McDonald’s appears to be losing some customers to rivals like Burger King and Domino’s as inflation-weary consumers cut back on their dining and focus more on value offers.
That has the Chicago-based fast-food giant working to develop a national value offer that will resonate more with customers than its current batch of local and digital deals.
“It’s a street fight,” CFO Ian Borden told analysts on Tuesday. “Everybody is fighting for fewer consumers. We have to make sure we have that street fighting capability.”
The company is working to develop a national value platform that will be “net neutral” to franchisee profitability.
But executives also said that store profits have returned to pre-pandemic levels, which should give the company the ability to offer that kind of value.
“We’re in a strong position,” CEO Chris Kempczinski said. “Franchisee cash flow is at the second highest levels ever.”
McDonald’s has been signaling a more concerted value focus for months, particularly since February when Kempczinski suggested the brand was losing lower-income customers to grocery stores.
But the company’s value focus was more direct, and its shift in that direction starker than it had been during recent calls.
McDonald’s has traditionally won during difficult periods when consumers are cutting back on dining. But its affordability has taken a hit over the past several months, as franchisees raised prices to offset soaring costs for food and labor.
That has hit traffic. Same-store sales in the U.S. rose 2.5% in the first quarter, but that all came from higher prices. Consumers have expressed concern on social media over high fast-food prices, to the point of comparing McDonald’s unfavorably to casual-dining restaurants like Chili’s.
The company’s performance stands in contrast to two other value-focused chains: Burger King and Domino’s.
The pizza chain on Monday reported improved sales in the first quarter as it lured more value-oriented consumers. Burger King, meanwhile, reported 3.8% same-store sales growth and its executives said they felt the brand’s value message was resonating with customers.
“What we’re doing is working really well,” Josh Kobza, CEO of Burger King parent Restaurant Brands International, told analysts on Tuesday. “In the Burger King system in the U.S. and around the world, we already have some pretty effective value mechanisms.”
The challenge for franchised brands is to offer value without hammering franchisee profitability, something Burger King is working its way through still after an overly aggressive value focus contributed to its sales and profitability challenges in 2022.
McDonald’s has thrived in part because it has shifted away from an aggressive national value. Customers have apparently been willing to pay higher prices because of the brand’s convenience coming out of the pandemic.
The company does have value offers. But most of them are either local offers or they are on McDonald’s mobile app, where the brand hopes to lure people to its loyalty program.
But as franchisees have raised prices, the brand has lost some of its value reputation among consumers, and McDonald’s lacks broad awareness on its value offers. The brand has had a $1 $2 $3 Dollar Menu, but inflation has raised prices for those items, too, and few locations have anything on the menu priced at $1.
“In some markets, our relative superiority on affordability has declined” compared with competitors, Kempczinski said. Yet he insists the brand is “still viewed as a superior value proposition.”
Executives said that McDonald’s is outperforming competitors in global markets where it offers stronger value, and they clearly believe consumers want more value from fast-food restaurants now.
“The consumer is price weary, and we’re certainly going to be prudent and thoughtful about any further price increases that we’re looking at for the rest of 2024,” Borden said.
Executives stressed that they will work with franchisees to develop a strategy that works to drive traffic without hurting profitability. Franchisees have in the past suggested more value-engineered items such as the Snack Wrap.
Regardless, executives believe the company’s marketing strength can quickly erase whatever disadvantage they have in the fast-food market right now.
“But just using the size and scale of our marketing engine and the amount of media that we spend, I think that’s going to be the opportunity for us going forward,” Borden said. “We’re in a good position from a system financial health standpoint to go do that.”
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