Fast food owners, customers tighten the limits of the food economy test

Fast-food restaurants are tapping into inflation-weary consumer wallets by bringing value prices back to their menus — for a limited time. McDonald’s is offering a $5 menu this month. Wendy’s is launching a $3 breakfast. Burger King added value deals it will offer “for months.”

There’s a reason food prices have only limited returns, said Shubhranshu Singh, a professor of marketing at Johns Hopkins Carey Business School, who has studied the economics of fast food. In a world where ownership is also affected by inflation, at best it is a “cost” offer, and at worst, a loss of money.

“The $5 meal is not something that can be a permanent part of the menu; the cost has increased so much, if a franchisee is going to sell a $5 meal, he will lose money for every customer who buys it,” said Singh. .

Indeed, while the national association of McDonald’s franchisees dismissed the news, saying that the company should invest more to make the menu a permanent part.

At McDonald’s, options include a McChicken or McDouble, a four-piece chicken nugget, fries, and a drink. The Wendy’s deal consists of a bacon or sausage, egg, Swiss cheese, and croissant sandwich, along with a small order of crispy seasoned potatoes (drink not included). Burger King offers one of three sandwiches or nuggets, plus fries and a drink.

What all restaurants need is customers to increase their orders.

“They want customers to get value for money and then buy more, the idea is not that consumers will buy value for money and leave,” Singh said. “If consumers do, selling food at a premium would be a bad idea.”

In major markets like California, where the minimum wage for fast-food workers is now $20 – and inflationary pressures on ingredients and packaging remain – the only hope restaurants can make a profit from their overpriced food is if customers buy the food and also . add apple pie or other higher margin items.

“How can we serve a $5 meal at minimum wage and still make a profit? It’s no longer possible for consumers to buy other things,” Singh said.

Scott Rodrick, who owns 18 McDonald’s in Northern California, recently told CNBC that it has been “quite a rollercoaster” since the new minimum wage went into effect on April 1. “The impact of this inflation on the customer is the most obvious concern and now I have a franchisee today, ” he said. “This has affected the margins.”

Margins are smaller for franchisees since the royalties are paid monthly to the company’s head office, often in the range of four to five percent.

A ‘break-even’ menu proposition, with complimentary sauces thrown in

For Nick Snowberger, who owns 16 McDonald’s restaurants in Montana and Wyoming, he said focusing only on the price of a certain menu misses the point.

“I focus on the holistic value, the total experience: friendliness, speed, accuracy, cleanliness of the restaurant,” said Snowberger, who noted that more than 95% of McDonald’s franchisees choose to choose the $5 package.

The value of the meal is pretty much a break-even proposition when it comes to profit, said Snowberger, but it’s good for the customer. “This is an opportunity to do business at a cost to our customers that is competitive and incentivized as it has been for a long time.”

They also try to throw a lifeline to customers in other ways, using the latitude and freedom they have as franchise owners.

“We made a decision that we will not charge more for extra sauces, we will give them for free. If the order is wrong, we will make it right on us, and we will accept all coupons and accept competitors’ coupons,” Snowberger said. This is a locally tailored decision, also supporting high school athletics, local fairs, and booster clubs.

Business prices have been “through the roof,” he said, with everything from meat, lettuce, fuel, labor, condiments and wages rising. But he added, “We are not upset about the value of the menu, but I do not speak for those who have pressure to pay more than me.”

The McDonald’s company declined to comment on the impact of value food on franchisee profits.

Franchisees focus on Frozen Coke, a fat margin menu item

Shoukat Dhanani, CEO of the Houston-based Dhanani Group, which owns and operates 510 Burger King restaurants in eight countries, said the value of meals is not a losing proposition, even for franchisees.

“We make less margin than we usually make. But we don’t lose money,” Dhanani said. “They come less; we want people to come more; everyone feels the traffic is decreasing,” he said.

His company also operates 170 Popeyes restaurants, but said the chicken chain hasn’t felt any price pressure to add more food.

Burger King franchisees, similar to McDonald’s, can choose new product concepts. “When any promotion comes up like this, we choose that; if it passes, we roll out. We have some say,” said Dhanani.

Despite the price pressures consumers are feeling now, Dhanani said the situation for fast-casual restaurants will worsen in 2022, when inflationary pressures will be hardest, from labor pressures to commodity prices. Consumers are now at the tipping point, he said.

“Because inflation, wages, and insurance are going up, we have to raise prices to stay in business. When we go through it, a lot of consumers get sticker shock,” Dhanani said.

They expect their value menu to be a hit, even if their margins are smaller. Dessert drinks like Burger King’s Frozen Coke and Frozen Strawberry Lemonade have the highest profits.

At McDonald’s, franchisees have had experience in recent years with the sale of meal bundles, often for $4 or less. “We try to keep it as a value proposition as possible,” Snowberger said. “But I can also say with 100 percent confidence that when you come in, I want to try to sell more. We always hope to sell additional items, pies, cookies, shakes, or pork in burgers.”

Leaders lose ‘mistakes’ vs gain market share

Major fast food chains aren’t the only quick service restaurants trying to please hit customers while keeping their franchise operators.

Craig Dunaway, the chief operating officer of Penn Station East Coast Subs, which operates 320 restaurants in 15 states, said the value concept tested by larger competitors is a loss leader and is generally a bad business idea.

“As franchisors, what we sell is a return on investment. If your franchisees will not make money, they will not grow, so introducing loss leaders is a mistake for franchisors,” he said. Only one Penn Station East Coast Subs location is company-owned; other franchises.

Value menus are a way to attract consumers and hopefully change their minds, but Penn Station allows franchisees to set their prices, while the company sets its prices and doesn’t enter loss leader territory.

“If Penn Station tries the price point game, we’re going to lose,” Dunaway said, noting that the chain is absorbing some of the higher costs rather than constantly raising prices. At the same time, it’s trying to develop new cost-competitive products, like the $4.99 sandwich on 9-grain bread it tested this summer.

But Rodrick says there’s another way to win with value: increasing market share when traffic is down. He said the new data showed fewer customers at the restaurant, and those coming in were spending less than they had previously spent. “The competitive space is getting really hot and we plan to be at the forefront of bringing some relief to our customers who have been affected by inflation. … Sometimes as a franchisee like myself, you have to invest in the margin,” Rodrick said.

While the franchisee in the local base has done a good job in the value campaign in the market, he added that the “national value communication” of McDonald’s “has gotten from us last.”

Although Rodrick described the profit pressures facing businesses in California as “tremendous” – in addition to wages, including the increase in insurance costs in the state – “I can only lament the impact or aggressiveness of a large market share,” he told CNBC.

No matter how much the franchisee can offer in the margin, the price of food attracts customers.

Randi Maerz, a nurse in Keokuk, Iowa, ran a McDonald’s breakfast burrito recently and lured Wendy’s to try the $3 breakfast menu.

“I don’t want to pay $5 for two burritos at McDonald’s, and one just isn’t filling,” he said.