Summer value meals become a battleground for fast-food chains targeting low-income diners.

• Numerous fast-food chains, including McDonald's and Taco Bell, are offering $5 meal deals in an attempt to regain customers.
• Discounts may be the only way to entice low-income consumers back due to the high prices of menus.
• Investors doubt that the introduction of value meals will significantly increase sales while maintaining profitability.

In recent years, fast-food chains have reintroduced $5 footlong sandwiches in an attempt to attract customers who have reduced their spending.

Restaurant companies are preparing to report their second-quarter results, and investors anticipate hearing that sales have slowed down, with only a few exceptions such as . To improve their next quarter's results, chains like McDonald's, Taco Bell, Burger King, and others have introduced or revived meal deals priced at $5.

Although Wall Street is not anticipating a significant sales increase from the promotions, McDonald's reported an increase in traffic as a result.

During economic downturns, the fast food industry tends to perform better than the broader industry. However, recent price increases have caused many consumers to believe that fast food is no longer a cost-effective option. In a recent LendingTree survey, over 60% of respondents reported reducing their fast-food spending due to its high cost.

The high prices of fast-food menus have caused many customers, including those from the low-income group, to switch to casual-dining chains. In response, fast-food chains like Chili's have emphasized their affordability compared to the cost of a fast-food meal.

According to Robert Byrne, senior director of consumer research at Technomic, a restaurant market research firm, the battle is for the less affluent customer.

The decline in consumer behavior has caused Wall Street to retreat. McDonald's, Burger King parent, Wendy's, and Taco Bell owner have all experienced a drop in share prices this year. However, the S&P 500 has risen by 14%.

Eric Gonzalez, a KeyBanc analyst, stated on CNBC that investors believe the second quarter is likely to be forgotten, with many large chains likely to miss their consensus estimates.

McDonald's and Wendy's are set to reveal their second-quarter earnings on Monday and Wednesday, respectively, while Restaurant Brands and Yum Brands are expected to report their quarterly earnings the following week.

Can value meals fuel bigger purchases?

During the first quarter, fast-food chains typically offer discounts and value meals to help consumers save money after the holiday season and adhere to their New Year's resolutions. However, as temperatures increase, restaurant sales typically rise, and operators do not need to rely on promotions to attract customers.

This summer, fast-food chains are offering discounts to attract customers and boost sales.

Byrne stated that restaurants are facing a shortage of space to increase prices on their menus.

But the value meals are not only about growing traffic.

"Byrne stated that the objective is to transform the consumer who is interested in the deal into a higher-ticket consumer by introducing additional add-ons or other products they may be interested in, but the risk is that they may not accept them."

Discounts may not be sustainable in the long run if they do not increase sales, which is a concern for investors who are already uncertain about the traffic increase.

Gonzalez stated that the value menus were introduced at the end of the quarter, and there is a fear that it may not improve, leading to a race to the bottom.

The $5 footlong on Subway was a hit with customers, but it eventually caused problems for operators, who saw their profits decline and other issues with the brand, such as sales cannibalization from its large size. This resulted in restaurant closures, unhappy operators, and years of trying to find a solution to bring back customers.

Franchisee skepticism

Franchisees, like investors, are also skeptical about promotions and often push back against discounts because they negatively impact their profits.

In recent years, franchisees have become more powerful to resist parent companies' deal strategies due to their increased size and financial resources.

In 2018, McDonald's franchisees formed the National Owners Association in opposition to the company's unpopular discounts and store renovation plans. Since then, the chain's operators have become more vocal in their resistance to management's plans.

McDonald's initially proposed a $5 value meal, but it did not meet the criteria, so they added marketing funds to make it more appealing to operators. Coke CEO James Quincey stated on Tuesday's earnings call that the company has seen weaker sales away from home in the U.S. due to quick-service restaurants' struggles. To increase demand, Coke is collaborating with food-service customers to promote food and drink combo meals, as per Quincey.

McDonald's has extended its value meal past its initial four-week window, with 93% of its restaurants voting in favor of the extension.

According to both executives and foot traffic data, the promotion is bringing customers back to its restaurants. On June 25, the launch day of McDonald's $5 meal, there was an 8% increase in visits compared to the average Tuesday in 2024, as reported by Placer.ai. The pattern continued in the following days as McDonald's exceeded its year-to-date daily visit averages. Placer.ai also found that discounts helped drive traffic to Buffalo Wild Wings, Starbucks, and Chili's.

Mark Kalinowski of Kalinowski Equity Research surveyed over 20 McDonald's franchisees in his quarterly report and asked about the impact of the $5 meal deal on their sales. The average response was 1.3%.

Kalinowski wrote in a research note on Wednesday that the survey results may suggest that the $5 Meal Deal should be viewed as an initiative to retain customers rather than a big sales builder.