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Subway began phasing out its foot-long $5 sandwiches a decade ago. However, other fast-food chains have recently revived the $5 price point to attract customers who have scaled back on spending.
As many restaurant companies prepare to report second-quarter results, investors expect to hear that customer visits have declined and sales have slowed, with a few exceptions like Chipotle. To improve next quarter’s results, chains such as McDonald’s, Taco Bell, Burger King, and Wendy’s have introduced or reintroduced $5 meal deals.
McDonald’s anticipates an increase in traffic due to these promotions, although Wall Street remains skeptical about any significant sales boost.
Fast food typically performs better than the wider industry during economic downturns. However, recent price hikes have led many consumers to believe that fast food is no longer a bargain. More than 60% of respondents in a recent LendingTree survey reported cutting back on fast food due to high costs.
Rising menu prices have deterred many fast-food customers, including those in lower-income brackets, who constitute a significant portion of the industry’s clientele. In response, operators like Brinker International Chili’s have used marketing to emphasize their value compared to fast food. Casual dining chains have started capturing market share from the fast-food industry, according to Darden Restaurants CEO Rick Cardenas.
“It’s a battle for less affluent customers,” said Robert Byrne, senior director of consumer research at Technomic, a restaurant market research firm.
This shift in consumer behavior has also unsettled Wall Street. Shares of McDonald’s, Burger King’s parent company Restaurant Brands International, and Wendy’s have all declined by double digits this year. Taco Bell owner Yum Brands fell over 1% in 2024, while the S&P 500 rose by 14%.
“The sentiment among investors is that the second quarter will likely be disappointing, with many major chains probably missing consensus estimates,” KeyBanc analyst Eric Gonzalez told CNBC.
McDonald’s is set to report its second-quarter earnings on Monday, while Wendy’s will release its results on Wednesday. Restaurant Brands and Yum Brands will report their quarterly earnings the following week.
Can Meal Deals Drive More Sales?
A sign advertises meal deals at a McDonald’s restaurant in Burbank, California, on July 22, 2024.
Mario Tama | Getty Images
Typically, fast-food chains focus on discounts and value meals in the first quarter when consumers try to save money post-holidays and adhere to New Year’s resolutions. As temperatures rise, so do restaurant sales, usually negating the need for deals to attract customers.
This summer, however, is different. Fast food chains need discounts to drive traffic and sales growth.
“The fact is that restaurants are running out of room to charge higher prices on their menus,” Byrne said.
But convenient meals aren’t just about driving traffic.
“It’s also about converting the consumer who comes in for the deal into a higher-priced customer by introducing add-ons or other items,” Byrne said. “The risk is that they don’t do it.”
Without convincing customers to add a milkshake or another entrée to their order, discounts can erode profits and become unsustainable in the long run. This is a significant concern for investors who are already skeptical about the expected traffic surge from these promotions.
“The value menus were launched towards the end of the quarter. There’s just a fear that it won’t improve and that it will be a race to the bottom,” Gonzalez said.
Subway’s $5 footlong offers a cautionary tale. While popular, it remained a staple for operators for too long, eroding profits and exacerbating other brand issues, such as cannibalizing sales. This led to restaurant closures, dissatisfied operators, and years of searching for new ways to attract customers.
Franchisee Skepticism
It’s not just investors who are skeptical of promotions; franchisees often resist discounts because they hurt their bottom line.
In recent years, franchisees have gained more power to oppose parent companies’ deal-making strategies. Many franchisees now manage more restaurants and sometimes even have private equity backing.
At McDonald’s, franchisees formed the National Owners Association in 2018, rebelling against the burger giant’s unpopular discounts and store remodeling plans. Since then, chain executives have been more transparent about management’s plans.
McDonald’s initial proposal for a $5 meal was not accepted, so Coca-Cola contributed marketing funds to make the deal more attractive to operators. Coca-Cola CEO James Quincey said on Tuesday’s earnings call that the beverage giant has seen weaker out-of-home sales in the U.S., while fast-food restaurants struggle. To boost demand, Coca-Cola is partnering with foodservice customers to market food-and-beverage combo meals, according to Quincey.
McDonald’s extended its convenient meal promotion beyond the initial four-week window. Ninety-three percent of its restaurants voted in favor of the extension, executives wrote in a memo to the U.S. system seen by CNBC.
The promotion is bringing customers back to its restaurants, according to executives and foot traffic data. June 25, the launch day of McDonald’s $5 meal, saw an 8% increase in visits compared to the average Tuesday in 2024, according to a report from Placer.ai. The pattern continued in subsequent days, as the chain surpassed its year-to-date daily visit averages. Placer.ai also found that the discounts helped drive traffic to Buffalo Wild Wings, Starbucks, and Chili’s.
In his quarterly survey of more than 20 McDonald’s franchisees, analyst Mark Kalinowski of Kalinowski Equity Research asked respondents what percentage of their sales had been incrementally boosted by the $5 meal offer. The average response was 1.3%.
“These responses suggest that the $5 Meal Deal might help keep some customers from going elsewhere rather than being a significant sales tool,” Kalinowski wrote in a research note on Wednesday.
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