The fast food sector has seen an uptick in discounted offerings from companies like McDonald's (MCD) and Burger King as pressure to bring in more consumers intensifies. What does this mean for the broader restaurant sector?

BTIG Managing Director and Restaurant Analyst Peter Saleh and TD Cowen Managing Director Andrew Charles join Market Domination to give insight into the discounts offered at fast food chains and what investors need to keep in mind moving forward.

Saleh characterizes the industry as healthy overall but highlights several key risks: "I think these discounts, as steep as they are, are going to likely hurt same-store sales in the medium term, and I think they could hurt margins in our opinion. These are investments in value perceptions given all the media backlash against all the price increases that have been happening. So we think this is something necessary, a necessary evil for these companies to be doing at this point in time, but it's going to take some time to change the perception and the narrative in the media that these companies are more about value than they are about price hikes."

Charles notes he is "cautiously optimistic" about the fast food giants' strategy: "I would say the last time we saw this, to your point, was in 2018, not a banner year for McDonald's. You had same-store sales of about 2.5%. It's a little bit above the consensus right now for 2% for the year and during that time, traffic was negative by about 2.2%. So the analog here is not great."

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This post was written by Nicholas Jacobino

Video Transcript

Mcdonald's addresses viral social posts and media reports on the company raising prices significantly beyond inflationary rates.

The fast food chain defending its commitment to value and affordability.

A key ingredient.

Other fast food companies are getting their hands on.

We're looking at how to navigate the big picture with the Yahoo finance playbook, Peter Sale BT IG, managing director and Andrew Charles.

Andrew Charles TD Cowan managing director.

Join us now to discuss guys.

Uh Good to have both of you on the show.

Peter, maybe I'll start with you.

We can start kind of uh high level Peter as you kinda look across your coverage universe, you know, at the fast food chains, Peter, you know, inside and out how healthy, how resilient does this industry look?

So, look, I I think the industry is healthy.

Um But I think they are going through a tougher time right now.

Lots of discounting.

Um You're seeing it from mcdonald's, I think this is just the beginning.

I think you're seeing it from Wendy's, you're seeing it from Jack In the Box, you're seeing it from Burger King and I think this is gonna continue.

I think these discounts as steep as they are um are going to likely hurt same store sales uh in the medium term.

Uh And I think they could hurt margins in our opinion, these are investments in value perceptions, given all the media backlash against all the price increases that have been happening.

So we think this is something necessary a necessary evil for these companies to be doing at this point in time.

But it's gonna take some time to change the perception and the narrative in the media that these companies are more about value than they are about price X. Um It's really interesting, I mean price wars we haven't seen in a while, right?

Because of this inflationary environment, Andrew, is it gonna work?

You know, are, are consumers going to gravitate to those chains where they see promotions?

Thanks for having me.

So uh we're, we're cautiously optimistic, but I would say the last time we saw this to your point was in 2018, not a banner year for mcdonald's, you know, you had same store sales of about 2.5%.

It's a little bit above the consensus right now for 2% for the year.

And during that time, traffic was negative by about 2.2 percent.

So the analog here is not great.

I think that the numbers are achievable though for mcdonald's based on this strategy.

And so, you know, we're optimistic that this could be met, but, you know, uh mcdonald's did rescind their guidance or their outlook for 3 to 4% us, same store sales.

And obviously this tactic likely wasn't contemplated being the year when they issued it.

And Peter back to you.

Um, you know mcdonald's big in the lift in household, Peter.

I mean, that five year old you can give her an Oreo mcflurry.

She's good to go.

Let, let's get some of your top picks though.

Domino's Pizza, Peter walk me through.

Why you think that's a buy right here?

Yeah, so Domino's our topic.

The only QSR that we uh are bullish on and it's a self-help story.

Uh They got several initiatives uh and that they're working on or that are gonna drive same store sales.

Uh and they're very company specific.

First of which is the change in the rewards program, which really happened last September of 2023.

So that gives them a benefit really.

It carries through the, the, the, the full year of 2024 and they're already seeing uh increases in transactions uh across the board with, with that um with that change.

And then when you look at the, the change in the Uber Eats Partnership that they added uh called at the beginning of this year.

Uh that is starting to add some incremental sales as well.

They think they'll exit the year close to 3% sales mix.

Uh The vast majority of that is gonna be incremental this year.

Uh and then they can layer on on top of that in 2025 adding on doordash and other partnerships as well.

So I think they have a lot of self help initiatives going on that.

I'll drive, you know, that mid single digit same store sales growth and that's why we're bullish them.