Value is on the menu this summer.
Restaurant chains such as Taco Bell (YUM), McDonald’s (MCD), KFC, and Burger King (QSR) have been leaning into value deals this summer in hopes of getting Americans to visit their restaurants more often and spend more when they do.
It's an attempt to turn around the narrative that fast food has gotten too expensive. Quick-service restaurant sales have finally started to flag after chains hiked prices over the past few years to offset higher labor and commodity costs, deterring diners, especially lower-income consumers.
That shift has been reflected in the hit to restaurant stocks this year. Shares of McDonald's and Wendy's (WEN) are both down 13% year to date, while shares of Burger King parent Restaurant Brands International are down 11.3% and YUM! Brands is up just 1%.
Starbucks (SBUX), which calls itself an affordable luxury, is now struggling to encourage investors it still is, with shares down 18% in 2024. The S&P 500 (^GSPC), meanwhile, is up nearly 15%.
Enter value meals — which Wall Street pros say could boost foot traffic but lower margins.
Many will be watching closely throughout July, which Evercore ISI analyst David Palmer called a "pivotal month for the fast food industry," for proof that the "$5 meal bundle is enough to accelerate industry sales."
The limited-time value deal comes down to a simple proposition: When value strategies work, it's because increased foot traffic offsets lower margins to bring in more dollars, Morningstar analyst Sean Dunlop said. Consumers adding more items to their checks also helps.
“It really comes down to … repeat visits after the fact,” R.J. Hottovy, head of analytical research at Placer.ai, told Yahoo Finance. “You're not making money on the value menu. You're making menu money on the other products, the more premium products, the dessert products, the beverage products that go along with that.”
While consumers may be happy about the cheaper prices, it's not guaranteed to be a good deal for fast food companies. And more competitors in the value arena could lead to no clear winner in the end.
"A value war is good for no one," Dunlop said. "It's also the typical reaction that we see when industry traffic slows down. ... Everyone's dominant strategy when traffic is down is to promote, discount, and lean into value, but all players lose if their peers also make that choice."
Value battle heats up
On Thursday, Taco Bell was the latest quick-service restaurant to introduce a value offering. With a name that plays on the idea that fast food is now a luxury, the $7 Luxe Box menu includes a Chalupa Supreme taco, beefy five-layer burrito, double-stacked taco, chips and nacho cheese sauce, and a medium drink.
The company said the bundle provides a 55% discount on the total price of the items if they were bought separately. And Nola Krieg, who is behind product development at Taco Bell, said the box echoes previous $5 box deals the taco chain has offered since the late 2000s.
"What we found is an opportunity to give consumers an ... abundant meal at a price that everybody can afford, at $7,” Taco Bell chief marketing officer Taylor Montgomery told Yahoo Finance at Taco Bell's headquarters. Montgomery hinted that other chains' value offerings may not be as hearty.
Taco Bell's offering compares to others rolling out across fast food. McDonald's $5 value menu, which began Tuesday, includes the choice of a McDouble burger or McChicken sandwich in addition to a four-piece chicken McNuggets, small fries, and a small soft drink.
Similarly, KFC's $4.99 meal offers two pieces of chicken, a side of mashed potatoes and gravy, and a biscuit, while Burger King’s $5 Your Way Meal includes the choice of a Chicken Jr., Whopper Jr., or bacon cheeseburger to go with fries, nuggets, and a drink.
Wendy's also sweetened the deal for its $5 Biggie Bag, an ongoing deal introduced five years ago, by throwing in a free Frosty. And even Starbucks is offering a “pairing menu.” For $5 or $6, customers can get a small iced or hot coffee with a butter croissant or breakfast sandwich.
And while promotions are back in a big way, this tasty competition isn't new in the industry.
In 2016, McDonald's, Burger King, and Wendy's competed over price. McDonald's had its McPick $2 menu, Burger King had a five-for-$4 meal deal, and Wendy's had a four-for-$4 deal. All saw a 3% to 5% sales boost in the first quarter of 2016.
Fast food back in focus
So, is it working this time around? Preliminary results show these deals just might be.
Over the “last two weeks in particular, we started to see [fast food restaurants] come back into the focus of a lot of consumers as these value menus rolled out,” Hottovy said, adding that this “extreme value is really resonating with consumers right now.”
Burger King is “definitively” seeing positive traction from its $5 promotion, Hottovy noted, while Wendy’s ongoing $5 Biggie Bag and Frosty freebie seem to be luring customers in too.
Most of these runs are for a limited time only, though, so time will tell if these promotions play out favorably for fast food giants, especially as grocery stores and casual dining chains like Cava (CAVA), Chipotle (CMG), and Sweetgreen (SG) offer customers competitive alternatives.
If the deals aren't compelling enough to boost traffic, the chains may be reluctant to renew them.
“It's reasonable to expect that [if] franchisees do not see incrementality in profit, they're going to be pushing back, and they're going to be unhappy with signing off on a ... subsequent promotion,” Bernstein analyst Danilo Gargiulo told Yahoo Finance.
Evercore's Palmer believes the success of these deals comes down to who can best communicate them to consumers.
"We suspect the answer will come in the advertising effectiveness — will it leverage McDonald’s $1 billion national advertising budget?" he wrote. "Should McDonald’s be able to stabilize traffic with value in 3Q the steady stream of new products in 2H24 and 2025 should kick off a substantial brand recovery."
—
Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
Click here for in-depth analysis of the latest stock market news and events moving stock prices
Read the latest financial and business news from Yahoo Finance
Fast food chains lean into value this summer. Will it be enough to boost their lagging stocks? - Yahoo Finance
Read More
No comments:
Post a Comment