Janice R. Andrews
The $5 McDonald’s lunch deal has gone viral online, but if the campaign grows, franchisees might run into difficulties. The $5 dinner deal, which was originally scheduled to expire in July, will now be available all summer long. A memo seen by Yahoo Finance indicates that 93% of McDonald’s locations decided to keep the agreement in place through August.
McDonald’s US Chief Marketing Officer Tariq Hassan said that the agreement strengthened the brand’s reputation for affordability after multiple price increases and effectively drew in customers from other restaurants. Customers lured in by the offer also frequently buy additional, more costly things.
Foot traffic was 0.8% less on June 25 when the campaign started than it was the same week the prior year. However, according to data from Placer.ai, traffic rose by 2.8% during the week of July 1 and by 2.4% by the week of July 8.
Placer.ai’s head of analytical research, R.J. Hottovy, attested to the fact that the agreement was bringing in more visitors. “It appears that more visits are being made as a result of this,” Hottovy stated to Yahoo Finance.
Lower-class consumers seem to be drawn to the offer, according to BTIG analyst Peter Saleh, but additional information is required to properly evaluate its efficacy. Saleh hinted that if McDonald’s creates a new national value platform with buy one, get one free or a $1 $2 $3 Dollar Menu version, the agreement might be extended further.
Ahead of the announcement of the extension, Saleh stated, “This is kind of their bridge to that value menu.” He continued by saying that franchisees believe the $5 offer, which consists of a four-piece Chicken McNuggets meal, tiny fries, a small soft drink, and a choice of a McChicken sandwich or McDouble burger, is “too narrow” and uninspiring for patrons.
The success of the meal package could have an impact on value options offered by fast food chains. Given its market dominance, McDonald’s promos can have a big impact, especially when grocery shops and fast-casual restaurants like Cava, Chipotle, and Sweetgreen provide competing options.
Franchisees are dealing with difficulties in spite of the deal’s popularity. Saleh claims that between 20% and 25% of purchases now contain the $5 lunch offer, which is significantly more than what McDonald’s usually desires and historical norms. Many of these consumers are regulars who are choosing the cheap lunch over more expensive ones.
“That isn’t entirely incremental. These aren’t brand-new clients. A portion of these patrons are repeat consumers who were scheduled to visit anyhow,” Saleh clarified.
Hottovy noted that 20% of customers ordering the $5 meal deal are also using an additional 20% off digital coupon via the app. Normally, 10%–15% of customers use discounted deals. The amount of coupons being used is “much higher than what McDonald’s had expected.”
Franchisees claim that the contract is having a detrimental effect on their margins, making it less profitable—in some circumstances, even unprofitable. As a result, some franchisees are cutting back on deal-related marketing initiatives including window displays and in-store video advertisements. The 20% off coupon threshold has been raised by others.
“Some markets were at $5 and some were at $10 … almost all, or many, have gone above the $10 mark,” added Saleh.
Wall Street expects McDonald’s to announce moderate results compared to Q2 2023 when it gets ready to release its earnings on Tuesday, July 29. Consensus data from Bloomberg projects:
- Revenue: $6.64 billion, up from $6.5 billion in the second quarter of 2023.
- Adjusted earnings per share: $3.08, down from $3.17 in the second quarter of 2023
- Global growth in same-store sales: 0.94% (down from 11.7% in Q2 2023)
- Growth in US same-store sales: 1.06% (as opposed to 10.3%).
- Growth in foreign-owned same-store sales: 1.97% (vs 11.9%).
- Growth in same-store sales for international franchises: -3.8% (as opposed to 14%)
McDonald’s will keep assessing the effect of the $5 meal bargain on consumer happiness and franchisee profitability as the summer goes on.
