One thing is becoming increasingly clear as restaurant chains have reported their summertime earnings this month: Discounts just don’t quite do it like they once did.
To wit: Del Taco last week said that its $1 Chicken Quesadilla Snacker was a record-breaking product—which nevertheless failed to bring in new customers. “Although we used innovation to launch a high-demand value product, it didn’t have the desired effect on transactions,” CEO John Cappasola said at the time.
Earlier this year, meanwhile, we found out that McDonald’s new $1 $2 $3 Dollar Menu, specifically designed to generate traffic, did not in fact generate traffic. The company lost business at breakfast and used another discount, a two-for-$4 breakfast sandwich offering, that didn’t help it regain those lost morning customers.
In September, Subway pulled the plug on its $4.99 footlong offer.
And this week, Burger King said its same-store sales declined 0.7% in the U.S. last quarter. Burger King is definitely the king when it comes to promotional discounts.
All of this suggests an industry environment in which there are so many discounts at the moment that the offers just don’t resonate the way they once did, as if Americans are tired of all this cheap food.
“We are well into the third year of heavy competitive value promotions,” Cappasola said last week. “The value-driven consumer has many options, which perhaps diluted our ability to use the new $1 Snacker.”
To be sure, just because an offer is a good one doesn’t mean it’s a traffic generator, as Del Taco learned, and as McDonald’s did earlier this year. Promotional mix and marketing strategy play a role in whether these offers work or not.
Still, just about every major fast-food restaurant company, and quite a few minor ones, has a discount offer of some sort. The environment is so loaded with offers that consumers have come to expect them and won’t rush out to the restaurant just because it has one.
Or, perhaps these offers are targeting a low-income consumer that is simply unwilling to increase their frequency right now. Or perhaps the economy is doing so well that a lot of these customers are trading up and discounts aren’t the draw.
But one potential problem as these offers fail is some brands will try steeper discounts to succeed.
Burger King, for instance, started selling 10 chicken nuggets for $1 in a clear response to its disappointing third quarter. The offer “has driven good results for us already,” Daniel Schwartz, CEO of Burger King parent Restaurant Brands International, said on Wednesday.
To be fair, Schwartz also said that everything the company does at Burger King is done through the lens of franchisee profitability. And though Burger King’s same-store sales fell in the third quarter, operator profitability did not.
And these discounts are coming as many of these same brands have refranchised restaurants, relying on franchisees to make profits off of these lower prices. And those franchisees are the ones responsible for paying higher wages as development demands in recent years have helped drain the labor pool. (And many brands are pushing their franchisees to add more units.)
Perhaps not surprisingly, franchisee relations appear to be strained at many concepts at the moment. As this continues, don’t be surprised if there’s more.
All that said, many fast-food chains need some value to get customers, making discounts something of a necessary evil. But it’s looking more like the industry has gone too far in that direction.
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