When the economy hit a recession in 2008, and consumers started to cut back on dining out, McDonald’s and Subway each had a ready-made response: cheap food.
McDonald’s had its Dollar Menu, anchored by the Double Cheeseburger. Subway had its $5 Footlong. Each value offer fueled the chains’ successes during the Great Recession and sent their competitors for a loop.
Fast forward to 2023, and despite an economy that may or may not reach a recession but is hitting low-income consumers hard, neither of them have that kind of public response. But that doesn’t mean those deals don't exist.
Just look on the app.
One recent afternoon, for instance, McDonald’s app had six different deals on items including buy-one, get-one Quarter Pounders with Cheese, Big Macs and Double Cheeseburgers. Customers could get 20-piece nuggets for $5, any size coffee for 99 cents, or 20% off any purchase of $5 or more.
Subway, meanwhile, has sent a steady stream of deals through its app of late, for Footlongs priced at $5.99 or available buy-one, get-one.
They’re certainly not alone. Burger King, Wendy’s and Jack in the Box all advertise numerous discounts on their mobile apps to loyalty customers, giving deals on burgers, breakfast sandwiches, fries and beverages.
For the brands, the strategy is simple: Use promos to convince customers to come in more often. Rather than all-encompassing deals like Dollar Menus or mass coupon mailers, the digital discounts can theoretically convince diners to visit a restaurant when they otherwise wouldn’t. And companies argue that digital sales are more profitable for operators in the long run.
But this isn’t keeping franchisees from pushing back. With rising costs for food and labor, some operators believe the discounts have become too onerous.
Some Subway franchisees won’t accept the brand’s app discounts, citing those high costs. Enough of them don’t accept the discounts that the app features a “see participating locations” button on many of its deals.
McDonald’s operators, citing weakening cash flow, are getting more vocal in their frustration with the level of discounting on its popular mobile app.
“We should not, and can no longer, be accepting of the burden of the entire impact of inflation,” the National Owners Association, an independent group of McDonald’s franchisees, wrote to its membership last month. “Promotions and discounts have become significant line items on our [profit-and-loss statements].” The group called for internal organizations to set discount percentage thresholds on some of its offers.
Discounts have long created a rift between franchisors and franchisees. Franchisors generate revenue through a percentage of sales, known as a royalty. As such, they have an incentive to drive sales. That often leads to discounts in periods when consumers are cutting back.
Franchisees, however, need to make a profit off those sales. Therefore, pushback against discounting strategies has been common. In 2009, for instance, Burger King franchisees sued the brand over its plan for a $1 Double Cheeseburger. Subway operators have routinely pushed back aggressively against any strategy to resurrect the $5 Footlong offer, which largely disappeared in 2012.
Mobile apps are supposed to correct this.
Restaurant companies were gradually creating mobile order-and-pay apps before the pandemic, but the past three years have made such apps a must-have. “The app is now a larger percentage of sales,” said John Gordon, a restaurant consultant out of San Diego.
For the brands, there is good reason to focus on mobile order: It generally saves on labor because a person doesn’t take the order; customers who order on the app spend more; and it reduces pressure on the drive-thru and other takeout-focused areas.
It’s also fueled a loyalty program explosion. Since the start of the pandemic, virtually every major fast-food chain has created a loyalty program, including McDonald’s, Subway, Wendy’s, Burger King and Jack in the Box. Loyalty programs have become the biggest industry marketing trend, and arguably the most important.
Companies often use some kind of deal or promotion to convince consumers to sign up for the app. Taco Bell, for instance, gave loyalty members early access to its Mexican Pizza before it returned last year. McDonald’s has included a loyalty component in many of its promotions over the past two years.
Jack in the Box created its mobile app and loyalty program last year. Over the holidays, it used an offer called “24 Days of Jackmas” to convince customers to join. The result was a 16% lift in sales and the best digital sales week in company history, CEO Darin Harris told investors recently, according to a transcript on the financial services site Sentieo/AlphaSense.
Giving customers deals to join the loyalty program makes sense because those are a brand’s core customers. And those customers are giving brands access to their information, which the brands can use to influence their dining behaviors. Eight in 10 Americans said they would join a restaurant company loyalty program, according to a recent survey by the National Restaurant Association.
