Fast food lives by the discount, and dies by it

Demand stalls at Wendy’s, Burger King and McDonald’s despite frequent discounts, says RB’s The Bottom Line.
Photograph courtesy of The Wendy's Co.

The Bottom Line

This is a tough time to be in the burger business. At least it was last quarter.

McDonald’s last month said that its same-store sales rose 2.4% in the U.S., which was better than expected and has led to all sorts of enthusiasm among investors. But its traffic was still down in the period, despite a new dollar menu and other discounts.

And then Burger King said its same-store sales declined 0.7% in the third quarter. It, too, is a big discounter.

This week, Wendy’s said its same-store sales declined 0.2%. Traffic was down, too. None of the companies provided any details as to how much traffic was down. Suffice it to say the big three fast-food burger chains lost some customers last quarter.

The performances, combined with surprisingly strong sales at chains like Applebee’s, Chili’s and BJ’s Restaurants, led Bernstein Research analyst Sara Senatore to wonder whether casual dining demand was catching up with that of QSR.

We’re not ready to go there—after all, Red Robin’s sales are weak, Cheddar’s is still struggling and a number of private concepts are still looking for answers.

And total foot traffic in the QSR space is so much higher than it is in casual dining that it’s not nearly enough to explain the weak consumer demand among the three largest burger concepts.

But it is enough to wonder where fast food demand has been this year.

The challenge in the fast food space can be illustrated best by the varying degrees of consumer reaction to discount offers at McDonald’s and at Wendy’s.

McDonald’s, for instance, created a new 123 Dollar Menu in January in the hopes of generating traffic by getting customers to come in more frequently.

It didn’t work. Customers are not coming in more frequently, as the chain has seen a decline in customer count all year. Some of that is at breakfast, but the fact is that the return of the dollar menu did not quite do what it was intended to do.

What it has done is get customers to order more when they do come in. They are often adding items from that menu onto existing orders, leading to larger average checks. Whilele the company’s traffic is down, the traffic it does have is, theoretically, more profitable.

(One other possibility I won’t delve too deeply into: Delivery. McDonald’s has been the most aggressive fast food chain in the delivery space and it’s entirely possible that the larger delivery orders are lowering traffic while increasing average check and same-store sales.)

On the other hand, there is Wendy’s.

On its earnings call earlier this week, company executives said that they were losing market share to competitors on a dollar basis but gaining share from a traffic perspective.

The upshot: Customers are coming in and are ordering the company’s 4-for-$4 menu and ignoring its more profitable premium items. Wendy’s is now working to convince customers to trade up from value to premium.

So the chain is keeping its customers, but its customers are less profitable.

What would you rather have: Fewer, more profitable customers, or more, less profitable customers. Most operators would probably take the former, especially at a time when labor costs are going up as much as they are.

But there are risks in the fast food space to that, too, and especially to chains like McDonald’s that have seen weak traffic for some time. The business needs a steady dose of foot traffic, and some of those customers might not return.

Still, the different results between McDonald’s and Wendy’s illustrates the tightrope these companies walk as they compete in a saturated restaurant market.  

Raise prices on premium items and maintain an aggressive price strategy and you risk customers trading down to the cheaper items and your profits will suffer. If your value offer isn’t strong enough, however, you can lose customers.

So far, it appears, investors have chose McDonald’s method of performance. Its stock soared after its sales results. Wendy’s stock fell.

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