“I’ve never seen consumers less price sensitive than they are today,” one fast-food franchisee said.
Restaurant chains including McDonald’s and KFC are paring back $5-and-under “value” items in favor of more expensive $10-to-$30 combination meals, a strategy employed to lift sales and profits and offset rising food costs as the U.S. economy reopens.
“Value” meals — sandwich, soda and fry combinations priced at $5 or less — have long been a staple of fast-food offerings. Chains used the deals to lure bargain-conscious customers, bringing traffic to stores. But deals priced at $5 and under have become less generous in the last 18 months.
During the pandemic, fast-food gained market share from other restaurants forced to close as customers motored through socially distant drive-throughs to pick up a bag of burgers. Now that the country is reopening, those chains are selling new, pricier sandwiches and meals to customers — a move that some warn may alienate some hourly workers and other lower-income customers as government subsidies wane and mom-and-pop restaurants reopen.
So far, the chains’ trade-up tactic is working, helping lift comparable sales at limited-service restaurants by 11.5 percent this May compared to the same month in 2019, according to data from Black Box Intelligence. Profit margins are also up at several major chains.
“Value menu items are not really profit drivers. They’re designed to drive traffic,” said BTIG analyst Peter Saleh.
The pandemic also forced chains to halt development of new items. As Covid-19 cases fall, chains are again launching new sandwiches — and promoting them — to try to boost traffic, he said.
Wendy’s said it pioneered the value menu in 1989, when it dedicated part of its menu board to 99-cent items. But today, Wendy’s is “trading folks up into our best, highest-quality food items,” said Chief Executive Officer Todd Penegor during a May earnings call with analysts, “and we’ll continue to do that.”
Wendy’s current menu includes items that are higher priced than its standard burgers, like its Spicy Pretzel Bacon Pub — a fried chicken fillet on a pretzel bun topped with pickles, fried onions, bacon, two kinds of sauce and muenster cheese, for $7.
KFC, owned by Yum Brands International, said it stopped marketing “$5 Fill Ups” — a pot pie or chicken dish, plus a medium drink, chocolate chip cookie and sometimes a biscuit — aimed at individuals in 2020. It now promotes family meal deals that cost as much as $30.
Domino’s Pizza said in April it did not need its “Boost Week” discount to drive store traffic. So it suspended the half-price pizza promotion for online orders.
When commodity costs are as high as they have been over the past year, franchisees discount less to maintain profitability.
Franchisees typically try to maximize profits, said Credit Suisse analyst Lauren Silberman. When commodity costs are as high as they have been over the past year, franchisees discount less to maintain profitability. Many chains increased their margins during the pandemic, including McDonald’s and Yum Brands’ Taco Bell, she said.
Producer Prices Index data for May showed prices businesses have paid for meat and poultry have spiked more than 20 percent since the start of the year.
Fast-food customers include both wealthier and lower-income hourly workers.
People with household incomes of $100,000 or more made up about 39 percent of fast-food visits in May, while people making less $25,000 comprised about 12 percent of visits, according to data from The NPD Group.
Those with incomes between $25,000 and $100,000 made up 49 percent of visits, the data shows.
Chains and franchisees that remove too many low-priced deals risk losing core customers who specifically come in for those items, said Mark Kuperman, chief operating officer at Revenue Management Solutions, a Florida-based pricing adviser to restaurants.
To be sure, chains haven’t completely abandoned the value menu. McDonald’s launched its “$1 $2 $3 Dollar” menu during the fast-food discount wars of 2018 as part of its turnaround plan. Today, that menu is pared down to 8 items instead of 12.
Restaurant operators are optimistic.
“I’ve never seen consumers less price sensitive than they are today,” one fast-food franchisee told Reuters.