Franchise owners and customers put the value meal economy to the test.

• In response to price-weary consumers, Burger King, McDonald's, and Wendy's are all introducing value menus to boost their restaurant sales that have been declining.
• Some experts in the fast-food industry consider value meal deals to be unprofitable "loss leaders."
• Customers are relieved by the new promotions, but franchisees may experience shrinking margins if they cannot entice customers to buy additional ticket items or capture more market share from competitors.

Inflation-weary consumers are being catered to by fast-food restaurants through the return of value pricing on their menus, albeit for a limited time. McDonald's is offering a $5 value menu this month, Wendy's is rolling out a $3 breakfast, and Burger King is adding value deals that will be offered "for several months."

According to Shubhranshu Singh, associate professor of marketing at the Johns Hopkins Carey Business School, who has studied the economics of fast-food value meals, the reason they are only returning on a limited basis is that they are at best an "at cost" offer and at worst, a money loser.

Singh stated that the $5 meal cannot be a permanent menu item due to the significant increase in cost. Franchisees will lose money on every customer who purchases these value meals if they continue to sell them at $5.

While McDonald's franchisees were happy about the news, they urged the corporation to invest more to make it a permanent menu item.

McDonald's offers a McChicken or McDouble, four-piece chicken nuggets, fries, and a drink. Wendy's deal includes a bacon or sausage, egg, Swiss cheese, and croissant sandwich, along with a small order of crispy seasoned potatoes (drink not included). Burger King provides one of three sandwiches or nuggets, plus fries and a drink.

What all the restaurants need is diners adding more to the orders.

"Singh stated that the goal is for customers to purchase the value meal and then buy more, rather than just buying the value meal and leaving."

In major markets like California, where the minimum wage for fast-food workers is now $20 and inflationary pressures on ingredients and packaging persist, restaurants can only turn a profit on a value meal if a customer adds higher-margin items like an apple pie to their order.

Singh stated that it is impossible for them to serve $5 value meals with the minimum wage and still make a profit, unless consumers purchase other products.

Scott Rodrick, owner of 18 McDonald's in Northern California, stated that the new minimum wage has been a "rollercoaster" since its implementation on April 1. He expressed his concern about the impact of inflation on customers as a franchisee, stating that it has affected margins.

Due to the monthly royalties paid to corporate headquarters, franchisees have smaller profit margins at the start.

A 'break-even' menu proposition, with free sauce thrown into the bargain

Nick Snowberger, owner of 16 McDonald's restaurants in Montana and Wyoming, believes that focusing solely on a specific menu price is misguided.

Snowberger emphasized the importance of holistic value, which includes hospitality, speed, accuracy, and cleanliness, when discussing the restaurant experience. He pointed out that over 95% of McDonald's franchisees supported the $5 bundle.

Snowberger stated that value meals are not very profitable, but they are beneficial for customers. He added, "This presents an excellent opportunity to conduct business at a cost that is competitive and motivating for our customers."

As a franchise owner, he is attempting to assist customers in other ways by utilizing his latitude and independence.

Snowberger announced that they will no longer charge for extra sauces and will offer them for free. In the event of an incorrect order, they will rectify it at their expense and accept all coupons, including those from competitors. These decisions align with their commitment to supporting local initiatives, such as high school athletics, local fairs, and booster clubs.

The cost of conducting business has significantly increased, affecting various aspects such as meat, lettuce, fuel, labor, condiments, and wages. However, the speaker stated that they are not concerned about the value menu, but they cannot speak for those who face higher cost pressures.

McDonald's refused to comment on how value meals affect franchisees' profits.

Franchisee focus on Frozen Coke, fatter margin menu items

Dhanani Group CEO Shoukat Dhanani claims that value meals are still profitable for franchisees, despite owning and operating 510 Burger King restaurants across eight states.

"We are experiencing less revenue than usual, but we are not losing money," Dhanani stated.

Although his company owns 170 Popeyes restaurants, the chicken chains have not yet experienced price pressure to offer a value meal.

Dhanani stated that franchisees of Burger King, like McDonald's, have the ability to vote on new product concepts. "We vote on promotions and, if approved, implement them. We have some control," he said.

Fast-food restaurants faced tougher times in 2022 due to inflation's squeeze, with labor pressure and commodity prices being the biggest challenges, according to Dhanani. However, it is now the consumer who is feeling the brunt of the price pressures, he said.

To remain competitive due to rising wages, inflation, and insurance costs, we must increase our prices, which can result in consumers experiencing sticker shock when they see the new prices, as Dhanani explained.

Despite smaller margins, he anticipates the value menu to be successful. Dessert drinks such as Burger King's Frozen Coke and Frozen Strawberry Lemonade have the highest profit margins.

McDonald's franchisees have recently gained experience in selling meal bundles for $4 or less. "We aim to provide value to our customers," Snowberger stated. "However, I can assure you with 100% confidence that when you visit us, we will try to sell you more. We are always looking for opportunities to sell additional items such as pies, cookies, shakes, or bacon on your burger."

Loss leader 'mistake' vs. market share gain

While keeping franchise operators content, some quick-service restaurants, apart from the major fast-food chains, are also attempting to satisfy customers who are no longer interested in their offerings.

According to Craig Dunaway, the chief operating officer of Penn Station East Coast Subs, which operates 320 restaurants in 15 states, larger rivals' value concept is a loss leader and generally a poor business idea.

"As a franchisor, our primary focus is on generating a return on investment. If a franchisee fails to generate profits, they will not expand, so it is crucial for franchisors to avoid introducing loss leaders," he stated.

Franchisees at Penn Station have the freedom to set their own pricing, while corporate suggests price points and avoids loss-leader territory.

According to Dunaway, if Penn Station were to adopt the price point strategy, it would result in a loss. The chain currently takes on some of the higher costs instead of consistently increasing prices. Additionally, Penn Station is working on introducing new cost-competitive products, such as a $4.99 half sandwich on a 9-grain bread, which will be tested this summer.

Rodrick stated that there is another way to win with value: increasing market share during a time of declining traffic. He mentioned that recent data shows a decrease in customers in restaurants and a decrease in their spending. He explained that the competitive space is becoming increasingly heated and that they plan to be at the forefront of providing relief to customers affected by inflation. As a franchisee, Rodrick emphasized the importance of investing in margin.

McDonald's franchisees have excelled in local value campaigns, but the "national value communication" from the company has been lacking recently.

Rodrick described the profit pressure his business is facing in California as "extraordinary," including a massive increase in insurance costs in the state. He told CNBC that he can either lament the impact or get aggressive about growing market share.

Despite the potential loss in profits, value meals are effective in attracting customers.

A nurse in Keokuk, Iowa, opted for Wendy's breakfast menu instead of McDonald's breakfast burrito recently.

She stated that she didn't want to spend $5 on two burritos at McDonald's because one wasn't very filling.