Lost amid the news that McDonald’s sales took a big tumble last week, thanks to a serious E. coli outbreak in several western states, is that the company plans to upgrade to its value effort.
The chain has been running a $5 Meal Deal since June. It argues this value offer has done its job, pulling in the lower-income consumers that had abandoned the chain over the past year because of its rising menu prices. Those customers generally bought more than the meal deal, with an average check of $10—slightly under the chain’s average.
Traffic in the third quarter was “slightly negative,” meaning the value push—plus a Collector’s Edition cups promotion in early August that was by all accounts a major success—still did not yield actual traffic growth.
“Our performance so far this year has fallen short of our expectations,” CEO Chris Kempczinski told analysts on Tuesday.
Still, the traffic in the third quarter was better than it had been, and company executives said they gained market share during a difficult period, prompting them to declare victory. “We’re encouraged by signs of progress in the third quarter and the more consistent market share traction we are seeing,” he added.
McDonald’s wants to create a branded value menu, featuring multiple options for meal deals and encompassing both in-store and digital offers. It would be similar to the value menus the company offers in other markets, such as the McSmart menu in places like Germany and Australia.
McDonald’s value effort was driven at least in part by a need to quell consumer frustration over prices. The fast-food giant had been hammered late last year and earlier this year by social media reports of $18 Big Mac meals and bogus studies saying its prices had doubled since 2019. They hadn’t, but they have grown 40% since 2019, making the company ground zero for Americans’ pushback against generationally high inflation.
Its decision to create the $5 Meal Deal kicked off value wars throughout the fast-food space. Several other chains jumped on board, including rival Burger King. In some form, almost every major fast-food chain is offering some type of value-focused deal.
The hope was that a few months of lower prices on some items would quell concerns about rising menu prices. And then as wages outpaced inflation, as they are now, consumers would have more cash to spend on higher-priced items and companies could return to a normal marketing cadence.
McDonald’s numbers suggest that isn’t happening, and that the largest fast-food chain on the planet is gearing up to keep pushing for those lower-income diners.
“The industry environment remains challenging,” CFO Ian Borden told analysts. “There’s no doubt about that.”
The problem with broad-based value, which McDonald’s and other chains are deploying, is that these offers don’t just attract customers that might be eating out less often over prices. These offers also cater to existing, higher-income customers that might come in anyway.
In that sense, existing traffic buys cheaper food. And franchisees that operate stores and require profitability for their livelihoods end up paying the price.
There’s some evidence that the value push hit profit margins. Profit margins on company stores declined 1% last quarter, for instance. The company does not provide franchisee margin data. But it at least suggests that profitability in a value-focused era is diminished.
A more permanent value menu, therefore, suggests that this value-focused era, and the profitability concerns that come with it, are here to stay.
McDonald’s argument is that the company can supplement value with strong marketing promotions that get customers in the door at higher prices with more frequency. And there is some definitive evidence that it works, at least for a time. Same-store sales were strong in the first half of October, when the company started selling its Chicken Big Mac, until the E. coli outbreak emerged.
And the company has plans for more marketing in the future. “What we’re trying to do with stronger value and affordability is drive more traffic and more guest counts,” Borden said. “And as we bring more traffic and guest counts into the restaurants, we’re pairing that with things like the Collector’s Edition or the Chicken Big Mac LTO.”
But that puts pressure on marketing efforts to work. McDonald’s can afford this, because its marketing is as strong as any restaurant chain on the planet right now, and its franchisees generate strong revenues and good enough profitability that they can withstand whatever profitability hit this might bring.
That is not necessarily the case for brands like Burger King, Subway or KFC, where per-store revenue and profitability is nowhere near as strong as that of McDonald’s. A sustained value push could create real problems for those types of chains.
Those brands would be wise not to follow McDonald’s lead.