Are fast-food chains in a discount trap?

Some companies could struggle evolving past low prices, says RB’s The Bottom Line.
Photograph by Jonathan Maze

the bottom line

In 2012, McDonald’s and Subway both tried to move past deals that were popular during the recession when nobody had any money and ate out cheap.

McDonald’s shifted away from its Dollar Menu, which had worked well to generate traffic for a decade.

Subway ended its permanent, $5 footlong promotion.

Neither chain has been the same since. Subway has struggled annually and is now shedding units and sales. McDonald’s has performed better, but its U.S. traffic has been down all but one year since then.

We say this because the quick-service restaurant sector has spent much of the past two years discounting their menus.

Many of them could find discounts tough to give up.

“When was the last time you paid full price at The Gap?” Lauren Bailey, co-founder and CEO of Phoenix-based restaurant company Upward Projects, said at the Restaurant Leadership Conference this week. “It’s a slippery slope when people only come to you when it’s free, or when it’s an offer.”

For fast-food chains, pricing and discounts are a balancing act. Quick-service concepts do need some form of low-priced offers to get customers in the door. It is a fact of life for a sector that has a high percentage of younger and lower-income consumers.

“Half of our customers are value-oriented,” Jack in the Box CEO Lenny Comma said in February. “We have to present something to them.”

This could become more important over time because the convenience market, to which these chains have staked their claims over the years, is increasingly competitive. Think about it: If you can order delivery or online, maybe you might be less likely to go to a drive-thru.

Yet discounting too much is a trap. Training customers to only come into the restaurants when there is a deal gets customers accustomed to those low prices.

Restaurant chains have time and again fallen into this trap, and many now have little choice but to keep it up.

Burger King, for instance, could face a big challenge if it tries to evolve beyond its discounting strategy. In the fourth quarter last year, as Dan Accordino, CEO of BK's largest operator, Carrols Restaurant Group, noted in February, the chain offered a two-for-$6 Mix & Match deal, a $3.49 King Deal, a two-for-$10 deal and a $6 box, plus $1 10-piece chicken nuggets. And while the chain has routinely offered premium items—and its test of a $5-plus Impossible Whopper could promise another one—that’s nevertheless a lot of discounts.

The chain’s $5 monthly coffee subscription, while innovative and a potentially groundbreaking move in the industry, is yet another example.

Burger King is hardly the only one. Quick-service chains from Taco Bell and Del Taco to McDonald’s, Jack in the Box and Wendy’s have all, to one degree or another, promoted discounts during a particularly competitive period in the industry.

And they’ve done this even while decrying the practice. Comma, for instance, said back in August that “deep discounting” was “not in the best interest for the long-term health of the brand.”

McDonald’s has long said it needs value, but not too much of it.

“We strive to be competitive on value,” McDonald’s CFO Kevin Ozan said last year, according to financial services site Sentieo. “We don’t strive to win on value.”

Quick-service chains have been walking a tightrope on value in recent years. They may need to be careful that they don’t fall off.

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