24/7 Insights
- Fast-food businesses are trying to battle inflation and other hurdles.
- McDonald’s Corp. (NYSE: MCD) franchisees fear the $5 value meal will undermine their margins.
Faced with a customer base that believes inflation has made its food too expensive, McDonald’s Corp. (NYSE: MCD) has announced a $5 value meal to offset the perception. The $5 menu includes a McChicken or McDouble, four-piece chicken nuggets, fries, and a drink. Just as the program launched, McDonald’s franchisees said it was too expensive for them to support it, which puts the program in jeopardy.
Who Pays the Price?
A large group of franchisees represented by the National Owners Association wrote in a letter to its membership, “The fact remains that in order to provide the consumer with more affordable options, they must be affordable for the owner/operators. McDonald’s vast resources and financial investment are essential to any sustainable affordable strategy.” In other words, these owners say that they do not want to make McDonald’s more successful using their bank accounts.
McDonald’s responded with a statement that is unlikely to quell the criticism: “We know how much it means to our customers when McDonald’s offers meaningful value and communicates it through national advertising. That’s been true since our very beginning and never more important than it is today.”
CNBC points out that franchisees had a usually profitable year in 2023. They clearly do not think that justifies a low-margin $5 meal plan that will undermine their margins.
McDonald’s Is Not Alone
McDonald’s is in trouble, along with other fast-food businesses that have been hit by food and fuel inflation. Its stock is down 10% this year, while the S&P 500 is up 11%. Rival Starbucks Corp. (NASDAQ: SBUX) has done even worse. After weak earnings, its shares are down 19% this year. Each continues to wrestle with similar problems.
The company has additional hurdles even if McDonald’s can convince franchisees to support the $5 meal. The minimum wage is rising in many states. In California, it will be $20 an hour this year. This is another reason McDonald’s may have lower margins than in the past.
The $5 meal is a temporary solution.
The Price of a Big Mac in Every State
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