McDonald’s relies on value agreement to reverse declines

The country’s largest fast-food chain is facing inflationary pressures and suffering the repercussions of customers’ more cautious spending habits.

McDonald’s price hikes and customer backlash led to the launch of a deal so tempting it seemed almost impossible to sustain.

Related: Popular bankrupt restaurant chain reopens first store

What started as a summer special will now run through winter, reflecting a struggling economy that has yet to fully recover.

McDonald’s has raised their prices recently.

MIRA OBERMAN/Getty Images

A bittersweet announcement

In June, McDonald’s (MCD) announced the launch of its $5 Value Meal Deal, which consists of its customers’ favorite menus.

The deal includes a McDouble or McChicken sandwich, fries, four-piece Chicken McNuggets and a small soft drink, all for just $5.

Initially, the limited-time deal was to last until the end of the summer and be available only in select locations, but McDonald’s quickly changed its mind after quarterly earnings did not perform as expected.

Related: Walmart is embracing the beloved fast-food chain you’ve never heard of

According to McDonald’s Q2 2024 earnings report, global comparable sales fell 1% and net income was flat compared to the prior year.

In the 2023 first quarter earnings call, McDonald’s CEO Chris Kempczinski warned that inflation is putting more pressure on the restaurant industry due to more conscious spending by customers.

Although the mass contract was originally only supposed to run until July, this decline led to it being extended until the end of August, with 93% of franchisees voting to keep it.

On Thursday, McDonald’s announced that the $5 meal will be extended through December, but will be offered at fewer U.S. locations than before.

80% of franchisees voted for the new $5 value meal extension. However, as voting is ongoing, more locations may be added.

According to McDonald’s President Joseph Erlinger on the mid-year earnings call, the $5 meal deal has successfully boosted sales due to its outstanding performance with lower-income customers.

“We have seen a lot of enthusiasm and the number of $5 meal deals sold is beyond expectations. Trial rates of the offer are highest among lower income consumers and brand sentiment around value and affordability has started to shift positively.” Erlinger said.

The fast food industry is struggling with inflation

The decision to expand McDonald’s value meal came in an effort to win back lower-income consumers amid customer complaints about the chain’s price hikes.

“Together with our franchisees, we’re committed to keeping our prices as affordable as possible, which is why we’re doubling down with even more ways to save,” said Erlinger.

More McDonald’s:

• McDonald’s New $5 Meal Deal Isn’t Going As Planned (So Far…)
• McDonald’s president signals a worrying trend, changing outlook

However, McDonald’s is not the only fast food chain that uses discounts and offers to win back customers.

Other fast-food chains have also adopted the tactic of offering deals to boost sales, including Subway’s $6.99 Any Footlong Deal, Starbucks’ (SBUX) with Starbucks Run Saturdays and Burger King (QSR) with its $5 “You Way” meal, which competes directly with McDonald’s value meal.

McDonald’s new approach to value

The inflation gap between food and restaurants is about 3%, with inflation for food at home rising nearly 1% and prices for food outside the home rising 4%.

During McDonald’s Q2 earnings call, McDonald’s CEO Christopher Kempczinski said that because of the inflation gap, McDonald’s is looking to increase value that will be more beneficial in the long term, rather than promoting one-off or limited term.

While McDonald’s will continue to pursue deals, it will focus on improving marketing and cutting costs to return the business to positive numbers.

Related: Veteran fund manager sees world of pain coming for stocks