McDonald’s $5 value meal has met expectations since its release on June 25.
First, the chain wanted to see an improvement in brand perceptions around value and affordability. Check.
Second, it wanted to ensure the deal connected with the single user, especially the lower-income consumer. McDonald’s has seen increased trial rates in households under $45,000 and between $45,000 and $75,000. Check.
Lastly, the brand wanted to see a shift in guest count, which has started to happen. Placer.ai’s research found that June 25 was McDonald’s busiest Tuesday of the year until that was re-set by Tuesday, July 2. Check.
Plus, customers buying the $5 value meal end up with a $10 average check, meaning they frequently add to the order.
The kicker, however, is that these movements have not translated into sales momentum yet. McDonald’s U.S. comps slipped 0.7 percent in Q2 because of a more discriminate consumer who’s buying fewer items per visit, purchasing lower-priced menu items, and choosing to eat at home instead. The $5 value meal came five days before Q2 ended, so it had minimal impact on the quarter. However, in July, McDonald’s U.S. still experienced negative domestic same-store sales as it lapped the popular Grimace birthday meal and shake from last year.
But U.S. president Joe Erlinger is optimistic that a sales bump is coming.
“The success, obviously, we’ve seen is the shift in traffic that we’re experiencing,” Erlinger said during McDonald’s Q2 earnings call. “And in my 22 years of experience at McDonald’s, traffic and guest counts usually come before sales. We’ve got some exciting promotions upcoming here in the second half of the year. But if we can get the traffic moving, we’ll see customers obviously willing to spend more. Remember that the customer that’s coming in for the $5 Meal Deal, they are buying more than just the $5 Meal Deal because we see that average check up around a little over $10. That’s why we feel strongly about how the $5 Meal Deal is connecting in the marketplace and specifically with that low consumer, which has been our opportunity.”
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The $5 offer—which features a McDouble or McChicken, small fries, four-piece Chicken McNuggets, and a small drink—was reportedly supposed to last four weeks, but 93 percent of U.S. restaurants agreed to extend the promotion. Some franchisees said they would keep the deal through August. Erlinger said the company is working with franchisees to extend it even longer.
The long-term answer for a national value platform remains to be seen. Leadership said these value deals are a big investment for operators. That’s why both sides are being “very thoughtful and considerate as we work through what our national everyday value and affordability platform will be,” Erlinger said.
In another avenue, McDonald’s continues to offer a host of discounted deals in the app. In the U.S., digital mixes more than 20 percent and the loyalty program has grown to more than 37 million users that have been active within the past 90 days. Still though, that means around 80 percent are not using the app, and these guests need value too. In a few years, when McDonald’s reaches its goal of 250 million global loyalty users, there will be a different conversation about how digital can drive value, CEO Chris Kempczinski said. But as it stands today, the company doesn’t have enough penetration for it to be the sole focus.
“We feel really good about our digital business and we’re seeing strong performance on the digital business. I think the challenge on digital right now is basically only about 25 percent of our customers are on digital in terms of identified customers,” Kempczinski said. “And so as you think about what you need to do to drive the overall business, we just don’t have digital yet at the size and with the penetration that’s needed to move the entire business. And I think some of what has happened as you look at things is we probably were a little over-rotated on digital versus broad everyday value that we’re offering available to all consumers—those who maybe aren’t yet on our digital platform. That’s the work that’s underway. I think in time, certainly, digital is going to continue to grow for us. We’re going to get more and more customers on our digital platform.”
Kempczinski said consumers still recognize McDonald’s as the value leader versus key competitors, but its value leadership gap has recently shrunk. He attributed that to significant inflationary cost increases ranging from 20 to 40 percent depending on the market. As the company absorbed these cost increases in partnership with franchisees, it has looked for ways to protect restaurant profitability via productivity efforts and selective price increases. These price increases disrupted long-running value programs and led consumers to reconsider their buying habits.
“We know how to do this,” Kempczinski said. “We wrote the playbook on value and we are working with our franchisees to make the necessary adjustments. McDonald’s competitive strengths are formidable and growing.”
Whatever the offer is, it will need to cover different parts of the menu, be available to all guests, be led by price point, and be backed by McDonald’s powerful marketing engine. For instance, the $5 Meal Deal already existed in Upstate New York. Once the brand put a national marketing campaign behind it, trial and participation rates doubled in the market. Also, the offer performed 70 percent greater than a BOGO deal the chain ran in January.
“Certainly when we launch our new national everyday value and affordability platform, building awareness of that platform will be absolutely critical,” Erlinger said.
Kempczinski agreed, and emphasized that the pace will depend solely on McDonald’s. The brand has seen some markets like France have strong alignment and move quickly. In other spots, it requires more conversations because of the breadth of changes.
“McDonald’s at its essence, this is a growth business,” the CEO said. “And so we’re not accepting negative comps as just sort of the way it is because of the consumer headwinds. We absolutely are committed to getting this business back to growth. Foundation of that is the value platforms that we’ve talked about. But we need to do more on menu innovation. We’ve got more levers that we can do on digital and certainly getting our marketing to be more of a contributor as it was last year. I think all of those things need to work in combination to get the business back to where we know its rightful place is.”
In addition to the U.S., global comps fell 1 percent. International Operated Markets saw same-store sales fall 1.1 percent and International Developmental Licensed Markets experienced comps falling 1.3 percent.
McDonald’s finished Q2 with 42,406 restaurants worldwide. That includes 13,484 in the U.S. and 28,922 internationally.
