McDonald’s has spent much of the past two years trying to regain a low-priced reputation that it had lost in the post-pandemic response to historic inflation.
The company introduced new value offers. It created a new McValue Menu. It put a ton of offers on its mobile app. And then it topped it all off with a decrease in prices for its combo meals, which it re-rebranded as Extra Value Meals (EVM).
Executives this week took something of a victory lap. “As I’ve said before, and I will say again, McDonald’s is not going to get beat on value and affordability,” CEO Chris Kempczinski told analysts. “It’s in our DNA and we will remain agile to respond as appropriate to a dynamic competitive landscape.”
Executives can probably be excused for feeling a bit satisfied right now. The chain’s same-store sales rose 6.8% last quarter, which bested analysts’ expectations. The key metric accelerated on a two-year basis and was its best result in more than two years.
The company gained share with low-income diners in December, Kempczinski said. Those diners have been more reticent to visit restaurants with the frequency they once did, which has hit fast-food chains that depend on such consumers to provide a steady dose of traffic. Those consumers, especially now, are price sensitive.
And they also argued that this value did not come at the expense of franchisee cash flow. Operator cashflow was up year over year “despite a difficult environment,” CFO Ian Borden said in an interview. “We’ve got the strength and resilience and capacity in the system,” he said, noting that the company is hitting on key metrics.
“We’re improving share with low-income consumers,” he said. “It’s certainly been a little while” since the company has done that.
The profitability question is crucial, particularly at a time when beef prices remain high. Rival Burger King just saw franchisee profitability fall 10%, entirely on high beef prices. That McDonald’s was able to improve cash flow, even a little bit, in an environment like this speaks volumes.
It’s also important for the ongoing value strategy. Franchisees are the ones who ultimately control pricing. If cashflow starts taking a hit with these discounts, they may raise prices.
McDonald’s this year drew a line in the sand on that pricing issue, by adding a new value component to the standards on which it judges franchisees. That generated some real skepticism from a number of the chain’s operators who worried that the standard threatened operators’ role of setting their own prices.
An independent group of franchisees, the National Owners Association, has since responded with a “bill of rights” that, among other things, notes that operators are the ones who control pricing.
Kempczinski on Wednesday reiterated that franchisees control pricing. But he said they have a responsibility to protect the company’s value reputation.
“Franchisees set pricing,” Kempczinski said. “But at the end of the day we are the custodians of the McDonald’s brand. That is what we’re selling. And one of the things that’s core to our brand is our value positioning.
“We don’t prescribe exactly how the franchisees have to go deliver value, but the franchisees need to protect the brand. And part of that brand DNA is our value leadership we have there.”
The pricing issue came into play with the negotiations over Extra Value Meal prices. McDonald’s had to convince franchisees to lower prices on combo meals, effectively increasing the discount it gives customers who buy bundled meals by another 5%, from an average of 10% to 15%.
To do so, the company provided a few carrots, including help for operators who lose money on the combos and extra marketing spending. Those benefits are starting to roll off, and franchisees ultimately control the marketing.
Borden said that 98% of franchisees voted in favor of the Extra Value Meals. McDonald’s executives expect that they will remain behind the program. “They’re going to make their own decisions,” Borden said. “The vast, vast majority believed it was the right thing. We’re seeing incrementality. And we just had an incredibly strong quarter.”
It helps that McDonald’s has paired these offers with strong marketing promotions, including Monopoly and the definitely-not-discounted Grinch Meal. But that’s really how these things should work. Value may be a key part of the equation here, but it is hardly the only part.