For a while after the pandemic, quick-service restaurants (QSRs) were rolling right along. Many raised prices in 2021 and 2022 and consumers, who were excited to have stores available again, were happy to oblige. QSRs: “We’re open!” Consumers: “We’re delighted!” It was a lovefest all around.
Then July 18, 2023, happened. That’s when Sam Learner of Connecticut posted an image on X about an $18 Big Mac. And all hell broke loose. Consumers shared their own stories and a consensus formed that McDonald’s and other QSRs were acting like Marie Antoinette.
Cut to today. Now you can get a decent-sized meal at McDonald’s for $5, a deal it rolled out in late June, intending it to last one month. On Monday it announced it was extending the promotion through August. Subway is offering $3 dippers. Wendy’s has a $3 breakfast. You can bring a jar of change into a restaurant again. But for how long? Will prices crank up again once the outrage settles?
Don’t count on it. But operators can still make a buck if they’re smart about it.
Settle in
Sara Senatore, managing director of global equity at Bank of America
“Value pricing is going to stick around,” said Sara Senatore, managing director of global equity research and senior restaurant analyst at Bank of America. “I think after the pandemic we got used to the idea that price-point value is less urgent to customers. There was a fair amount of exuberance around spending because of pent-up demand. People viewed fast-food restaurants as a reasonable way to spend their money, in the absence of other options.”
Until they didn’t. The Learner post was the tipping point. But Senatore says forces had been gathering for a while.
“It wasn’t just that demand changed. QSRs were facing cost inflation, particularly with beef prices and labor. So it made sense that they were increasing prices,” she said. “You could make the case that a linchpin also was when McDonald’s stopped doing national marketing around its $1, $2, $3 Dollar Menu. But that was in 2018. Clearly it took a while for the focus on value to be as acute as it is.”
Senatore notes something else that roiled the American psyche.
“When fast-food inflation started to exceed the inflation you were seeing in the rest of the economy, people did not like that,” she said. “McDonald’s was increasing prices even as you were starting to see prices at other restaurants roll off and prices at grocery stores roll off. When menu-price inflation started to gap out from broader inflation, consumers suddenly weren’t seeing the same kind of price increases everywhere.”
The barbell strategy
So that’s what happened. What’s an operator to do about it? For one, don’t start with lowering prices.
Ted Babcock, senior vice president at Fishbowl Consulting Services
“What many QSRs are doing is bundling items, packaging them, doubling them,” said Ted Babcock, senior vice president at Fishbowl Consulting Services. “The chicken sandwich at McDonald’s hasn’t gone down. But you can get two for $4. That isn’t a price reduction on the core product. It’s a price-point promotion on a different product.”
Even on the much-ballyhooed $5 value meal — in which consumers can get a McChicken or McDouble, a four-pack of chicken nuggets, French fries, and soda — Babcock sees profits.
“McDonald’s is using a barbell strategy in promoting low and high-priced items,” he said. “When you go through a McDonald’s drive-thru or go on its splash page, you see a big image of the Double Quarter Pounder with Cheese. If you go into a store maybe you’ll see a sticker of the $5 value meal in the window, if you look closely. McDonald’s wins in bringing people into the store with the promotion. It will be interesting to see what it reports on its next earnings call.”
Shubhranshu Singh, a marketing professor at Johns Hopkins University, figures he knows what the brand will say.
Shubhranshu Singh, professor of marketing at Johns Hopkins
“They’re doing fine,” he said. “These chains are not charity organizations. They’re not trying to serve cheap food to people who are complaining about high prices. They’re trying to get people who have either stopped going to the store or never went there. I suspect the value-pricing approach is working for McDonald’s.”
But there’s no question that the perception of fast food as affordable to low-income consumers has been rocked. Singh points to a big player in casual dining that is trying to cut into the QSR world.
“Applebee’s is advertising that it costs less to dine in with them than it does for fast food,” he said. “It’s interesting positioning. But it doesn’t take into account what consumers really value about fast-food: it takes less time. They will pay more because the food arrives faster.”
The persistence of delivery
One might think that consumers would be similarly incensed at third-party delivery providers for the fees they charge. But the big three — DoorDash, Uber Eats, Grubhub — seem unblemished during this time of inflation, which is somewhat puzzling to analysts like Senatore.
“It has been surprising how sticky the delivery business has been in light of the fact that it tends to be much more expensive to order through a third-party app than to order in other ways, particularly pickup,” said Senatore. “It’s something that we’re watching closely because you would think that would be an easy thing to give up.”
If you need to discount, go ahead. But make sure you see a benefit.
Operators need to deploy a variety of tactics to survive. This has always been the case but it has more urgency now. A digital strategy that rewards loyalty should be in every operator’s playbook, says Babcock.
“We’re in a period of declining traffic and increasing promotions. It makes your social relevance more important. You need to be able to target the right consumers, with the right offers, at the right time. You have to get people in the door with a promotion and show them something else. If you’re not doing that, you’re doing it wrong,” he said.
And despite some of the negative attention Wendy’s got with dynamic pricing, it’s fair game.
“It’s real-time price variation. That’s all it is,” Babcock said. “It’s been around forever. If Taylor Swift is performing in your town, a hotel room will be more expensive. Amazon does it all the time. Uber does it with surge pricing. Just make sure not to mess with a consumer’s expectations. It’s really a matter of execution and communication.”