They’re clearly doing so. Some 40 million people in the U.S. downloaded McDonald’s app last year, more than the next three restaurant chains combined, CEO Chris Kempczinski said in a call earlier this year. That means one out of eight Americans downloaded McDonald’s app last year alone. There are more than 50 million members of its MyMcDonald’s Rewards loyalty program in its six biggest global markets.
At Wendy’s, its Wendy’s Rewards program now has 29 million members, up 40% over a year earlier.
For brands, the loyalty program enables the type of targeted deals that could theoretically influence behavior without leading customers to spend less when they’d go otherwise.
For instance, if someone wouldn’t visit McDonald’s without a discount, the loyalty program can convince that person to visit. A Dollar Menu can do the same thing, of course. But some customers who might have stopped by a McDonald’s on a road trip or on their way to work might use the Dollar Menu, too, when they’d otherwise get a Big Mac.
“In the past, we didn’t have the ability to deliver that sort of precision value, and you would end up with a national deal that would hit everybody,” McDonald’s CEO Chris Kempczinski said in July. “There’s a lot of waste in that. There are people you’re delivering value to under that scenario that would have still bought without it.”
“What we’re transitioning to is a much more targeted, tailored approach toward value,” he added.
At the same time, fast-food brands that once used broad-scale value offers have shifted much of them to the app. Those offers are frequent and constant. “Like a freight train,” one McDonald’s operator said.
The value may be necessary to combat a spending shift at restaurants. Quick-service restaurants are believed to be getting some “trade down” consumers from other, more expensive concepts, as rising prices lead consumers to tighten their belts.
At the same time, restaurant-level cash flow took at hit at numerous brands last year, including many franchise systems. The association’s State of the Industry report estimated that the typical restaurant generating $900,000 in annual revenue generated a $110,000 loss based on average costs for food, labor and other items.
Unit-level cash flow at McDonald’s declined by $100,000 in 2022. At Burger King, per-store EBITDA, or earnings before interest, taxes, depreciation and amortization, declined to $140,000. It had been $180,000 in 2018. Company-operated restaurant margins at Wendy’s declined to 13.8% from 16.7%. That’s an approximately $47,000 decline in operating profit in one year.
That’s the kind of decline that leads operators to fight back. McDonald’s operators estimate their cash flow will decline another $25,000 to $50,000 this year. “That gap in operating revenue performance is not sustainable for our business,” the owners association wrote.
Even with last year’s decline, however, operating cash flow is up 35% at McDonald’s locations since 2018. The company also notes that it is working to build long-term loyalty to the brand by giving customers deals on the app and by giving them access to menu items and promotions that others do not.
McDonald’s also generated positive traffic in 2022, something a lot of brands cannot say. “We must maintain our disciplined approach to pricing,” Kempczinski said on McDonald’s most recent earnings call. “We need to balance passing through our pricing on our menus, while maintaining our strong position on value with our customers.” He said that communication with franchisees on pricing “will remain essential.”
“Our franchisees are focused on the long term, and time and again, that approach has been rewarded,” he said. “As long as we continue to do the right things for the customer, we can always work through short-term challenges.”
A Subway spokesperson said that digital has been a growing sales channel, one that is increasingly profitable, and noted that most of the transactions are incremental. The company also argues that digital promotions drive profitability and generate ongoing momentum in the digital business even after they’re over.
“Data continues to show that restaurants which consistently accept coupons experience higher sales and traffic than those that do not,” the spokesperson said. “As Subway continues to enhance both its menu and guest experience, maintaining a strong value proposition systemwide is key for healthy business growth.”
To be sure, some brands have shifted discounts to the app and, as a result, have lowered their discount percentage. At Carrols Restaurant Group, Burger King’s largest franchisee, 14% of its sales in the fourth quarter had some form of discount. That’s down from 19% in the same period a year earlier. “There are a lot of promotions in 4q 21 that just got priced better or simply went away,” Interim CEO Anthony Hull said, according to a Sentieo transcript.
Discounting is an industry fact of life. But just because those discounts look different and come in a fancier package doesn’t mean they won’t generate the same kind of concerns from operators worried about profits.