McDonald's needs consistency in value meal messaging: Analyst

First, it was the chicken sandwich wars, now fast food chains are going all in on competing value meals. Citi Director and Restaurant Analyst Jon Tower comes onto Market Domination to talk about how he envisions these value meal strategies panning out for the competing brands, which now includes McDonald's (MCD), Wendy's (WEN), Restaurant Brands International's (QSR) Burger King, and Yum! Brands' (YUM) Taco Bell.

"Many of them have come to reasonable levels in terms of what they're going to promote, when they're going to promote it, how they're going to do it. And I think it should start moving the needle for traffic," Tower says about the relationships between franchisees and franchisors.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Luke Carberry Mogan.

Catch more of Yahoo Finance's coverage on the latest fast food value meals:

Are consumers responding to fast food's new value options?

Fast food chains lean into value this summer. Will it be enough to boost their lagging stocks?

McDonald's $5 value meal hits menus as the Golden Arches looks to bring customers back

Taco Bell joins the fast food value meal trend

McDonald's officially adds $5 value meal to menu

UBS maintains McDonald's Buy rating, cites value meal boost

The key to value meals: Don't 'sacrifice' quality for price

Fast food companies compete for the best value meal

Video transcript

Kfc mcdonald's and now Taco Bell, diners looking for a deal are in luck.

But what does the resurgence of the meal deal mean for investors looking for value?

We're looking at how to navigate the big picture with the Yahoo finance playbook.

And we're joined now by John Tower director and restaurant analysis city, John.

It's good to see you.

So and you are the perfect guy to talk to about this John, you know, the sector, you know these names.

Um I guess big picture to start there, John, you know, do, do you think it's gonna work a all these these value meals that are being rolled out here?

You think it's gonna mean more people come in the door?

It's gonna boost traffic, John.

Yeah, look, I, I think there's a very good chance it does work at least stop the bleeding when it comes to traffic.

That's been the bigger problem.

It's been decelerating for quite some time now, mostly due to the fact that, you know, prices have moved well beyond food at home inflation.

I think there's about a 700 basis point gap between the two since PRE COVID and you know, restaurants have been on the wrong side of it.

This will help at least send stem some of that tide in terms of the traffic loss.

And the big thing that the restaurant brands will have is a marketing budget to blast this in front of every consumer.

Everywhere they consume media, whether it's on their television or on their mobile device, you will see more and more price pointed offers hitting consumers right in the face.

But John will margins be sacrificed in the process.

And if so are there strategies that some of these companies can implement to protect their margins?

Yeah, a lot of these operators have gotten much better about protecting profits when it comes to focusing on value.

So they lean more on bundled value meals.

Hence the 3456 $7 starting price points or bundle value offers that are out there rather than just straight up discounting menu items uh individually.

So I think you'll see a scenario where profits don't necessarily take a nose dive as the mix of value continues to grow higher on these menus.

Um So, you know, I'm I'm not all that worried about the profit piece and keep in mind as well.

A lot of these operators are franchised and therefore, you know, they're not seeing it directly on their own pnls.

The franchisees will end up feeling it a little bit more at the store level.

And that's frankly where a lot of the tensions come from here in terms of seeing these value platforms not be launched earlier.

Say in, in late 2023 there's a friction between franchisee and Franchisor on where and what they're going to discount what they're going to promote and at what price point in order to get traffic coming back to the stores.

But I think many of them have come to reasonable levels in terms of what they're going to promote when they're going to promote it, how they're going to do it.

And I think it should start moving the needle for traffic.

Let's get to some pics, John.

That are interesting.

You, you cover a lot of names.

You got a big coverage universe.

Here one is mcdonald's and there John, you, you, it looks like your rating is still neutral.

You're on the sidelines.

How come John and what would you need to see before you get more bullish on that name?

Yeah, there's been a few things.

Um we've been a little bit more, I'd say conservative on how they were coming into 2024 in terms of our expectation for sales domestically and across their global business and to date that's played out.

Um I think, you know, you don't necessarily wanna completely bet against mcdonald's on value as that is core to their, their ethos as a brand.

Uh But I think we're gonna have to see some consistent value uh running across the menu beyond just this five week window.

And I know, you know, some of the franchisees have signed up for something beyond that just five week window that they've, they've talked about with this $5 meal.

I think there's gonna be more to come beyond that later in 24 with respect to, um, value messaging and probably more in 25.

But we need a consistent message there.

I think in order for us to get comfortable and then internationally as well.

You know, the the softness that we've seen here is it's it's traveled across the globe, right?

Whether it's Asia, whether it's Europe, if we can get confidence that those markets are not contracting or not slowing down uh any further, I think, you know, then we can get more comfortable with where estimates are and then get more comfortable with getting warmer to the stock.

And John, when you think about loyalty memberships, digital rewards, what companies are best positioned on that front because that feeds into the whole notion of value for the consumer as well.

Yeah, look, there's been, I would say the pizza category has been the leader with respect to digital for a long time.

Then beverage has done a phenomenal job.

It's not been until recently that a lot of the other fast food concepts have gotten better when it comes to loyalty programs, digital ordering.

I think actually Taco Bell owned by Yum is uh revamping its program.

You'll see it hitting in the third quarter of this year, it'll reduce some friction in the drive through window where I think that's been a, a point of, of, of pain for consumers in terms of utilization.

Uh and, and, uh you know, frankly wanting to use the platform on a regular basis and driving frequency.

Um I think that revamp will help the programs themselves to date.

They've been more of a discounting mechanism.

Um It's a way to communicate 1 to 1 with the consumer, but I, you know, it's still TBD in terms of who's gonna win in this over the long term.

I like Taco Bell's revamp.

I think they're gonna move the needle in the short term as that uh program gets revamped.

John.

Appreciate your time and, and those stock picks.

Thanks for joining us today.

Thank you.

Have a good one.