McDonald’s thrived during the Great Recession and both investors and executives expect it will have the same kind of success in the next one—whenever that will be—in part because of the chain’s value perception.
But how the company accomplishes this will look much different.
Specifically, the fast-food burger chain is shifting away from its one-size-fits-all value strategy and toward a more targeted approach that relies mostly on local offers and its loyalty program.
“We’ll continue to have some national programs, whether it’s 2-for-$6 or buy one-get one, but we’ve really moved to a more local approach, which then becomes ultimately a personalized approach,” Chief Financial Officer Kevin Ozan told investors on Tuesday. “So, we’re in the middle of that evolution, going from national to local to really more personalized.”
The value question is becoming increasingly important, given concern about the state of the economy and the consumer. Soaring inflation has hammered consumer sentiment, which hit a record low in June, according to the University of Michigan. The Federal Reserve has been increasing interest rates, with the goal of slowing the economy to get that inflation under control.
Consumers have already started reacting. Ozan told investors that McDonald’s is seeing some consumer trade down to value offers, and they are ordering fewer combination meals.
McDonald’s has traditionally used national offers to get attention for its low-priced menu, believing that such offers were key to bringing in traffic. These offers often proved critical during economic downturns when people gravitated to low-priced items.
Best performing restaurant chains during the Great Recession
These restaurant companies generated the strongest same-store sales during the economic downturn of 2008-2009.
Source: Restaurant Business
The Dollar Menu proved a success during the Great Recession. The company was one of the best performing restaurant chains during that period. Its success was so great that it forced competitors to work to keep pace, notably Burger King, which priced its larger Double Cheeseburger at $1—which infuriated franchisees, who filed a lawsuit, and which didn’t generate the promised sales, either.
Over time, however, that Dollar Menu would prove unprofitable due to franchisees’ cost increases. And McDonald’s CEO Chris Kempczinski noted that such national deals hit more than just the customers who would not other visit the chain if they didn’t have such offers.
“In the past, we didn’t have the ability to deliver that sort of precision value, and you would end up having a national deal that would hit everybody,” he said. “There’s a lot of waste in that. There are people you’re delivering value to under that scenario who probably would have still bought without it.”
That “waste” also leads customers away from higher-priced items, which reduces chains’ sales of its more profitable menu items. That also keeps franchisees from pricing those premium items at higher levels more worthy of their quality.
That is an important consideration these days, given franchisees’ profit challenges.
McDonald’s in recent years has not abandoned its value focus. It still has a Dollar 123 value offer on its menu, coupled with periodic promotions. But it has shifted the value offers toward more local deals, particularly at breakfast.
“Historically, we would have a big national value menu,” Ozan said. “Today, value is primarily driven at the local level.” That local approach “allows individual field offices to promote products that make sense in their local markets and based on their competitive set.”
But the company wants even more targeted offers. “What we’re looking at doing with the U.S. team, along with our pricing advisers, is exactly what products on the menu do you need to offer value, to what degree, and then through what vehicle,” Kempczinski said. “Is it through an offer? Is it through a menu price adjustment? Or is it through some sort of promo that you do? So it ends up being a much more nuanced way we’re able to look at value.”
Digital could also play a major role. McDonald’s launched its loyalty program, called MyMcDonald’s Rewards, last year, as part of its bid to target specific customers with more targeted offers. It currently has 22 million active members.
The value offers through that app have already worked to get customers. McDonald’s said Tuesday that customers shifted toward its digital offerings.
“It’s tough to talk about value these days in a one-size-fits-all approach,” Kempczinski said. “What we’re transitioning to is a much more tailored approach toward value.”
McDonald’s has been widely viewed as a potential winner during a potential recession, just as it did during the 2008-2009 downturn. Kempczinski, for his part, agrees with that assessment—even if the way the company wins this time is different.
“That’s our planning expectation,” he said. “While there is going to be some shifting within the cohorts, [with] our value positioning, our value scores, we expect to come out a winner out of all that.”