many large chains will likely miss consensus. [estimates],” KeyBanc analyst Eric Gonzalez told CNBC.

McDonald's is predicted to report its second-quarter results on Monday, while Wendy's is scheduled to report its results on Wednesday. Restaurant Brands and Yum Brands are expected to report their quarterly results the next week.

Generally, fast-food chains focus their discounts and low cost meals on the primary quarter, when consumers want to lower your expenses after the vacations and keep their New Year's resolutions. As temperatures rise, restaurant sales also increase, and operators don't often depend on special offers to draw customers.

But this summer all the things is different. Fast food chains need discounts to spice up customer traffic – and increase sales.

“The fact is that restaurants are running out of room to put higher prices on their menus,” Byrne said.

But Value Meals are usually not nearly increasing traffic.

“It's also about converting the consumer who comes for the offer into a higher-priced consumer by presenting them with other add-ons or other things they might be able to do,” Byrne said. “The risk is that they don't do it.”

If customers aren't persuaded so as to add a milkshake or other appetizer to their order, the discounts will eat into profits and turn out to be unsustainable in the long term. That's an enormous concern for investors who’re already skeptical that the chains won't see the client growth they've hoped for.

“The low-cost menus were introduced towards the end of the quarter. There is just a fear that it will not get better and it will be a race to the bottom,” Gonzalez said.

Subway's $5 footlong sandwich is a cautionary tale. Although the offering resonated with customers, it stayed with operators for too long, eating into their profits and exacerbating other brand problems, reminiscent of sales cannibalization as a result of its massive footprint. This led to restaurant closures, disgruntled operators and years of trying to find a brand new option to win back customers.

Not only investors are skeptical about these special offers, but franchisees also often resist price reductions because they reduce their profits.

Franchisees have also gained more power in recent times to withstand parent corporations' deal-making strategies. Many franchises at the moment are larger, have more restaurants and sometimes even private equity capital.

At McDonald's, franchisees joined together to form the National Owners Association in 2018, rebelling against the burger giant's unpopular discounts and plans to renovate its stores. Since then, the chain's operators have been increasingly resisting management's plans.

An initial proposal by McDonald's to supply a $5 menu was not accepted, so Coke Coca-Cola contributed marketing money to make the deal more attractive to operators. Coca-Cola CEO James Quincey said on Tuesday's earnings call that the beverage giant is seeing weaker take-out sales within the U.S. as quick-service restaurants struggle. To boost demand, Coca-Cola is working with foodservice clients to market food-and-drink combo meals, in response to Quincey.

McDonald's on Monday prolonged its discount meal offer beyond the unique four-week period. 93 percent of 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 restaurants, as executives and footfall data show. On June 25, the launch day of McDonald's $5 meal, there have been 8% more visits than any average Tuesday in 2024, in response to a report from Placer.ai. The pattern repeated itself in the times that followed, because the chain exceeded its annual average of every day visits. Placer.ai also found that discounts helped boost footfall at Buffalo Wild Wings, Starbucks and Chili's.

In his quarterly survey of greater than 20 McDonald's franchisees, analyst Mark Kalinowski of Kalinowski Equity Research asked respondents what percentage of their sales were increased by the $5 meal offer. The average answer was 1.3 percent.

“These responses may suggest that the $5 menu offer should be viewed as an initiative that may help dissuade some customers from going elsewhere, rather than as a means of increasing sales,” Kalinowski wrote in a research note on the survey results on Wednesday.