McDonald’s (NYSE:MCD) has long been synonymous with value in the fast-food industry, but rising costs are making it difficult for the company to maintain its affordability leadership. The fast-food giant recently extended its $5 meal deal, aiming to attract price-conscious customers. However, rising costs and competition from fast-casual restaurants are making it harder for McDonald’s to stick to its value-driven strategy.
The Struggle to Maintain Value Leadership
During their recent earnings call, McDonald’s executives mentioned the word “value” 96 times, underlining its importance to their strategy. Despite this emphasis, McDonald’s saw a 0.7% drop in U.S. same-store sales for the quarter, marking the first decline in 16 quarters. This decline highlights the challenges McDonald’s faces in retaining its appeal among low-income consumers who have traditionally relied on the company for budget-friendly meals.
The fast-food industry is seeing a shift as consumers prioritize quality over cost. Competitors like Chipotle (NYSE:CMG), with its $13 steak bowl, Wingstop (NASDAQ:WING), and Shake Shack (NYSE:SHAK), have all experienced positive sales growth by offering higher-quality options at a premium price. These brands are attracting a demographic willing to pay more for perceived better value, even as overall dining costs rise.
The $5 Meal Deal: A Temporary Fix?
To reclaim its value leadership, McDonald’s extended its $5 meal deal through August. This promotion has shown some success, particularly among lower-income customers, with the company reporting a 3% increase in foot traffic. However, analysts are uncertain about the long-term effectiveness of such promotions.
TD Cowen analyst Andrew Charles downgraded McDonald’s stock to Hold from Buy, expressing concerns that the company is overemphasizing price promotions at the expense of what makes the brand unique. “In order to fix this value problem, they’re ignoring the other parts of the playbook,” Charles said, referencing McDonald’s past success with menu innovation and creative marketing campaigns.
The Broader Industry Context
The cost of eating out has increased 4.1% year over year, compared to a 1.1% increase in grocery prices. This inflationary pressure is prompting consumers to rethink their dining choices, often opting for fast-casual restaurants that offer a more elevated dining experience. Dr. Cathrine Jansson-Boyd of Anglia Ruskin University explains that there’s a “real snobbery in consumption,” where even middle-income consumers prefer to spend a little more for better quality, diminishing the appeal of traditional fast food.
McDonald’s is also grappling with higher operating costs, including rising wages. In California, for instance, a new wage law has increased the minimum pay for fast food workers to $20 per hour. Additionally, the cost of key ingredients like ground beef and chicken has skyrocketed, further squeezing the company’s margins. Between June 2019 and June 2024, the price per pound of ground beef surged nearly 36%, while chicken rose by 26%, according to the U.S. Bureau of Labor Statistics.
The Path Forward: Reestablishing Value
Jefferies managing director of equity research, Andy Barish, remains cautiously optimistic, noting that McDonald’s is likely to regain its value leadership, but it will require significant investments and time. Barish pointed out that low-income consumers are still willing to dine out more often if presented with a good deal or discount, suggesting that there is still room for McDonald’s to regain its footing.
However, creating a modern-day equivalent of the Dollar Menu in today’s economic climate is not easy. As BTIG analyst Peter Saleh noted, “Traffic and same-store sales are going to be volatile for the foreseeable future.” Saleh believes that while the $5 meal deal is a step in the right direction, a new national value platform will require several months of sustained advertising and consumer adoption to be successful.
Conclusion
McDonald’s value strategy is at a crossroads as the company navigates rising costs and changing consumer preferences. While the $5 meal deal has shown promise in attracting budget-conscious diners, the long-term success of McDonald’s will depend on its ability to innovate and adapt to the evolving fast-food landscape. As the company aims to reestablish its value leadership, it faces an uphill battle that will require a careful balance of affordability, quality, and brand differentiation.