McDonald's is winning some diners with $5 meal deal but faces long-term challenges in being a value leader
Value, value, value — McDonald's (MCD) executives said the word 96 times on the company's latest earnings call, but the fast food leader is facing a steep climb to get back its position atop of the value game.
After years of price hikes, the fast food chain is facing consumer pushback as its value perception among low-income eaters drops. The chain recently extended its $5 meal deal through August while it works to create a permanent platform like its old $1 $2 $3 Dollar menu.
CEO Chris Kempczinski admitted the company's "value leadership gap has recently shrunk" after the Golden Arches reported earnings that showed a 0.7% drop in US same-store sales, the first decline in 16 quarters.
But the fast food giant is facing multiple headwinds, as consumers increasingly prefer healthier options with an elevated dining experience. Chipotle (CMG), with its $13 steak bowl, Wingstop (WING), with its $9 chicken sandwich combo, and even Shake Shack (SHAK), with its $11.99 Smoky Classic BBQ Burger, all saw positive sales growth this earnings season.
"You've got these new chains that have come along, and some of them are pretty varied, like McDonald's, in terms of a variety of menu. ... Others are really specific, like your Chipotles that really offer a select group of products but do it really well in a way that consumers really like," Michigan State University marketing professor Forrest Morgeson told Yahoo Finance.
"McDonald's value proposition isn't nearly as unique as it used to be," he said.
The cost of eating out has risen 4.1% year over year, compared to a 1.1% jump in grocery prices. Discerning diners are now thinking beyond dollars and cents and are adding factors like the quality and quantity of food, service, and cleanliness when they choose to splurge on dining out.
"Even though it might be X percent more expensive to eat at Shake Shack than McDonald's ... consumers are seeing inherent value around the what they pay for versus what they get for going to a fast casual restaurant instead of a quick service restaurant," said TD Cowen analyst Andrew Charles, who downgraded shares of McDonald's to Hold from Buy last week.
And that combination of quality and value is crucial in attracting both low- and middle-income consumers.
"There's a real snobbery in consumption," Dr. Cathrine Jansson-Boyd of Anglia Ruskin University said.
"They're not going to go to a Michelin-star restaurant, so they will pick the second lowest one because that will then make them feel a little bit better," she explained.
McDonald's, in the meantime, has done away with some amenities like Play Places. Many closed during store redesigns or never reopened after COVID. Based on TD Cowen's consumer tracker, the value perception among low-income audiences has declined in the past year.
"In order to fix this value problem, they're ignoring the other parts of the playbook," said Charles. "I'm worried that McDonald's playbook is just going too deep on value and not enough on what makes the brand so special, around menu innovation and creative marketing campaigns."
McDonald's had a very successful Q2 last year when the Grimace Shake promotion stole the show.
In a memo viewed by Yahoo Finance, US chief marketing officer Tariq Hassan and US national field president Myra Doria told franchisees the $5 meal deal is doing the job.
Around 10% of diners were using the deal per the memo, and it's performing well with lower-income customers. The company also said it saw a 3% increase in foot traffic.
A franchise owner, who asked to stay anonymous but frequently posts on X, formerly Twitter, as McFranchisee, told Yahoo Finance the $5 meal "filled a need" as consumers are focused on affordability.
In a note to clients, Jefferies managing director of equity research Andy Barish said McDonald's will reestablish itself as the historical "value leader," and the low-income consumer is "willing to dine out more often if they're prompted by a deal or a discount."
Additional US investments are needed, said BTIG analyst Peter Saleh, and it will take a while for diners to adopt the new national value menu once it's available.
"Traffic and same-store sales are going to be volatile for the foreseeable future," Saleh wrote in a note to clients. "Investors need to be patient, as the $5 Meal deal is a limited-time offering, and a new national value platform could take several months of sustained advertising to resonate."
But creating a modern-day dollar menu when the economics have vastly changed won't be easy. Wages have risen quickly, including in California, where a new wage law boosted the pay of fast food workers to $20 per hour.
Plus, between June 2019 and June 2024, the average price per pound for ground beef jumped nearly 36%, $3.95 to $5.36, while chicken jumped 26%, from $1.59 to $2.01, according to the US Bureau of Labor Statistics.
McDonald's is running into a similar problem as Subway, said Chris Hydock, a marketing professor at Tulane University. The sandwich chain was known for its $5 footlong until it had to raise the price to $10 in New York.
"When it was no longer economical to offer a $5 footlong, Subway had a major kind of branding challenge," Hydock told Yahoo Finance over the phone.
"For so long they [McDonald's] built their image around ... the Big Mac and Ronald McDonald and PlayPlaces ... [that] morphed into, over time, the dollar menu," he added. "They just can't do that anymore."
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.