Early reports from McDonald’s $5 Meal Deal showed a material traffic burst, with the chain reporting its best-performing Tuesday of the year, according to Placer.ai. But is the performance and fallout really that straightforward? BTIG analyst Peter Saleh, over the past week, conducted franchise checks with operators to measure the deal’s sentiment and some other developments.

The overall point—it’s a mixed bag. Franchisees indicated the deal, which features a McDouble or McChicken, small fries, four-piece Chicken McNuggets, and a small drink, has generated transactions thus far. Yet there’s also been greater trade down and fewer incremental guest visits than expected. Geographically, Saleh heard performance fluctuated, with stronger sales in more urban locales that cater to a lower-income demographic. Some franchisees reported selling more than 200 units per day (double earlier projections), and 20–25 percent of transactions included the $5 Meal offering.

That said, savvy consumers used McDonald’s 20 percent digital coupon to purchase the meal, Saleh said—a point that’s dampened franchisee gross margins. His checks suggest 20 percent of customers are ordering the meal with the additional discount. “While we appreciate the need to encourage app adoption,” Saleh said, “we believe this double-dipping will likely be eliminated at some point in the future as franchisees look to extend this promotion into the fall or even until year-end.”

Originally, McDonald’s said the June 25-launched offer would run for a limited time. The news came alongside a free medium fry with any $1 purchase mobile app deal that’s slated for every Friday through the rest of 2024. There have also been local activations, like a BOGO for $1 breakfast sandwich run in Memphis, mix and match McChicken and McDouble for $3.99 in Western New York, and a Double Cheeseburger and small fries for $3.50 in Columbus, Ohio. More than 90 percent of U.S. McDonald’s operators reportedly offer meal bundles for $4 or less.

Saleh believes, based on talks, a number of regions (about 55 in the U.S.) have elected to extend the $5 Meal into August or September. Presently, he added, extensions are determined by the regional co-op. And continued advertising support is funded locally. “Though, we heard rumblings a national marketing extension could be happening in the coming weeks,” he said.

Broadly, however, franchisee opinions were consistent that the $5 Meal feels like a bridge to a longer-term national value architecture that’s being tested and projected for early September. “This suggests to us that the price wars and deep discounting will continue through the summer and likely for the balance of the year,” Saleh said.

That wouldn’t come as any true stunner. Operators told Saleh traffic “remained very soft” throughout Q2. That’s been especially true in June as McDonald’s lapped its Grimace Shake promotion from summer 2023. For July, while just two weeks in, some franchisees said they’ve experienced a lift in traffic. Others noted the opposite.

Saleh pointed out comparisons ease in July, with the current month impacted by the timing of July 4th and Hurricane Beryl in Texas. The most bullish comment he heard was a roughly 450-basis-point improvement in traffic from June to July, with the majority explained by about 500 basis points of easing expectations. The most bearish anecdote reflected a 200-basis-point deceleration in traffic due in part to poor weather.

“Our conversations suggested it’s just too early to know if this $5 Meal deal will drive profitable incremental traffic,” he said.

Morgan Stanley expects McDonald’s battle to generate demand in a value-pressured climate will surface in Q2 results, set for July 29. The company projects “downbeat” results and trimmed its bottom-line forecasts by 2–3 percent.

Analyst Brian Harbour said the $5 Meal deal “should be part of a permanent value strategy to cater to a key custom cohort that has pulled back.” There’s room to regain and hold share there, Harbour said, but the immediate term “may not offer much solace.” He predicted same-store sales declines down 0.5 percent from 1 percent prior and the Street estimate of 0.6 percent, thanks, as Saleh mentioned, to running against the ultra-popular Grimace shake promotion.

Research firm Gordon Haskett, as reported by Seeking Alpha, showed aggregate foot traffic was up 1 percent, year-over-year in the 11-day period that ended July 5. Analyst Jeffrey Farmer, once again, pointed to working against Grimace (July 12 of last year). That latter menu launch generated 3 billion views on TikTok.

Farmer also expects comps in Q2 to fall 0.5 percent in the U.S. Additionally, Truist Securities lowered its price target on McDonald’s to $230 from $300, and Guggenheim cut its figure to $280 from $315.

The dressed-down way to explain the kickback to date, Saleh said, is the $5 Meal Deal is a temporary solution to a longer-term problem. As you’d expect with any buzzing offer, incidents were higher at start and have moderated. But as noted, elements of that moderation, Saleh believes, were “somewhat self-induced” as franchisees work to limit the trade down and double-dipping with additional digital coupons. He heard “several operators” deliberately reduced point-of-purchase advertisements and increased the minimum threshold beyond $10 for the 20 percent off coupon in an effort to limit the check impact and maintain profitability.

The result? Fewer purchases of the $5 Meal deal in more recent looks.

“Regardless of the success of this bundle promotion, we expect it to be temporary, as the offering is just too narrow to sustain sales and traffic for an extended period of time,” Saleh said. “We believe the new value platform will include much more variety and choice for the consumer.”

Saleh is more optimistic on his Q2 comp prediction, expecting U.S. same-store sales to climb 1.5 percent above Wall Street’s consensus of 0.4 percent. He believes McDonald’s and its franchisees are still planning to raise menu pricing this year, but more in-line with historical levels of 2–2.5 percent versus the roughly 8 percent over the past five years.

Looking ahead, he continued, success in the second half of 2024 will rest on the popularity of McDonald’s new value menu—a difficult thing to gauge since it hasn’t been unveiled let alone rolled out.

“That said,” Saleh added, “franchisees seemed modestly optimistic, with several noting that the weaker sales environment has actually helped improve franchisee/franchisor relationship over the past several months.”

This value dynamic has mounted for McDonald’s for months. The chain even took the rare action to address rumors head-on in May as outlets nationwide, from the New York Post to TheStreet, posted stories about the brand’s rising prices. FinanceBuzz ran a study claiming the cost of individual McDonald’s items surged over the past decade, with the McDouble up 168 percent to $3.19 (claiming the national average was $1.19 in 2014).

McDonald’s USA president Joe Erlinger penned an open letter cracking through “myths versus facts” and explained how much of the pricing reported couldn’t be taken from a wide angle since it’s set by individual franchisees and varies by restaurant. So any larger headline was not an accurate representation of historical or current pricing at McDonald’s locations.

Namely, the company said the Big Mac Meal’s price increase from $7.29 in 2019 to $9.29 in 2024 was a 27 percent rise, not 104 percent as shared through social media. “I can tell you that it frustrates and worries me, and many of our franchisees, when I hear about an $18 Big Mac meal being sold—even if it was at one location in the U.S. out of more than 13,700. More worrying, though, is when people believe that this is the rule and not the exception, or when folks start to suggest that the prices of a Big Mac have risen 100 percent since 2019,” Erlinger wrote.

The issue really started to pulse in Q4 last year when McDonald’s CEO Chris Kempczinski shared with investors “… the battleground is certainly with that low-income consumer,” and that the fast-food giant witnessed U.S. pressure with the $45,000 and under cohort. This as restaurant prices continue to outpace grocers.

Naturally, this is hardly a McDonald’s-specific challenge, but the brand is often the canary in the coal mine of broader trends when it comes to the category. That’s even more so the case on the topic of value.

McDonald’s is still performing well despite tightening wallets. Q1 saw 2 percent global same-store sales growth—the brand’s 13th straight quarter of positive figures, with 30 percent growth over the past four years. The U.S. increased 2.5 percent thanks to average check growth, menu price increases, effective marketing campaigns featuring core menu items, and continued expansion of digital and delivery.

Fast Food, Finance, Menu Innovations, Story, McDonald's