In an effort to woo more consumers, McDonald’s (NYSE:MCD) rolled out its $5 meal deal on Tuesday. This $5 meal includes a choice between a McDouble burger or McChicken sandwich, a four-piece chicken McNuggets, small fries, and a small soft drink.
McDonald’s has faced severe backlash from irate customers and even House Republicans over its high fast-food prices. In May, MCD’s U.S. president, Joe Erlinger, stated in a letter to consumers that their prices have not exceeded inflation.
Erlinger pointed out that the average price of a Big Mac in the U.S. was $4.39 in 2019, and despite rising inflation, wages, and higher supply chain costs, the average cost of a Big Mac is now $5.29—an increase of 21%, not a 100% rise.
Value Meals Are Making a Comeback
High inflation over the past two years is heavily weighing on consumers. Typically, fast-food chains benefit during high inflation as people opt for cheaper meals during tough times. However, full-service restaurants and grocers are now emphasizing their value, price, experience, and quality compared to fast food.
Furthermore, there has been a subtle shift in consumer preferences. Last week, Darden Restaurants’ (NYSE:DRI) CEO Rick Cardenas stated on the restaurant chain’s earnings call that customers are shifting from quick-service restaurants to casual dining chains.
Fast-food chains are gearing up for a value war. Earlier this year, KFC (NYSE:YUM) introduced a $4.99 value meal that offers two pieces of chicken, a side of mashed potatoes and gravy, and a biscuit, while Burger King (NYSE:QSR) brought back its $5 Your Way Meal.
Will MCD’s Value Meals Expand Its Margins?
It remains to be seen whether these value meals will expand the company’s margins. However, MCD’s franchisees are not so hopeful. While they do expect the fast food chain’s value meals to attract more consumers, they are unlikely to expand margins.
A McDonald’s franchisee told Yahoo Finance, “Value promotions never increase margins — never. They do drive guest counts. Hopefully, the increase in guest counts will offset the slimmed-down margins.”
Top-rated TD Cowen analyst Andrew Charles shares this view and told Yahoo Finance that while such value offerings will entice consumers, restaurants must encourage customers to order premium or extra items to boost profitability.
Is McDonald’s Stock a Buy or Sell?
Analysts remain cautiously optimistic about MCD stock, with a Moderate Buy consensus rating based on 19 Buys and 10 Holds. Year-to-date, MCD has declined by more than 10%, and the average MCD price target of $310.84 implies an upside potential of 20.7% from current levels.
