Restaurant CEOs have become obsessed with the word “value” in explaining to investors why their sales lagged this quarter while sharing plans to revive traffic in the coming months.
On McDonald’s quarterly conference call last month, executives said the word “value” nearly 80 times, underscoring the fast-food giant’s biggest priority.
And McDonald’s isn’t alone. Other leaders at restaurant companies from Taco Bell owner Yum Brands to pizza chain Papa John’s also used the word dozens of times in their latest conference calls.
“The word ‘value’ has received a lot of airtime in the past few months,” Josh Kobza, the CEO of Burger King parent company Restaurant Brands International, said on Thursday.
There’s a reason for that emphasis. Prices for food away from home have climbed 27.2% since June 2019, according to the Bureau of Labor Statistics. In response, restaurant traffic has fallen and sales are lagging as consumers spend less money dining out, no longer convinced that it’s a good deal.
Many chains are hoping to bring back customers through discounts and promotions, like the $5 meal deals found at McDonald’s, Burger King and Taco Bell.
“In this current economic cycle, consumers have become more deliberate in managing their overall ticket and are showing a preference for brands that are offering compelling value,” Papa John’s finance chief Ravi Thanawala said on the company’s call on Thursday.
Reputations for value
Many restaurant executives acknowledged their chains were falling short.
For example, McDonald’s CEO Chris Kempczinski said his company’s reputation for value has dimmed recently. In the second quarter, the burger giant reported that its U.S. same-store sales declined 0.7% year over year.
“There were also factors within our control that contributed to our underperformance, most notably our value execution,” Kempczinski said on the company’s July 29 conference call. “For 70 years, McDonald’s has defined value in our industry, and we are taking meaningful actions across the world to assert our leadership.”
McDonald’s $5 Meal Deal launched a few days before the end of the second quarter, but the value meal had been attracting low-income consumers and outperforming expectations, executives said. The chain is extending the promotion through August in most markets and working with franchisees on a longer-term discounting strategy.
Meanwhile, unlike McDonald’s and many other restaurants, Chipotle Mexican Grill reported strong same-store sales growth and increasing traffic for its latest quarter. But the burrito chain is still focusing on value, as it’s faced backlash from some customers who allege that the company has been shrinking the size of the portions.
While CEO Brian Niccol denied any corporate scheme to make burrito bowls smaller, he did say the chain will reemphasize generous portions with its workers. After all, those sizable portions have helped Chipotle gain its reputation for value.
“The good news is that we are already beginning to see our actions positively reflected in our consumer scores and our value proposition remains very strong,” Niccol said on the company’s July 24 call.
It isn’t just fast-food executives who are concentrating on value.
Dine Brands, which owns Applebee’s and IHOP, is also seeing low-income consumers pull back their spending, CEO John Peyton told CNBC.
Customers who make less than $75,000 annually aren’t visiting Dine’s restaurants as frequently as they used to, and if they do, they’re sticking to the value menu. Both Applebee’s and IHOP reported surprise same-store sales declines this quarter.
“It’s certainly going to be a tough back half of the year, and it’s a fight for market share for our increasingly value-driven customer,” Peyton said.
Value for shareholders
Companies aren’t just thinking about offering value for customers — they’re also thinking about shareholder value. Restaurant stocks have been under pressure this year as investors grow concerned about the health of the industry. Shares of McDonald’s and Restaurant Brands have both fallen 10% year to date, while Starbucks‘ stock has tumbled 21%. The S&P 500 has risen 11% during that period.
Worries about chains’ financial health aren’t confined to the top line. They’re also about profits, particularly as companies lean into discounts. While cheap deals might draw in customers, they can hurt the profitability of restaurants, weighing on earnings and hurting franchisees’ financial health.
And so-called value wars — where chains try to outdo one another with deals — only intensify those concerns as investors fear a race to the bottom.
While such concern hasn’t borne any fruit yet, it’s still early days. For now, it looks like the conversations about value and discounts are bringing some customers back.
For example, Burger King was one of the first chains to unveil a $5 value meal this summer. Its U.S. same-store sales were roughly flat for the quarter, but executives said the deal is attracting customers. Burger King now plans to offer it into October.
When its rivals followed suit with their own $5 discount deals, the Restaurant Brands chain didn’t see any clear impact to its business.
“There are actually some positives to the focus on value across the industry,” Restaurant Brands’ Kobza told CNBC. “I think it has the ability to improve the value-for-money perception of the category with our guests as more people talk about the incredible value that’s offered by our sector. I think that really helps everybody.”