Restaurant chains may or may not be able to get traffic growth from discounts but they certainly can lose traffic if they shift away from them.
To wit: Wendy’s traffic fell 12.5% in the second quarter. Some of that is due to a reduction in breakfast sales but more appears to be coming from concerns the chain’s discount offers.
Bob Wright, the chain’s new CEO, didn’t mince words in describing the chain’s value efforts, notably through its “Biggie” value platform. “The Biggie platform was built for value conscious consumers,” Wright told analysts. “But the offering has become increasingly complex and value diluting, making it less effective as a reason to visit Wendy’s.”
But Wright, and Wendy’s, can take some solace in this fact: They’re not alone.
In fact, fellow fast-food burger chain McDonald’s similarly drew customer ire when the brand opted to replace a buy-one, add-one for $1 offer with a menu of 10 items under $3. While operators lowered prices on items like McChickens and McDoubles, the offer to many consumers was a worse deal than before.
For instance, if a McChicken at your local McDonald’s cost $3.50, you could get two of them for $4.50. But then in March the company lowered the price on that McChicken to $2.50 and took away that old deal. Now those two sandwiches cost $5. Customers looked on that as a 50-cent increase.
That came along with a reduction in the offers on the company’s mobile app. So to loyalists, McDonald’s had a lot less value last quarter.
The result? While the chain’s same-store sales increased 0.8%, traffic to its restaurants declined. The severity of McDonald’s quarter, in fact, may have been masked by the frequency of the marketing promotions the chain ran, which might explain the company’s decision to replace its U.S. president.
Regardless, CEO Chris Kempczinski called that change “a bad trade.” Two-thirds of the chain’s miss on same-store sales, Kempczinski said, was related to that offer shift. The data firm Numerator estimates McDonald’s lost sales from lower-income consumers totaled $310 million last quarter alone.
Maybe more to the point at McDonald’s, the shift away wiped out a lot of the progress the chain had been making with that group. The fast-food giant started pushing value heavily more than two years ago after consumer pushbacks on pricing led to declines in customer counts and weak sales. It used offers and marketing to get back in those customers’ good graces, including the resurrection of its old Extra Value Meals platform.
Last quarter’s sales decline among low-income consumers was its first such decline in a year.
Value is always a challenging topic in franchised brands. Many consumers are clearly frustrated with price increases, which makes price-based marketing at least part of the equation. But rely on value too much for too long and brands can become reliant on discounts for traffic and that hurts store profits.
These days, however, the story is more complex. The restaurant industry is pushing more value than at any time since the Great Recession, and there’s no real indication that it’s all done much for most chains’ value reputation.
There is plenty of anecdotal evidence to suggest consumers care less about price-specific marketing. While Burger King has some offers, for instance, it has shifted away from discount marketing and has focused instead on improving quality and operations and then marketing all of it. The result was an 8.5% same-store sales increase, or an astounding 1,550-basis-point outperformance compared with Wendy’s and its best outperformance compared with McDonald’s in a decade.
Brands don’t necessarily need a lot of discounts to get customers in the door. But if they do use them they should tread carefully when changing those offers, because customers notice and get angry if they get less. The punishment can be severe.
Restaurants and their consumers view these changes differently. To the restaurant chain, it’s a discount reduction, one necessary to stabilize per-store profitability. To a consumer that has dealt with years of inflation, the changes represent a price increase. That’s certainly how customers of both McDonald’s and Wendy’s viewed those chains’ changes.
But such is the drawback to a big, screaming, national price point. Customers notice when you change that price point.