Over the past few years, fast-food restaurants had abandoned a value approach and concentrated on quality and higher priced menu items to offset rising beef prices and other commodities, the NPD Group points out. But with commodity prices stable or declining, the three major burger chains have returned to discounting, launching various versions of the value meal.
Wendy’s fired the first shot in the battle with its 4 for $4 promotion last year, followed by McDonald’s McPIck 2 for $2, which was quickly replaced with the 2 for $5. McDonald’s will now offer the McPick 2 with store operators being able to customize menu items to local customers’ preferences. Burger King’s response was a 5 for $4 program followed by 2 for $10 Whopper Meal. Carl’s Jr./Hardees, Checkers/Rally’s and Sonic Drive Ins have since come up with their own versions.
NPD found the average “deal rate” for quick-service restaurants is 26 percent but for restaurants offering combo value meals the number of meals served with the promotion is 35 percent. Overall, these offerings are increasing visit frequency or driving more traffic or increasing check size. In some cases, two or even all three of the above.
There is no question the burger giants have profited from the success of the value meals. In the first quarter of this calendar year Burger King’s comparable store sales in North America rose 4.4 percent, McDonald’s comps in the U.S. were up 5.4 percent, while Wendy’s same store sales in North America increased 3.6 percent.
But in every war there has to be a loser. Common sense would indicate that all those added meals the major burger players sold didn’t come from home cooking or skipped meals. Jack in the Box flatly admitted the chain had been caught unprepared for the value meal promotion and saw its first quarter comparable store sales go flat. Good Times Burgers, a chain that is used to strong comp store sales growth, eked out just a 0.5 percent growth. There has been speculation that some of the customers who deserted Chipotle due to the Mexican chain’s food safety problems may have switched to McDonald’s.
There is an old saying: When elephants fight, mice get trampled.
Economic News This Week
- Pending home sales increased 5.1 percent in April, marking the third consecutive monthly increase per the National Association of Realtors Pending Home Sales Index rising 5.1 percent. Sales were up 0.5 percent over April 2015 and have increased on a year over year basis for 20 consecutive months. Further, the index is at a level last seen more than 10 years ago.
- April sales of new single family homes increased to 619,000 on a seasonally adjusted annual basis. This is 16.6 percent increase compared to March and 23.8 percent more than the April 2015 estimate.
- The Builder Confidence remained steady in May at 58. The National Association of Home Builders/Wells Fargo Housing Market Index has been at this level for the past four months. A reading of more than 50 means more builders are confident in the market for single family home building than are negative about the future.
- First quarter Gross Domestic Product was a bit better than originally projected, according to the Commerce Department’s second estimate that put GDP growth at 0.8 percent. The first estimate was 0.5 percent. Economists predicted that the second estimate would be 1.0 percent.
- Initial jobless claims totaled 268,000, a decline of 10,000 for the week ending May 21. The 4 week moving average was 278,500, an increase of 2,750. Claims have been less than 300,000 for 64 weeks – the first time this has happened since 1973.
- The Advance Report for New Orders for Manufactured Durable Goods increased 3.4 percent in April. New orders have been up 3 of the last 4 months. The transportation segment drove the new orders. Without transportation, new orders were up just 0.4 percent. Shipments of manufactured durable goods increased 0.6 percent while unfilled orders also increased 0.6 percent. Nondefense new orders for capital goods – those products used to manufacture other durable goods - rose 0.6 percent.
- The University of Michigan Index Final Reading for May declined slightly from the preliminary reading but was still higher than the April readings. The overall reading for the Index of Consumer Sentiment finished the month at 94.7, up from 89.0 in April. The Index for Current Economic Conditions came in at 109.9 which is up from 106.7 in April. The Index of Consumer Expectations was also up significantly, rising to 84.9 from April’s 77.6.
Foodservice News This Week
- McDonald’s CEO says robots won’t eliminate jobs. Steve Easterbrook says restaurants “will always have an important human element” and technology advances will result in workers being shifted to the dining room. Mr. Easterbrook spoke at the McDonald’s annual stock holders meeting which was being picketed by employees and their supporters demanding a $15 an hour wage and the right to organize.
- The Krystal Company reports a “dramatic” sales increase for its eight remodeled stores in Augusta Ga. The units “feature a vibrant color package, LED lighting enhanced digital menu board, and artwork that is modern but maintains the brand’s heritage.” Krystal plans to implement its remodeling program one market at a time.
- Arby’s hopes to use smaller locations to fuel its expansion into urban areas. The chain also plans to offer breakfast to offset the typically higher rents in cities. Arby’s will open a second location in New York City this summer and plans to open its first restaurant in Los Angeles.
- Foodservice operators acknowledge they’re lagging when it comes to technology. About one third of operators say they are lagging in technology while just 10 percent of operators believe their establishment is “leading edge.” The National Restaurant Association study shows foodservice operations are better in some areas such as POS equipment, websites, and offering WiFi to guests but not doing well in other areas including table top and kiosk ordering systems, mobile payment systems and smart phone aps. Cost is one factor in adapting technology and operators are also concerned of complicating customers’ experience.
- US Foods’ initial public offering raised $1.02 Billion. This is the second largest IPO in the United States so far this year. The private equity owners of US Foods – Clayton, Dubilier & Rice LLC and KKR & Co. LP – will use the funds to pay down the company’s debt. The move may also make US Foods easier to sell to another owner.
- Corporate Stirrings: Wendy’s Japan LLC will purchase the 135 unit hamburger chain First-Kitchen Ltd. from Suntory Holdings Ltd. First-Kitchen had sales of US $79 million in 2015. No purchase price was disclosed. The Boston Restaurant & Sports Bar announced significant changes ranging from a complete turn over in top management, an evaluation of each individual restaurant, improved “overall operational efficiencies,” lower food costs, menu revisions with a reduction in overall menu items, and a newly designed prototype. Scottsdale, Ariz.-based Kahala Brands has agreed to merge with a subsidiary of MTY Food Group. Kahla Brands owns 18 fast food concepts, including Cold Stone Creamery and Blimpie. MTY is based in Montreal and is the franchisor and operator of 40 concept restaurant brands.
- Growth Chains: Slim Chickens, which has more than 30 locations, plans to grow to 600 in the next decade. IHOP plans to open six restaurants in Panama. Arby’s will open 25 locations in Kuwait and Saudi Arabia in the next 7 years. Hurricane Grill & Wings has signed a development agreement for three stores in Virginia and another agreement for four stores in Florida. Wahlburgers continues to open restaurants in Florida with a goal of 20 locations in the next few years. Dickey’s Barbecue Pit has signed a development agreement for 8 restaurants in Texas and Louisiana in the next 5 years.
- Comparable Store Sales Reports: Diversified Restaurant Holdings (Buffalo Wild Wings down 1.0 percent), Famous Dave’s down 7.7 percent, J. Alexander’s (J. Alexander’s and Redland’s down 3.0 percent & Stony River Steakhouse up 0.7 percent), Popeye’s up 1.1 percent, and Steak N Shake up 1.8 percent.
For details and same-store sales of other chains, please click here for the Green Sheet.