McDonald’s $5 meal deal is an admission of self-inflicted wounds

The golden arches of history are long, but they bend back towards offering Americans cheap food.

Shares of McDonald’s rose 2.6%, their best session since January 2023, after Bloomberg reported that the fast food chain plans to offer a $5 meal deal in the US. Shares of competitors in the quick service restaurant industry broadly fell in response.

This news comes on the heels of McDonald’s April 30 earnings call, where CEO Chris Kempczinski bemoaned the state of the consumer, saying “it is clear that broad-based consumer pressures persist around the world.”

“The macro headwinds have been more significant than I think we even anticipated coming into the year,” added CFO Ian Borden. 

But most economic data we’ve received this year, particularly in the US, doesn’t suggest the consumer is in dire straits. And industry peers weren’t sounding as dour as McDonald’s during their earnings calls. So what’s the deal?

“McDonald’s raised prices significantly, and consumers are finding other places to spend,” writes Samuel Rines, macro strategist at WisdomTree, in a May 9 note.

Chris Turner, CFO at Yum! Brands Inc, talked up same store sales growth at Taco Bell that was above the industry average in the first quarter of 2024, and flagged a pick-up in same store sales growth so far in the second quarter. Part of the success, in his eyes? The Cravings Value Menu introduced in January to better appeal to price-centric consumers.

“We think Taco Bell is incredibly well-positioned for what I would describe as a more normal consumer environment today,” he said. “Consumers care more about value in the US.”

Over at Domino’s, CFO Sandeep Reddy discussed the conscious decision to avoid pushing too many price increases through in 2023, and how this contributed to same store sales growth of 5.6% in the US during the first quarter.

A key focus was on “making sure customer value was maintained,” he said.

McDonald’s is trying to recapture and articulate its value niche (which may or may not be successful with customers and franchisees), while its competitors already have evidence that their tactics are working.

“Domino’s and Taco Bell talked about maintaining their value-oriented propositions,” added Rines. “Meanwhile, that is only now entering the formula for McDonald’s.”

Which raises the question… how did we get to a place where McDonald’s wasn’t offering a clear and obvious value proposition to their customers? Where competitors metaphorically ate McDonald’s lunch as consumers ate a cheaper option?

This may be a part of why those companies — particularly Domino’s — are handily outperforming McDonald’s in the stock market so far this year.