McDonald’s $5 value meal is slowly bringing diners back
McDonald’s Corp.’s new $5 meal deal has led to a modest increase in US visits and brought back some low-income diners - the first signs that the burger chain’s strategy to appear more affordable is paying off.
Traffic began picking up in late May following news of the impending launch of the meal, and visits largely continued to grow after its debut on June 25, according to cellphone mobility data compiled by Placer.ai for Bloomberg News. McDonald’s initially planned to run the promotion for a month, but franchisees voted to extend it based on early results.
Diners making less than $40,000 a year increased their visits the most between May and June, according to an analysis by Chris O’Cull of Stifel Financial Corp. Slowing demand from less affluent guests had been hurting results, the chain has said. Meanwhile, the number of purchases grew in three out of the four weeks since the promotion’s launch, according to Bloomberg Second Measure.
The deal looks like it’s helping McDonald’s keep some customers from going to rivals, but it’s not a gamechanger, according to restaurant analyst Mark Kalinowski. “It doesn’t seem to be a gangbuster promotion or anything close to it.”
McDonald’s declined to comment on the deal’s performance.
The $5 bundle served as the linchpin of the company’s strategy to spark demand this summer after its US customers cut back on burger outings amid a cooling economy. Investors will likely only get a partial look at the meal’s impact when the company reports second-quarter results on July 29 because the promotion debuted during the period’s last week.
Analysts have been reducing same-store sales estimates for McDonald’s, now expecting growth of 0.8%, which would be the weakest since 2020. One headwind is the comparison with the Grimace Shake, a promotion introduced last June that took off.
The company’s shares had declined 15% this year through Thursday’s close, compared to a 13% rise in the S&P 500 index during the same period.
The deal may ultimately prove to be less of a major sales driver and more of an avenue for the country’s largest restaurant chain to challenge perceptions that its burgers have gotten too expensive.
Polling data suggests that’s starting to work, with the intent to buy McDonald’s jumping 10 percentage points in July among diners making more than $100,000, according to Morning Consult. However, the metric was steady among US adults overall, suggesting there’s more work to do.
McDonald’s spent an estimated $8.4 million on a TV ad marketing the deal, according to data provider iSpot, racking up 1.9 billion impressions. About 72% of people who saw the ad said they were “more likely” or “much more likely” to buy the deal, the measurement company’s polling shows.
One potential downside of the value meal expressed by franchisees is that the promotion would push some customers to trade down to cheaper options. That appears to be happening. Average transaction values declined from a year ago each week between June 23 and July 21, according to Second Measure, which tracks a subset of US credit and debit card transactions.
That’s precisely the effect it had on 53-year-old Michelle Call, a resident of Las Cruces, New Mexico, who eats McDonald’s two to three times a week after dialysis treatments that leave her hungry and exhausted. She was paying about $7 for her usual order of an unsalted McDouble (no cheese) and fries, which matched prices at local Mexican restaurants. But the $5 meal deal tipped the scales in favor of the chain, she said.
“It’s been a really good deal,” said Call, who relies on disability payments. “It’s not a lot of money.”
On top of trading down, operators surveyed by BTIG’s Peter Saleh said many customers are using a 20% off discount when purchasing the $5 meal. That’s hurting some franchisees’ gross margins.
The company said in a statement it plans for customers to use digital offers along with promotions, and that them being paired with the $5 meal deal has been in line with expectations. Data suggests that combining the offers often results in higher average purchase amounts, according to McDonald’s.
McDonald’s had been offering discounts on its mobile app, but deferred a national value campaign as it outperformed peers coming out of the pandemic. Many of its customers were “probably ordering generously, not cost consciously,” Morgan Stanley analyst Brian Harbour said in an email.
But diners have pulled back, repelled in part by McDonald’s prices increasing by 40% since 2019.
The chain’s $5 meal deal entered a field crowded with offers from rivals such as Burger King and Wendy’s. The price of combo meals across the industry has been declining, according to research firm Datassential, though diners’ perception of the value of the bundles has also waned.
“It feels maybe like a defensive strategy,” said Eric Gonzalez, an analyst at Keybanc Capital Markets Inc, speaking of McDonald’s. “They just have to be in the game.”