McDonald's to extend $5 meal deal until August, franchisees may get hit in the early innings
McDonald's $5 meal deal swept the internet, but franchisees may struggle from an extended run.
The promotion, originally limited to July, will be available all summer. Per a memo obtained by Yahoo Finance, 93% of all McDonald's restaurants voted yes to extend the $5 meal deal through August.
The company's US chief marketing officer, Tariq Hassan, said the deal successfully drove foot traffic back from competitors and boosted the brand's affordable image after several price hikes. Customers drawn in by the deal may try other pricier items too.
When the offering rolled out formally on June 25, foot traffic was down 0.8% that week year over year, per Placer.ai. Traffic was subsequently up 2.8% the week of July 1 and up 2.4% the week of July 8, compared to last year.
"It does look like incremental visits are coming in because of this," R.J. Hottovy, head of analytical research at Placer.ai, told Yahoo Finance.
The deal is "resonating with that lower-income consumer," BTIG analyst Peter Saleh told Yahoo Finance, though more data is needed to gauge its effectiveness.
Saleh thinks it may be extended to September as the new national value platform, while the Golden Arches figures out other launches like buy one, get one, or a version of the $1 $2 $3 Dollar Menu.
"This is kind of their bridge to that value menu," Saleh said prior to the extension announcement. He added that franchisees are learning that the $5 deal, which consists of a choice of McDouble burger or McChicken sandwich, four-piece chicken McNuggets, small fries, and a small soft drink, is "too narrow" and "doesn't allow the customer to have a ton of variety."
The meal deal could have implications for value offerings across the industry.
McDonald's is the "dominant player ... Anything they do is gonna have a big ripple effect," Hottovy said, especially as grocery stores and casual dining chains like Cava (CAVA), Chipotle (CMG), and Sweetgreen (SG) offer customers competitive alternatives.
But in some ways, the meal may be working against franchisees in the early innings.
So far, franchisees said 20% to 25% of transactions have included the deal, which is "way higher than historical [and] way higher than what McDonald's would typically want," according to Saleh. Customers that were already going to McDonald's are turning to the discounted meal too.
"That's definitely not all incremental. These aren't new customers. Some of these customers are existing customers that were going to come anyway," Saleh said.
Typically, 10%-15% of customers use discounted deals, according to Hottovy.
Plus, 20% of customers ordering the $5 meal deal are using an additional 20% off digital coupon from the app. Its usage is "much higher than what McDonald's had expected it to be" too.
"Franchisees are telling us that ... their margins are being impacted by [the deal], and it's making this a lot less profitable, or in certain cases, not profitable at all," Saleh said. Some franchisees are pulling back on marketing for the deal, like video ads on the in-store screen or signage on the windows.
Others are making the threshold to get 20% off higher.
"Some markets were at $5 and some were at $10 ... almost all, or many, have gone above the $10 mark," per Saleh.
This comes as the company is set to report its earnings on Tuesday, July 29.
Here's what Wall Street expects from McDonald's in Q2, per Bloomberg consensus data, compared to Q2 of 2023, when the Grimace Shake stole the show:
Revenue: $6.64 billion compared to $6.5 billion
Adjusted earnings per share: $3.08 compared to $3.17
Global same-store sales growth: 0.94% compared to 11.7%
US same-store sales growth: 1.06% compared to 10.3%
International owned same-store sales growth: 1.97% compared to 11.9%
International franchised same-store sales growth: -3.8% compared to 14%
—
Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.