Restaurant CEOs focus on value to bring back customers

Restaurant CEOs have become fixated on the word “value” when explaining to investors why sales were sluggish this quarter and how they plan to bring customers back in the coming months.

On McDonald’s During its quarterly earnings conference call last month, executives used the word “value” nearly 80 times to emphasize the fast-food giant’s top priority.

It’s not just McDonald’s. Taco Bell’s owner Yum Brand To the pizza chain Papa John’s The company used the phrase dozens of times on a recent conference call.

“The word ‘value’ has gotten a lot of attention in recent months,” said Josh Kobza, CEO of Burger King’s parent company. Restaurant Brands Internationalhe said Thursday.

There’s a reason for this emphasis: The price of eating out has risen 27.2% since June 2019, according to the Bureau of Labor Statistics. In response, restaurants are seeing fewer customers and sluggish sales as consumers, who no longer see eating out as a good deal, spend less on it.

Many chains are trying to lure customers back with discounts and promotions, such as $5 meal bundles from McDonald’s, Burger King and Taco Bell.

“In the current economic cycle, consumers are becoming more cautious in managing their overall shopping needs and favoring brands that offer compelling value,” Papa John’s Chief Financial Officer Ravi Thanawalla said on the company’s conference call on Thursday.

Many restaurateurs acknowledged their chains are falling short of their targets.

McDonald’s CEO Chris Kempczinski, for example, said the company’s reputation for value has recently deteriorated. In the second quarter, the burger giant reported that U.S. same-store sales fell 0.7% year over year.

“Some of the factors that contributed to the poor performance were within our control, most notably value realization,” Kempczinski said during the company’s conference call on July 29. “For 70 years, McDonald’s has defined value in our industry, and we are taking meaningful actions around the world to demonstrate our leadership.”

McDonald’s $5 meal deal, which launched just days before the end of the second quarter, is performing better than expected as the great meal deals attract lower-income shoppers, executives said. The chain has extended the promotion through August in most markets and is working with franchisees on a longer-term discount strategy.

On the other hand, unlike McDonald’s and many other restaurants, Chipotle Mexican Grill The company reported strong same-store sales growth and increased customer traffic in its most recent quarter, but the burrito chain remains focused on improving value as it faces backlash from some customers who say the company is cutting back on burrito portions.

CEO Brian Niccol denied that the company has plans to make burrito bowls smaller, but said the chain would reiterate its emphasis on providing employees with generous portions — after all, it’s the generous portions that have earned Chipotle its reputation for value food.

“The good news is that our efforts are starting to be reflected favorably in consumer ratings and our value proposition remains very strong,” Nicol said on the company’s July 24 conference call.

Fast-food operators aren’t the only ones looking at value.

Dyne BrandThe company, which owns Applebee’s and IHOP, is also seeing lower-income consumers pull back on their spending, CEO John Payton told CNBC.

Customers making less than $75,000 a year are not visiting Dines restaurants as frequently as they used to, and when they do, they are sticking to value menu items. Both Applebee’s and IHOP reported unexpected declines in same-store sales this quarter.

“The second half of the year is going to be tough as we fight for market share with increasingly value-conscious customers,” Payton said.

Companies aren’t just thinking about delivering value to customers, they’re also thinking about shareholder value. Restaurant stocks have been under pressure this year as investors have grown increasingly concerned about the health of the industry. Shares of McDonald’s and Restaurant Brands are both down 10% so far this year, but Starbucks‘The stock price fell 21%. S&P 500 It rose 11% during that period.

Concerns about the financial health of chains extend beyond sales, as profits are also affected, especially as companies turn to discounting. While low prices may attract customers, they can also hurt a restaurant’s profitability, squeezing revenue and hurting franchisees’ financial health.

And the so-called value wars, in which chains compete against each other in deals, are only intensifying those concerns as investors fear a race to the bottom.

Those concerns haven’t borne fruit yet, but it’s early days. For now, talk of value and discounts seems to be bringing some customers back.

Burger King, for example, was one of the first chains to roll out a $5 meal deal this summer. Executives said the promotion is attracting customers, even though the company’s U.S. same-store sales were roughly flat for the quarter. Burger King plans to run the promotion through October.

Rivals’ own $5 off sales had no apparent impact on the Restaurant Brands chain’s business.

“There’s actually a positive side to this industry-wide focus on value,” Restaurant Brands’ Kobza told CNBC. “As more people talk about the great value our industry offers, I think it has the potential to improve customer perception of value for money in the category. I think that’s really going to help everybody.”