McDonald's CEO in USA said the company is battle ready. To win, the fast food chain is using one of its most powerful weapons: value meals. All of this is to attract customers who have flocked to reduce fast food consumption in recent years. #2024 investment strategy #

On June 25th, McDonald's will launch a marketing offensive and introduce a new $5 meal deal, which will intensify the all-out war among restaurants in the USA to attract customers who have been hit hard by inflation.

Joe Erlinger, the president of McDonald's USA, told Bloomberg News, "We're committed to winning the value war."

Last month, after Bloomberg News reported that McDonald's planned to launch a $5 promotional campaign, competitors took corresponding measures to fight back - including insults.

The President of Burger King in the United States promised to "beat them to the punch" by launching a $5 value meal and hinted at McDonald's in a memo to franchisees. Wendy's burger company launched a $3 breakfast meal and mocked its competitors, who copied its idea, on social media. Even starbucks, known for its high-priced coffee and latte, said it would offer a $6 breakfast sandwich and coffee combo.

When asked about his opponents' slogans, Erlinger laughed and said he wasn't focused on the game.

"As the largest chain restaurant in the United States, McDonald's size and marketing power give the $130 billion company an advantage over smaller competitors, and the ability to reduce the impact on franchisee profits," he said. "Think about our size," he said, adding that the incremental cost of adding fries and drinks to sandwiches was negligible. The $5 meal includes a double McDonald's or crispy chicken sandwich, small fries, four chicken nuggets, and a small soft drink. Mcdonald's has also relaunched its app-only "free fries Friday" promotion, where customers can get a free medium fries for buying any item totaling at least $1 by the end of 2024.

(Picture source: McDonald's official website)

Franchisees who operate most of McDonald's stores are not all in agreement with this approach. Many say they want to launch a value meal that will attract customers, but they are concerned that people will opt out of more expensive options like the $9 Big Mac combo.

An independent franchise group announced last month that offering a 30% discount can't bring enough profit, so the model won't work.

The company said a $5 promotion in northern New York had worked well among low-income consumers and also pushed additional sales of wealthy customers who bought more than just the $5 meal.

However, for McDonald's, the four-week nationwide promotion (lasting longer in markets like Dallas and Las Vegas) is not just about driving sales. After images of an $18 Big Mac combo in Connecticut went viral on social media and claims of prices doubling in recent years, the nationwide campaign is also aimed at dispelling the perception of McDonald's as too expensive.

Erlinger denounced widespread reporting of price controls on Big Macs in an open letter, saying the reports did not accurately reflect the company's situation. In a May blog post, Erlinger said the company's prices had risen an average of 40% since 2019 to offset rising costs. He said the $18 price tag was just an anomaly among more than 13,700 stores.

This is comforting for customers like Dylan Covington. Covington, 33, who lives in Fort Wayne, Indiana, used to go to McDonald's once a week. The price increase forced him to reduce his visits to McDonald's to every two to three months. Instead, he goes to a local diner where he can buy a larger sandwich for about the same price.

"McDonald's has always been the cheap choice," Covington said. "Now it's not even cheap. Unless I really want a Big Mac, I don't see a reason to go there."

Consumer spending is falling.

As prices rise throughout the United States, local McDonald's deals are simply not enough to attract customers like Covington. Although the economy is still booming and the unemployment rate remains low, real disposable income growth in the United States is stagnant. Americans have exhausted most of their pandemic savings and debt is beginning to pile up. The number of people eating out is declining, and even fast food restaurants are becoming more and more exclusive to special treatment for many people.

McDonald's competitors started offering value meals early on. In January, Arby's launched a $6 meal, while White Castle launched a $5 bacon combo in April. McDonald's sales initially outperformed those of its rivals, prompting the company to take a wait-and-see approach.

Bank of America analyst Sara Senatore said, "It looks like they've gotten caught in a bit of a value trap."

According to Ering, customers are "getting increasingly picky about where they spend their money." As a result, the company decided to offer a larger-scale national deal to franchisees, who own and operate 95% of US stores and are authorized to participate in major marketing events. These operators initially rejected the promotion due to profit problems, but ultimately changed their minds, in part because extra funds provided by Coca-Cola provided encouragement.

McDonald's also offers additional promotions to customers who order through its fast-food chain application, such as free french fries, which are a key part of the company's growth strategy. Customers who order through the application order more frequently and are more likely to add drinks, desserts, and other extras, increasing their bills and sales.

A $5 promotion may not solve the problem right away. The company's original $1 menu was launched in 2002 and underwent multiple modifications before finally launching a $1-$3 menu in 2018. Chief Executive Chris Kempczinski introduced the value menu to investors in April 2018, and although it eventually performed well, it took some time to gain attention.

Pricing Perception

McDonald's declined to disclose its promotional plans after this summer, but Ering said it is fair to say that the promotion is not the fast-food chain's final decision on value. "In addition to the $5 combo, we obviously plan to maintain our competitiveness in value and affordability," he said. Currently, customers are not looking for new products or creative McDonald's chicken nuggets, burgers, or rolls. "They demand value and affordability," he said.

Meanwhile, competitors say they are ready to compete with fast-food giants. Patrick Doyle, Chairman of Restaurant Brands International Inc., the parent company of Burger King, said focusing more on value could help support the entire industry.

Doyle told investors in mid-June, "People think prices may be a little high." The value talk "hopes to help people change their overall perception of this category - to let some people open up and come back."