Franchisees Challenges
McDonald's Extends $5 Meal Deal Through August
July 22, 2024 – In a bid to sustain the momentum of increased customer traffic and bolster its value perception, McDonald's has announced the extension of its popular $5 meal deal through August. This decision comes after an overwhelming 93% of the franchise locations voted in favor of continuing the promotion, which was initially launched in late June.**
The $5 meal deal, which includes a choice of a McDouble or McChicken sandwich, four-piece Chicken McNuggets, small fries, and a small soft drink, was introduced to attract budget-conscious consumers amid ongoing inflation. The promotion has been credited with driving significant foot traffic back to McDonald's outlets, with analytics firm Placer.ai reporting an 8% increase in customer visits on the launch day, making it the busiest Tuesday of the year for the fast-food giant.
Boost in Traffic and Sales
The extension of the $5 meal deal has been lauded by McDonald's executives as a strategic move to maintain the brand's competitive edge in the fast-food industry. Tariq Hassan, McDonald's US Chief Marketing Officer, emphasized the deal's success in drawing customers away from competitors and enhancing the brand's image as an affordable dining option. "The $5 meal deal is resonating with millions of customers, particularly those from lower-income brackets who are seeking value in their dining choices," Hassan noted.
Data from Placer.ai supports this claim, showing a 2.8% increase in foot traffic during the week of July 1 and a 2.4% rise in the week of July 8 compared to the previous year. BTIG analyst Peter Saleh highlighted that the meal deal has particularly appealed to lower-income consumers, who have been significantly impacted by rising food prices.
Franchisee Concerns and Challenges
Despite the positive reception from customers, the extended $5 meal deal has presented challenges for franchisees. According to Saleh, 20% to 25% of transactions have included the $5 meal deal, a figure that is significantly higher than the typical 10% to 15% for discounted deals. This high uptake has led to concerns about profitability, as many of these transactions involve existing customers who would have otherwise purchased higher-margin items.
"Franchisees are reporting that their margins are being squeezed by the $5 meal deal," Saleh explained. "The additional use of a 20% off digital coupon from the McDonald's app has further impacted profitability, with 20% of customers using this discount in conjunction with the meal deal."
In response, some franchisees have adjusted their marketing strategies, pulling back on in-store advertisements and increasing the spending threshold required to avail the 20% discount. "Some markets have raised the threshold from $5 to $10 or more to mitigate the impact on margins," Saleh added.
Industry Implications and Future Outlook
The extension of the $5 meal deal is expected to have broader implications for the fast-food industry, as competitors like Wendy's and Burger King may feel pressured to introduce similar value offerings. McDonald's, as a dominant player in the industry, often sets trends that ripple through the market.
However, the long-term sustainability of such promotions remains uncertain. Analysts like R.J. Hottovy from Placer.ai have pointed out that while the deal has driven incremental visits, it may not be enough to offset the margin pressures faced by franchisees. "It's still too early to determine if the $5 meal deal will drive profitable incremental traffic in the long run," Hottovy remarked.
As McDonald's prepares to report its Q2 earnings on July 29, industry watchers will be keen to see how the $5 meal deal has impacted the company's financial performance. Wall Street analysts have tempered their expectations, with Morgan Stanley predicting "downbeat" results due to the competitive and value-pressured climate.
Conclusion
The extension of McDonald's $5 meal deal through August underscores the fast-food giant's commitment to offering value to its customers amid economic challenges. While the promotion has successfully boosted foot traffic and reinforced the brand's affordable image, it has also highlighted the delicate balance between driving sales and maintaining franchisee profitability. As the industry navigates these complexities, the $5 meal deal serves as both a short-term solution and a potential indicator of future value strategies in the fast-food sector.