For the past two quarters now, McDonald’s has been losing some of its customers as they balk at materially higher prices across much of the industry. As a result, the chain’s Q1 2.5% same-store sales growth came primarily from pricing, as traffic was flat to down.
“Consumers continue to be even more discriminating with every dollar that they spend as they faced elevated prices in their day-to-day spending, which is putting pressure on the QSR industry,” CEO Chris Kempczinski said.
Looking across Q1 earnings so far, the QSR segment does seem to be facing a bit more pressure than its casual dining peers and, unquestionably, its fast-casual peers. KFC U.S. same-store sales were down 7%, for instance. Taco Bell’s were up 2%, or 0.5% less than McDonald’s. Wendy’s? Up just 0.6%.
Sure, there are anomalies. Burger King’s same-store sales in the U.S. and Canada grew nearly 4%. But that company is going through a major reinvestment phase and had plenty of room for year-over-year progress. By comparison, fast casual Chipotle was up 7% and Wingstop was up a whopping 21.6%.
One could argue that McDonald’s – and QSRs in general – have historically differentiated by their lower price points and therefore have been the industry standard for value seekers. So, when costs go up, as they have done for about two years now – outpacing both full-service prices and grocery prices – QSR value perceptions are likely hit harder than their peers’ value perceptions. This is exactly what is happening with McDonald’s, as CEO Chris Kempczinski noted, “In some markets, we have seen that our relative superiority on affordability has declined.”
In other words, what Q1 has shown us so far is that consumers, particularly those in the QSR segment, have reached – and surpassed – their threshold on pricing. This limit is likely compounded by the closer-to-parity pricing with fast casual and aggressive pricing promotions from casual. Consider Chili’s “3 for Me” meal deal, for example, which has driven sales and provided the chain with an arrow in its quiver to aggressively go after QSR prices. This effort has been supported by Chili’s social media channels asking followers if they think its food is better than fast food, along with the #Chilis3ForMeRescue hashtag.
“What we launched … was much harder hitting value messaging. We're using fast food as a foil mainly because everybody is familiar with the fast food experience and the pricing. And so it's an easy foil to use for them to give you relative value,” CEO Kevin Hochman said during Chili’s parent company Brinker International’s earnings call.
We’ve recently seen similarly aggressive promotions from Applebee’s (50-cent boneless wings, Dollarita) and Olive Garden (Never Ending Pasta Bowl) as well, and with much success.
Amid this pricing war, fast casual seems to be in the sweet spot. Most fast-casual concepts have the benefit of convenience that QSR consumers tend to look for and don’t have to push value as much as their casual peers because they’ve historically had a slightly lower check average. In 2023, McDonald’s prices rose by about 10%, among the highest we’ve seen across the industry. Wingstop’s prices, by comparison, have been held to about 1-2% annually, according to analyst Todd M. Brooks.
So, now it’s up to QSRs to get creative in promoting compelling value offerings without compromising margins while costs remain high. McDonald’s has a plan to gain back that “superiority on affordability.” It is going to pull some pages from international markets where its value offerings are resonating, like Germany, where the company rolled out a “McSmart” platform earlier this year. McSmart presents affordable entry meals, executives said, which is what they’re focused on translating stateside.
“In the markets where we’re doing this well, our business is outperforming,” Kempczinski said. “The construct we see as our successful playbook is good entry-level offers, meal deals, and offering value specific to breakfast.”
McDonald’s will also prioritize a national value platform this year, versus its current “50 different ways with local value” approach, and it will flex its marketing muscle to drive awareness of that platform.
As its rival Burger King has proven so far from its “Fuel the Flame” investment, such awareness helps. Burger King spent $6 million of its advertising/digital investment during Q1 and yielded traffic gains from price-conscious consumers. Burger King has leveraged this investment to drive awareness of its $5 Duos, $5 Your Way meals, and $2.99 wraps without margin erosion. The chain plans to press the gas here.
KFC had early success with its two-for-$5 wraps and is now focusing on a $4.99 Meal for One, a $10 Meal for Two, a $20 Family Meal, and a Taste of KFC Deal.
Wendy’s, like McDonald’s, is also adding more marketing weight behind its breakfast value and is increasing media support around its Biggie Bundles platform.
Speaking of, bundling seems to be the tactic-du-jour for QSRs striving to claw back traffic. McDonald’s so far has found traction with such a tactic, doubling its value mix to north of 10% of sales by aggressively promoting value bundles, according to BTIG research.
White Castle just came out with a $5 Bacon Bundle, featuring two Sliders and one small fry. Jack in the Box launched a $5 Jack Pack bundled meal earlier this year, while Burger King rolled out a new $5 Breakfast Bundle.
Even Taco Bell is now testing new Bell Bundles in the Charlotte, N.C., market. Taco Bell has so far been immune to most of the challenges smacking the QSR segment in the face right now, perhaps because of the longtime success it’s had with its value menus, including its recent Cravings Value Menu launch. The menu is represented on nearly one-third of all transactions with 80% of those purchases including another item, creating a check uplift. That said, the chain’s additional test for even more of a value play illustrates just how critical such options are becoming for QSR consumers and we expect this space to become deliriously busy in the coming months.
Contact Alicia Kelso at [email protected]