Fast-food chains are set to enter a price war this summer as Americans dine out less. The price war could hurt all companies, but McDonald's, with its strong profit margins and cash flow, seems best positioned to emerge as the winner.
Both companies have raised prices aggressively over the past two years, outpacing the cost of groceries and full-service restaurant meals, as customers, especially lower-income families, visit chains less and cook more at home.
Now, chains are touting discounts to lure customers back. Burger King rolled out $5 Your Way Meals earlier this month, equating to a roughly 30% discount. McDonald's introduced its $5 Value Meal on Tuesday. Wendy's already sells Biggie Bag meals at that price and launched a $3 breakfast combo in May.
“A simple, price-driven, value offer that's nationally promoted remains important,” said Morgan Stanley analyst Brian Haber. “Customers aren't necessarily as sophisticated, and most customers don't use apps at traditional fast-food restaurants, which means a value offer that's nationally promoted has a much wider reach.”
But the promotions could cut into franchisees' profits. Sales could take a hit if increased foot traffic doesn't offset smaller bills, or if customers flock to restaurants just for the promotional items. Some franchisees are already voicing concerns.
Advertisement – Scroll to continue
“For this model to be sustainable, there is simply no profit to be made from a 30 percent discount and a financial contribution from McDonald's is required,” the National Association of Owners, an advocacy group that represents more than 1,000 local business owners, wrote in a letter to members.
“What's happening in the burger industry is a price war between companies trying to maintain market share,” said BTIG analyst Peter Saleh. “It's not a profitable business.”
Still, the companies hope the special will show the public that they're still unbeatable when it comes to cheap meals: McDonald's told Barron's that the $5 meal plan will help keep its franchisees profitable.
Advertisement – Scroll to continue
“If you look at the news stories about McDonald's over the last few months, they've been talking about how their prices are going up,” Saleh said. “McDonald's wanted to change that.”
Since last year, budget-strapped consumers have been posting on social media about how fast food is out of their reach, and while there are some extreme examples of price hikes (franchisees are free to set their prices), consumer perceptions of fast food are changing.
According to a LendingTree survey, 78% of respondents said they now consider eating fast food a luxury, and 65% were surprised by the price of the food they ordered.
Advertisement – Scroll to continue
McDonald's published an open letter last month calling online information “inaccurate” and saying menu prices have risen an average of 40 percent over the past five years, roughly in line with rising input costs such as ingredients and wages, rather than an increase of more than 100 percent as some internet users have alleged.
Still, a 40% price increase is hard for many to keep up with: A Treasury Department report found that weekly wages for the lowest-paid Americans rose 23% from 2019 to 2023. That's the highest increase among all income brackets, but fast food is being cut from budgets as the rising cost of living continues to put a strain on consumers' wallets.
Competitive promotions will be a costly way to win back consumers, but compared to its competitors, McDonald's is in a better financial position to pull it off.
McDonald's has more than 13,000 restaurants in the United States, nearly twice as many as Burger King and Wendy's.
Advertisement – Scroll to continue
Its restaurants are outperforming their rivals: In 2023, McDonald's average U.S. sales were about $4 million, while Wendy's and Burger King averaged $2.1 million and $1.6 million per restaurant, respectively.
McDonald's has more than four times the sales of the other two companies in the U.S., but only 40% of its total sales come from the U.S. The company plans to open more than 10,000 new restaurants over the next few years, many of them in international markets, which could help mitigate its weakness in the U.S.
McDonald's has more profitable margins than its competitors because it continues to add franchisees and collects royalties at little extra cost to the company: Its operating profit margin before interest and taxes was 44% in the first quarter, 15 percentage points higher than a decade ago and higher than Burger King's 30% and Wendy's 15%.
That means that if the price war continues for a long time, the company should have more cash and resources to help franchisees weather tough times. [consumer] “If McDonald's markets this properly and sticks to its strategy consistently, the response will be significant,” Haber wrote in a recent note.
In addition to the $5 meals, McDonald's is also offering free fries with any purchase of $1 or more on Fridays through the end of 2024, as well as a variety of other local sales across the country.
Advertisement – Scroll to continue
UBS analyst Dennis Geiger wrote in a Friday note that the value initiative, along with marketing and new product launches over the next few quarters, should lift McDonald's U.S. same-store sales by 2 percentage points. Geiger expects the company to launch a permanent value platform later this year.
“Despite recent U.S. sales pressures and concerns about value perception, we believe McDonald's is well positioned to improve its value offering and sales trajectory through the second half of 2024 and into 2025,” the analysts wrote.
Getting franchisees on board can be a challenge, but if the company provides enough support and shares the financial risk, it shouldn't be a big obstacle. “Franchisees aren't just concerned about cash flow, they're concerned about customer acquisition and revenue momentum,” Haber says. “I never felt they were going to sit back and do nothing.”
McDonald's may be able to use its scale to its advantage in negotiations with suppliers — longtime partner Coca-Cola has reportedly subsidized the company's marketing fund to subsidize the cost of its $5 promotion — and it wouldn't be surprising if other input costs were to fall as well, with savings passed on to franchisees.
“McDonald's' unique size and scale position it to withstand outside pressures while investing in growth,” the company told Barron's. “This, combined with the strength of our core equity, industry-leading customer base and strong franchisee relationships, positions us for massive growth.”
Restaurant Brands International, the parent company of Wendy's and Burger King, did not respond to requests for comment.
The fast-food industry saw this trend a decade ago, when restaurant inflation outpaced home-food inflation and sales slumped. Many chains rolled out great offers to entice customers. McDonald's fared better then: From 2016 to 2018, McDonald's U.S. restaurants saw average annual same-store sales growth of 2.6%, beating Burger King's 1.7% and Wendy's 1.4%.
McDonald's is doing better now than it did six years ago, thanks to new menu items, remodeled restaurants, the introduction of self-service kiosks and a mobile app, and technology that allows employees to deliver food directly to customers' tables.
McDonald's should look beyond its direct competitors in the burger business and focus on other areas of the restaurant industry. In the last low-price war, the company lost market share to non-burger rivals Chick-fil-A, Taco Bell, Domino's Pizza and Chipotle Mexican Grill, though not nearly as much as Burger King and Wendy's.
Still, the potential market for fast food continues to grow, especially in global markets, even as more competitors try to grab a bigger share. Despite some softness this year, McDonald's revenue is expected to grow 8% in both 2025 and 2026.
McDonald's shares are down 13% so far this year and are now trading at 20 times forward earnings, the lowest level since 2018. Even if the cheap valuation continues, the stock should reach at least $287 based on 2026 earnings, 12% above the current share price.
Wall Street is more optimistic: Analysts surveyed by FactSet expect the stock to reach $311 on average over the next 12 months, a 21% increase.In the fast-food world, size still matters.
Email Evie Liu at evie.liu@barrons.com.
