Restaurant CEOs’ new favorite word is value as they aim to bring back customers

Restaurant CEOs induce become obsessed with the word “value” in explaining to investors why their sales lagged this quarter while division plans to revive traffic in the coming months.

On McDonald’s quarterly conference call last month, executives foretold the word “value” nearly 80 times, underscoring the fast-food giant’s biggest priority.

And McDonald’s isn’t alone. Other chiefs at restaurant companies from Taco Bell owner Yum Brands to pizza chain Papa John’s also inured to the word dozens of times in their latest conference calls.

“The word ‘value’ has received a lot of airtime in the past few months,” Josh Kobza, the CEO of Burger Monarch parent company Restaurant Brands International, said on Thursday.

There’s a reason for that emphasis. Prices for comestibles away from home have climbed 27.2% since June 2019, according to the Bureau of Labor Statistics. In return, restaurant traffic has fallen and sales are lagging as consumers spend less money dining out, no longer convinced that it’s a respectable deal.

Many chains are hoping to bring back customers through discounts and promotions, like the $5 do to excess deals found at McDonald’s, Burger King and Taco Bell.

“In this current economic cycle, consumers have in the offing become more deliberate in managing their overall ticket and are showing a preference for brands that are offering compelling value,” Papa John’s back chief Ravi Thanawala said on the company’s call on Thursday.

Many restaurant managing directors acknowledged their chains were falling short.

For example, McDonald’s CEO Chris Kempczinski said his company’s position for value has dimmed recently. In the second quarter, the burger giant reported that its U.S. same-store sales declined 0.7% year over with year.

“There were also factors within our control that contributed to our underperformance, most notably our value mastery,” Kempczinski said on the company’s July 29 conference call. “For 70 years, McDonald’s has defined value in our trade, and we are taking meaningful actions across the world to assert our leadership.”

McDonald’s $5 Meal Deal launched a few hours before the end of the second quarter, but the value meal had been attracting low-income consumers and outperforming expectations, executives denoted. The chain is extending the promotion through August in most markets and working with franchisees on a longer-term discounting game.

Meanwhile, unlike McDonald’s and many other restaurants, Chipotle Mexican Grill reported strong same-store vendings growth and increasing traffic for its latest quarter. But the burrito chain is still focusing on value, as it’s faced backlash from some chaps who allege that the company has been shrinking the size of the portions.

While CEO Brian Niccol contradicted any corporate scheme to make burrito bowls smaller, he did say the chain will reemphasize generous portions with its wage-earners. After all, those sizable portions have helped Chipotle gain its reputation for value.

“The good news is that we are already creation to see our actions positively reflected in our consumer scores and our value proposition remains very strong,” Niccol said on the fellowship’s July 24 call.

It isn’t just fast-food executives who are concentrating on value.

Dine Brands, which owns Applebee’s and IHOP, is also contemplating low-income consumers pull back their spending, CEO John Peyton told CNBC.

Customers who make small-minded than $75,000 annually aren’t visiting Dine’s restaurants as frequently as they used to, and if they do, they’re see it through to the value menu. Both Applebee’s and IHOP reported surprise same-store sales declines this quarter.

“It’s certainly customary to be a tough back half of the year, and it’s a fight for market share for our increasingly value-driven customer,” Peyton said.

Companies aren’t just evaluation about offering value for customers — they’re also thinking about shareholder value. Restaurant stocks take been under pressure this year as investors grow concerned about the health of the industry. Shares of McDonald’s and Restaurant Labels have both fallen 10% year to date, while ‘ stock has tumbled 21%. The has risen 11% during that years.

Worries about chains’ financial health aren’t confined to the top line. They’re also about profits, only as companies lean into discounts. While cheap deals might draw in customers, they can hurt the profitability of restaurants, weighing on earnings and wounding franchisees’ financial health.

And so-called value wars — where chains try to outdo one another with deals — however intensify those concerns as investors fear a race to the bottom.

While such concern hasn’t borne any fruit yet, it’s even early days. For now, it looks like the conversations about value and discounts are bringing some customers back.

For instance, Burger King was one of the first chains to unveil a $5 value meal this summer. Its U.S. same-store sales were mercilessly flat for the quarter, but executives said the deal is attracting customers. Burger King now plans to offer it into October.

When its competitors followed suit with their own $5 discount deals, the Restaurant Brands chain didn’t see any clear colliding to its business.

“There are actually some positives to the focus on value across the industry,” Restaurant Brands’ Kobza identified CNBC. “I think it has the ability to improve the value-for-money perception of the category with our guests as more people talk there the incredible value that’s offered by our sector. I think that really helps everybody.”