The word “value” was mentioned by McDonald’s executives 78 times during the company’s hour-long second quarter earnings call Monday morning (and 18 times by analysts). That number should sufficiently illustrate the current macroeconomic backdrop from a company that over-indexes on low-income consumers.
We saw this coming – McDonald’s CEO Chris Kempczinski said it himself in February: “The battleground is with the low-income consumer.” But by the time the massive system was able to put a national $5 Meal Deal into place in late June, its value perception pendulum had already swung too far and the chain was left reporting a rare sales decline.
“It’s clear that our value leadership gap has recently shrunk," Kempczinski said during the call. "We are working to fix that pace. Over the last several years, our system has sustained significant inflationary cost increases ranging from 20% to 40% depending on the market. As we absorb these cost increases in partnership with our franchisees, we look for ways to protect restaurant profitability via productivity efforts and selective price increases. These price increases disrupted long-running value programs and led consumers to reconsider their buying habits.”
Of course, McDonald’s isn’t fighting this battle alone; the food-away-from-home index has outpaced the food-at-home index for the past 16 months in a row, driving more consumers to the grocery store for meal considerations. As such, the restaurant industry has been losing traffic since the end of last year. Last quarter, the quick-service segment experienced -2.3% traffic year-over-year, according to Revenue Management Solutions. To rectify this trend, concepts big and small have sprinted to implement value offerings. Just this week, for instance, several brands announced meal deals, including IHOP’s all-you-can-eat pancake deal; Applebee’s all-you-can-eat boneless wings, riblets and double crunch shrimp; Checkers and Rally’s $1.99 bacon ranch cheeseburger (among other deals); Krispy Krunchy Chicken’s $4 value meal; and the reduced price of White Castle’s sack of 10 cheese Sliders to $7.99.
And it’s only Tuesday.
This current value war is relatively new, but we’re starting to learn an awful lot about what is resonating and what is not, from McDonald’s and others. For instance, we know McDonald’s $5 Meal Deal has exceeded expectations. According to McDonald’s USA president Joe Erlinger, trial rates of the deal are highest among lower-income consumers, which means that cohort is trickling back. We know sentiment toward the brand around value and affordability has begun to shift positively, he said.
We also know franchisees seem to like what they see from the deal, as 93% of U.S. restaurants have committed to extending the offer. Indeed, data from Placer.ai suggests these pricing deals are having a positive impact across several brands. Buffalo Wild Wings’ foot traffic grew by 8.1% following its unlimited boneless wings introduction, for instance. The deal is available on Mondays and Wednesdays and visits to the chain have jumped by 45.6% and 49.3% on those days, respectively. Following Starbucks’ limited-time 50% Friday discount introduction in May, Friday visits increased 20% compared to year-to-date visits on that day.
Clearly, this is what consumers are looking for. According to Yelp’s July Trend Tracker, searches for “value meal” were up by 240% year-over-year, while “meal deal” was up 307%, and “cheap food” was up 118%. Brands that promote their value deals on TV are also generating a return. According to TV outcomes company EDO, the most effective creatives of 2024 so far are those promoting value and convenience, including Buffalo Wild Wings and Applebee’s. In the QSR sector, Long John Silver’s $6 shrimp basket deal yielded a 294% engagement rate.
Notably, this value environment, unlike those in the past, is also getting some nice momentum coming from loyalty programs. During this intensifying race to lure increasingly price-sensitive consumers, brands are not only pushing out combos and bundles at a memorable price point, they’re also aggressively promoting deals available only to loyalty members, as a way to better protect margins and drive higher adoption rates.
It’s early days here, but it seems to be working; new research released by William Blair finds that usage of brand loyalty programs jumped to 52% in June (when value launches reached a fever pitch) from 47% in March. This brings us to another takeaway from McDonald’s second quarter call; the company has thus far “over-rotated” value offerings on its digital platform versus broad, everyday value, according to Kempczinski, which hasn’t had as big of an impact as anticipated given that just 25% of customers are on those digital platforms. Once McDonald’s ramps up to 250 million loyalty users, as it anticipates doing by 2027, this will be a “different conversation about how digital can drive value,” Kempczinski said.
In other words, the current value environment is not only intensifying, it’s also evolving quickly. What we know now is that there is a broad-based consumer pullback, in the U.S. and elsewhere, and it’s going to take a strategic plan to get those consumers to come – and stay – back without compromising margins and, especially in McDonald’s case, franchisee profitability. It’s refreshing to hear executives admit they have an opportunity to improve value execution and that the company is working “collaboratively and constructively” to get the right programs in place from a value standpoint, as Erlinger noted. The trick now, – with McDonald’s and all restaurant companies – is to make sure these programs are sustainable.
“We’re only interested in doing things that are sustainable that we can continue,” Kempczinski said. “That’s going to be our guide as we think about where we need to go on these things.”
Contact Alicia Kelso at [email protected]
