Fast food companies compete for the best value meal

More fast food companies are rolling out value meals to appeal to consumers as inflation continues to pose a budgetary challenge, including McDonald's (MCD), Restaurant Brands International's Burger King (QSR), and Starbucks (SBUX).

Placer.ai Head of Analytical Research R.J. Hottovy joins Asking for a Trend to discuss the state of the overall food industry and consumer spending.

Hottovy believes various value meal offerings have been successful, explaining: "All these promotional deals right now are the key thing that are driving visits across the restaurant industry. And why is that? Because we saw a lot of visitation loss to things like value grocers and discount stores, and even convenience stores are another channel that we've seen it. And this is a restaurant's way of recapturing that lost market share a little bit. It's being helped out by food at home, inflation coming down a bit. They're able to withstand a little bit more on the discounting side."

He notes that the major question facing restaurants is whether they can keep up the momentum as value offerings increase competition.

"I think we're looking at a consumer that is really looking to stretch their household budgets. Interestingly, we do see that consumers are still willing to spend for big events and activities and holidays, but it's those shoulder periods in between that consumers are really taking a pause right now," Hottovy says. He adds that lower and middle-income consumers have become a "focal point" for restaurants as they try to get them back in their doors and spending.

For more expert insight and the latest market action, click here to watch this full episode of Asking for a Trend.

This post was written by Melanie Riehl

Video transcript

In the world of fast food companies are rolling out value meals to keep consumers coming back as inflation we know stays high.

Mcdonald's announced earlier this year that a new $5 meal deal is coming later this month for $5 customers can get a mcchicken or mcdole four piece chicken nuggets, fries and a drink getting hungry just thinking about it and it's not alone rival Burger King also launching a $5 meal deal even ahead of mcdonald's.

And just this week, breakfast foods are getting into the trend as well.

Starbucks launching a pairings menu that offers customers a drink and breakfast item combo from anywhere between five and $7.

Also throwing their hats into the room.

Wendy's and Popeye's.

But the question remains, how will these deals translate to traffic and revenue and here to help us sort through all that is RJ.

Hoty head of analytical research at Placer dot A I RJ.

You are just the man I talked to about this.

So the deals they're coming fast and furious RJ is gonna work is gonna, is gonna drive traffic.

Yeah, so far I think they have been successful and it's not just the Qsr guys are getting into the game.

It's the casual diners themselves.

As you mentioned, Burger King is front running mcdonald's in a lot of ways by offering its own $5 value menu.

And we just looked at the data this week for how visitation trends are doing year over year.

And we saw definitive acceleration in the last two weeks of Burger King visitation trend.

So value is front and center on consumers' minds.

Right now.

I think mcdonald's is also going to see a similar pop when we look at the numbers after the launch on June 25th, you know, chili Buffalo Wild Wings, all these promotional deals right now are the key thing that are driving visits across the restaurant industry.

And why is that?

Because we saw a lot of visitation lost to things like value grocers and discount stores and uh even convenience stores are another channel that we've seen.

And this is a uh restaurant's way of recapturing that lost market share a little bit.

It's being helped out by food at home inflation coming down a bit.

They're able to withstand a little bit more on the uh discounting side.

But really this is a way to get back in the battle because there has been market share loss the last couple of months.

And RJ as you know, listen, you're an investor and you're listening to this and you're in some of these names and you're hearing about all these deals.

How should you be thinking about margins and the impact there?

Yeah, I think we're going to see a margin hit here too.

I mean, some of these very extreme value promotions, I think that there will be a near term margin hit.

I think that that that goes without saying yes, there's going to be incremental visits because of that.

But I do think at the end of the day just where we are in terms of cost pressures, especially when we add on labor and other things.

Uh I think we will look at a margin hit.

The key is whether or not the visit frequency can sustain itself.

Can they have that, that that consumer who comes in for that, that value menu come back and maybe pay full price?

And that's a big question right now as to how sustainable that is because we are not going to see value grocers and other uh you know, convenience stores and other channels lay down, they are going to get in the promotional game as well.

So it's going to be very competitive.

Uh I think this summer really is going to go down as the summer value wars for the restaurant category.

And let me ask you RJ, you know, you know, this space so well as you look at this sector and you study, you see the themes, what is it telling you about the state of the consumer here?

How healthy how resilient do you think the consumer is?

Yeah, I think it really kind of shows more of a K shaped, you know, recovery and where we are post pandemic.

I do think that lower income consumer remains under pressure and a lot of that is the cumulative effect of inflation that we've seen in the last couple of years.

If you look where we are food inflation compared to uh you know, the start or the right after the pandemic, we're still up about 30%.

And even though that has slowed down this year, that still is a big chunk of discretionary spend that consumers are given inflation.

There.

Other things are starting to creep into whether that's insurance, whether that's or other service oriented type factors, healthcare being another one in there as well.

I think we're looking at consumer that is really looking to stretch their household budgets.

Interestingly, we do see that consumers are still willing to spend for big events and activities and holidays, but it's a shorter periods in between that consumers are really taking a pause right now and we've seen trade down or trade out a lot of cases.

So I think it's a situation where this, this right now really has to be the focal point for not only restaurants but a lot of anything catering to the kind of that lower to middle income consumer is really, is that low price point that consumers are fixated on and what really is driving visits, but also innovation too.

It has to be low prices or competitive prices, but also something new.

It can't be just something that, you know, you can get anywhere else.

It has to be something differentiated.

And I know that's tough to say, but if you look at kind of the winners of the last couple, uh you know, really the last year or so in this food retail space, all the Trader Joe's, which are low prices but innovators as well.

And I think the restaurant guys are starting to figure out the innovation plus value is the key to driving deserts RJ.

I'll get you out of here on this given, given kind of your broad views on the market.

The consumer, are there certain names in fast food, fast casual RJ that you think are just better positioned than others?

Yeah, it's a great question and looking across the board, I mean, I do think some of the the casual dining chains that are starting to really see a turnaround in visitation trends that maybe have gotten not as much love as they should have gotten.

So Brinker International, which is the parent company Chili's I think is really interesting with kind of the visitation trends we started to see there.

Um You know, looking kind of broadly mcdonald's is another one that I think will be very interesting to see the success of this value menu launch.

Um You know, there's a there's an interesting story on that one and, you know, I think that they're starting to find that uh they can innovate around that as well.

So those would be two names that just pop out uh top of the head here.

Um You know, it could be interesting to see in terms of uh where we are in visitation trends because I think those do generally have a pretty good correlation with where we end up seeing these stocks get over time.

So RJ, great to have you on the show.

Great to have you in this insight.

Have a great weekend.

You too.

Thanks Josh.