Traditional fast food chains are upping the ante against so-called “fast casual” chains — and one another — with Burger King being the latest outfit to double-down on a margin-crushing value menu.
This isn’t necessarily bad news for investors, but it’s not great, either. The idea behind dollar or value menus is that they drive traffic. Once the customer is in the restaurant, he or she is expected to add regular-priced menu items to a value purchase. In reality, the losses incurred by these value menus often net out only as a drag on results.
This is why McDonald’s (MCD) phased out its strict dollar menu for something with a tad higher margins this year — and everyone else is following suit.
Burger King — part of Restaurant Brands International Inc. (QSR) — on Tuesday launched a five-item meal for $4. The temporary promotion includes a bacon cheeseburger, small French fries, small drink, 4-piece chicken nuggets and a warm chocolate chip cookie.
We won’t know until quarterly results if this promotion was worth it, but in some ways BK has no choice.
As mentioned above, McDonald’s recently debuted its “McPick 2” menu. Wendy’s (WEN) has its Wendy’s 4 for $4 offering. On Monday, Pizza Hut — part of Yum Brands (YUM) — unveiled its $5 Flavor Menu. Yum Brands restaurants KFC and Taco Bell also have value menu offerings.
A Show-Me Situation for QSR Stock
These low- or no-margin menus hurt earnings, but the chains have no choice but to offer them, if only because so much of the competition does. They’re also key to fending off the increased popularity of higher-priced chains such as Chipotle Mexican Grill (CMG), Panera Bread (PNRA), Shake Shack (SHAK) and other operations selling supposedly healthier fare.
Make no mistake, many of these fast food chains need all the help they can get. Sales at BK parent QSR are expected to fall nearly 5% for the fiscal year just passed. McDonald’s sales are projected to decline by almost 8%. Wendy’s is looking at a drop of more than 9% this year — and 30% next year — while Yum’s top line is projected to be essentially flat.
Fast food has always been a high-volume, low-margin business, and that means it doesn’t take much on the expense line to push a company into reporting a loss. Notice how QSR stock dropped significantly after announcing the BK news.
Shares in QSR had a poor 2015. Perhaps that sets them up for a rebound like MCD’s this year. But until we see how this latest promotion works out, it’s tough to get excited about the name.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
