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U.S. fast-food price war flares as consumer spending softens

Stock MarketsApr 30, 2018 01:26AM ET
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© Reuters. Dollar Menu advertisements are seen outside a McDonaldÕs restaurant in Venice, California

By Lisa Baertlein

LOS ANGELES (Reuters) - Cheap fast-food "dollar" deals surged in the United States during the first quarter, marking a major shift in strategy as a cool-down in consumer spending sent restaurant chains scrambling for customers.

So-called "value" offers have been part of the U.S. fast-food landscape since 2002, when McDonald's Corp (N:MCD) debuted its popular Dollar Menu and gave the industry a reliable recipe for driving traffic.

McDonald's and other major chains deemphasized such deals in recent years, choosing instead to invest in food quality improvements to bolster competitiveness with more upscale brands like Chipotle Mexican Grill Inc (N:CMG) and Chick-fil-A.

Dollar deals roared back in the first three months of this year, when economists estimate consumer spending growth braked to below a 1.5 percent rate. That would be the slowest pace in nearly five years and follows the prior quarter's robust 4 percent growth rate.

Value menu traffic was up 10 percent for the first three months of 2018, while value menu sales chalked up a 13 percent gain, NPD Group analyst Bonnie Riggs told Reuters.

The results lifted value menu traffic 1 percent for the fiscal year ended March 2018, reversing three consecutive years of declines, according to NPD.

"It's clear that major restaurant chain operators are pulling out all of the stops to get consumers to visit this year," said Riggs, author of a new report titled "Value Wars 2.0: The Value Menu Strikes Back."

Restaurants across the spectrum have been battling for a bigger slice of a pie that is not growing. Total U.S. restaurant traffic was flat in calendar 2017.

Yum Brand Inc's (N:YUM) Taco Bell, known for its low-priced food and "Dollar Cravings" value menu, appears to have an edge in the latest price war.

It sold a record 53 million orders of its new $1 Nacho Fries in five weeks during the first quarter, contributing to outsized value menu sales gains, NPD said.

Taco Bell declined comment, citing the quiet period ahead of Yum Brands' financial report on Wednesday.

McDonald's, seeking to win back customers lost after it abandoned its popular but profit-squeezing Dollar Menu in 2013, in January jumped back in with the launch of a $1, $2, $3 value menu.

That menu includes $1 any size soft drinks and cheeseburgers, $2 small espresso drinks and Bacon McDouble hamburgers, and $3 Happy Meals and classic chicken sandwiches.

Consumer response was initially muted, prompting some McDonald's restaurants to offer a 2 for $4 "mix & match" deal on breakfast sandwiches such as the sausage McMuffin with egg.

McDonald's, scheduled to report quarterly results on Monday, declined to comment.

Meanwhile, some McDonald's restaurant operators worry about getting lost in a blizzard of competing deals.

"In 2002 we were one of the few chains discounting ... Today we are just part of the discounting noise," one McDonald's restaurant operator was quoted as saying in the latest McDonald's Franchisee Survey from Kalinowski Equity Research.

The fast-food value wars are contributing to an increasingly challenging operating environment, Dunkin' Brands Group Inc (O:DNKN) CEO Nigel Travis told investors last week.

Dunkin' Donuts franchisees, who were slow to warm to value deals, this month are responding with offers for $2 egg and cheese Wake-up Wraps, $3 egg and cheese English muffin breakfast sandwiches and $5 egg, cheese and bacon breakfast croissants.

Some investors worry that the dollar deals - including the $1 any size drinks and $2 small McCafe drinks from McDonald's - are siphoning business from Starbucks Corp (O:SBUX), which last week posted its second consecutive quarter with no U.S. traffic growth.

Starbucks, for its part, is adding specials to woo "occasional" customers who visit one to five times per month.

U.S. fast-food price war flares as consumer spending softens

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