Subway and McDonald’s have struggled to evolve beyond value

Both chains have lost customers since shifting away from popular discounts, says RB’s The Bottom Line. Maybe that’s a good thing.
Photograph courtesy of Subway

the bottom line

Early last year, McDonald’s Corp. brought back its famed Dollar Menu, albeit in an evolved form—with items priced at $2 and $3 in addition to a few dollar items.

The menu got people to add items to existing orders but didn’t succeed in its primary goal: Driving traffic. McDonald’s comparable guest counts declined 2.2% last year.

Similarly, Subway tried hearkening back to its own, highly successful offer with a set of sub sandwiches priced at $4.99. That one ignited a franchisee revolt and the company ultimately ended the offer while closing more than 1,000 locations last year.

The respective discount strategies highlighted a major similarity between the giants, two of the three largest restaurant chains in the U.S. by unit count: Both have struggled to develop adequate successors to their wildly famous value offers, which carried each chain through the Great Recession.

Subway used its $5 Footlong offer for years to destroy upstarts. McDonald’s used a Dollar Menu to successfully generate consistent traffic growth.

Yet both went away from those offers in 2012 when rising food costs made the price points untenable. And both companies have faced respective challenges in the years since.

As I wrote about yesterday, McDonald’s has seen its comparable store traffic decline by 12% since 2013. It has also closed roughly 3% of its locations since peaking in 2014 and now has fewer than 14,000 restaurants in its biggest market—enabling the coffee chain Starbucks to take its spot as the second most prolific restaurant chain in the U.S. Franchisees, worried about their cash flow, have formed a franchisee association for the first time in company history.

Subway, meanwhile, has seen unit volumes weaken since 2013. It has closed 8% of its locations since peaking at 27,103 restaurants in 2015. The company’s franchisees have been increasingly vocal about its state.

Both chains, meanwhile, face strong, growing competitors that don’t have to discount—McDonald’s has Chick-fil-A, for instance, while Subway has Jersey Mike’s, Jimmy John’s and Firehouse Subs.

To be sure, it’s here where the similarities end. McDonald’s has strong unit volumes and its U.S. system sales have grown for four straight years, including 2.4% to $38.5 billion last year. The company and its operators are investing billions on a massive overhaul of its restaurants.

Plus, it generated traffic growth in 2017 only to see it decline again last year, by 2.2%. It’s possible that McDonald’s evolved beyond its value problem only to encounter a new set of challenges (like weak morning traffic and speed problems).

Subway is in a far more precarious position. It lost its longtime spokesman Jared Fogle and hasn’t been able to successfully move beyond that campaign. It has low average unit volumes of $400,000 that leave operators with little cash for remodels or other improvement efforts.

It has considerable uncertainty among executives, three of whom have the word “acting” in their titles. Many believe the chain has to close thousands of locations and even the company acknowledges the need to “consolidate” restaurants.

The shift away from value hasn’t been all bad for McDonald’s and Subway. The two chains lost customers who were purely focused on value and were therefore unprofitable.

Franchisees at both chains will argue that they relied on their respective offers too long, training too many customers to visit only when the food was cheap.

That probably burdened the chains with the low-cost provider mantle. That was great during the recession when the economy was struggling. But it’s clear these days that customers want something more than just cheap food.

Value offers don’t work as well as they once did. The economy is growing. The restaurant industry is saturated. Quality and service are more important to a chain’s success. Perhaps consumers don’t feel the need to go to McDonald’s or Subway because they have other choices and have money to spend.

At the same time, however, both companies need a certain amount of traffic given their size. They have peppered the country with their locations and depend on volume to produce the necessary profits that keep their restaurants operational.

Subway’s unit-count reduction in particular has demonstrated what happens when the chain loses that volume. It can no longer support its massive size and begins to shrink.

Value is a key part of the equation. But both companies have struggled to find a value offer that both lures traffic and generates profits.

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