For a while after the pandemic, quick-service restaurants were rolling right along. Many raised prices in 2021 and 2022 and consumers, who were excited to have stores available again, still kept spending.
Then July 18, 2023, happened. That’s when Sam Learner of Connecticut posted an image on X (formerly Twitter) about an $18 Big Mac. And all hell broke loose. Consumers shared their own stories and a consensus formed that McDonald’s and other QSRs were acting like Marie Antoinette.
The viral tweets and media reports mounted in the ensuing months, and McDonald’s in May posted an open letter from its U.S. president, Joe Erlinger, who pushed back on what he called “inaccurate” reports and social posts.
Cut to today. Now you can get a decent-sized meal at McDonald’s for $5, a deal it rolled out in late June, intending it to last one month. In late July it announced it was extending the promotion through August. Subway is offering $3 dippers. Wendy’s has a $3 breakfast. You can bring a jar of change into a restaurant again. But for how long? Will prices crank up again once the outrage settles?
Sara Senatore is the managing director of global equity research and a senior restaurant analyst at Bank of America.
Don’t count on it. But operators can still make a buck if they’re smart about it.
“Value pricing is going to stick around,” said Sara Senatore, managing director of global equity research and a senior restaurant analyst at Bank of America. “I think after the pandemic we got used to the idea that price-point value is less urgent to customers. There was a fair amount of exuberance around spending because of pent-up demand. People viewed fast-food restaurants as a reasonable way to spend their money, in the absence of other options.”
Until they didn’t. The Learner post was the tipping point. But Senatore said forces had been gathering for a while.
“It wasn’t just that demand changed. QSRs were facing cost inflation, particularly with beef prices and labor. So, it made sense that they were increasing prices,” she said. “You could make the case that a linchpin also was when McDonald’s stopped doing national marketing around its $1, $2, $3 Dollar Menu. But that was in 2018. Clearly it took a while for the focus on value to be as acute as it is.”
Senatore noted something else that roiled the American psyche.
“When fast-food inflation started to exceed the inflation you were seeing in the rest of the economy, people did not like that,” she said. “McDonald’s was increasing prices even as you were starting to see prices at other restaurants roll off and prices at grocery stores roll off. When menu-price inflation started to gap out from broader inflation, consumers suddenly weren’t seeing the same kind of price increases everywhere.”
The barbell strategy
So that’s what happened. What’s an operator to do about it? For one, don’t start with lowering prices.
“What many QSRs are doing is bundling items, packaging them, doubling them,” said Ted Babcock, senior vice president at Fishbowl Consulting Services. “The chicken sandwich at McDonald’s hasn’t gone down. But you can get two for $4. That isn’t a price reduction on the core product. It’s a price-point promotion on a different product.”
Even on the much-ballyhooed $5 value meal—in which consumers can get a McChicken or McDouble, a four-pack of chicken nuggets, French fries, and soda—Babcock sees profits.
“McDonald’s is using a barbell strategy in promoting low and high-priced items,” he said. “When you go through a McDonald’s drive-thru or go on its splash page, you see a big image of the Double Quarter Pounder with Cheese. If you go into a store, maybe you’ll see a sticker of the $5 value meal in the window, if you look closely. McDonald’s wins in bringing people into the store with the promotion. It will be interesting to see what it reports on its next earnings call.”
Comparable sales in the U.S. fell 0.7 percent for the second quarter, McDonald’s reported July 29. Systemwide sales decreased by 1 percent.
Shubhranshu Singh is a marketing professor at Johns Hopkins University.
“Consumers still recognize us as the value leader versus key competitors, but it’s clear that our value leadership gap has recently shrunk,” CEO Chris Kempczinski said during the earnings call. “We wrote the playbook on value and we are working with our franchisees to make the necessary adjustments.”
“They’re doing fine,” said Shubhranshu Singh, a marketing professor at Johns Hopkins University. “These chains are not charity organizations. They’re not trying to serve cheap food to people who are complaining about high prices. They’re trying to get people who have either stopped going to the store or never went there. I suspect the value-pricing approach is working for McDonald’s.”
But there’s no question that the perception of fast food as affordable to low-income consumers has been rocked. Singh pointed to a big player in casual dining that is trying to cut into the QSR world.
“Applebee’s is advertising that it costs less to dine in with them than it does for fast food,” he said. “It’s interesting positioning. But it doesn’t take into account what consumers really value about fast-food: it takes less time. They will pay more because the food arrives faster.”
The persistence of delivery
One might think that consumers would be similarly incensed at third-party delivery providers for the fees they charge. But the big three—DoorDash, Uber Eats, Grubhub—seem unblemished during this time of inflation, which is somewhat puzzling to analysts like Senatore.
“It has been surprising how sticky the delivery business has been in light of the fact that it tends to be much more expensive to order through a third-party app than to order in other ways, particularly pickup,” said Senatore. “It’s something that we’re watching closely because you would think that would be an easy thing to give up.”
Understand the benefits of discounts
Operators need to deploy a variety of tactics to survive. This has always been the case but it has more urgency now. A digital strategy that rewards loyalty should be in every operator’s playbook, said Babcock.
“We’re in a period of declining traffic and increasing promotions. It makes your social relevance more important. You need to be able to target the right consumers, with the right offers, at the right time. You have to get people in the door with a promotion and show them something else. If you’re not doing that, you’re doing it wrong,” he said.
And despite some of the negative attention Wendy’s got with dynamic pricing, it’s fair game.
“It’s real-time price variation. That’s all it is,” Babcock said. “It’s been around forever. If Taylor Swift is performing in your town, a hotel room will be more expensive. Amazon does it all the time. Uber does it with surge pricing. Just make sure not to mess with a consumer’s expectations. It’s really a matter of execution and communication.”
A version of this story appeared July 24 in sibling publication Food On Demand. It has been updated to included second quarter earnings information from McDonald’s. Adam Wahlberg is the associate editor of FOD.