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June 23, 2021

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Fast food giants push expensive meals as US pandemic eases

Restaurant chains, including McDonald’s Corp and KFC, are paring back US$5-and-under “value” items in favor of more expensive US$10-to-US$30 combination meals, a strategy employed to lift sales and profits and offset rising food costs as the US economy reopens.

“Value” meals — sandwich, soda and French fry combinations priced at US$5 or less — have long been a staple of fast-food offerings. Chains used the deals to lure bargain-conscious customers, bringing traffic to stores. But deals priced at US$5 and under have become less generous in the last 18 months.

During the pandemic, fast food gained market share from other restaurants forced to close as customers motored through socially distant drive-throughs to pick up a sack of burgers. Now that the United States is reopening, those chains are selling new, pricier sandwiches and meals to customers — a move that some warn may alienate some hourly workers and other lower-income customers as government subsidies wane and mom-and-pop restaurants reopen.

So far, the chains’ trade-up tactic is working, helping lift comparable sales at limited-service restaurants by 11.5 percent this May compared to the same month in 2019, according to data from Black Box Intelligence. Profit margins are also up at several major chains.

“Value menu items are not really profit drivers. They’re designed to drive traffic,” said BTIG analyst Peter Saleh.

Menu board

The pandemic also forced chains to halt the development of new items. As US COVID-19 cases fall, chains are again launching new sandwiches to try to boost traffic, he said.

Wendy’s Co said it pioneered the value menu in 1989, when it dedicated part of its menu board to 99-cent items. But today, Wendy’s is “trading folks up into our best, highest-quality food items,” said chief executive Todd Penegor during a May earnings call with analysts, “and we’ll continue to do that.”

Wendy’s current menu includes items that are higher priced than its standard burgers, like its Spicy Pretzel Bacon Pub — a fried chicken fillet on a pretzel bun topped with fried onions, bacon, two kinds of sauce and cheese for US$7.

KFC, owned by Yum Brands International, said it stopped marketing “US$5 Fill Ups” — a pot pie or chicken dish, plus a medium drink, chocolate chip cookie and a biscuit — aimed at individuals in 2020. It now promotes family meal deals that cost as much as US$30.

Dominos Pizza Inc said in April it did not need its “Boost Week” discount to drive store traffic. So it suspended the half-price pizza promotion for online orders.

Franchisees typically try to maximize profits, said Credit Suisse analyst Lauren Silberman. When commodity costs are as high as they have been over the past year, franchisees discount less to maintain profitability. Many chains increased their US margins during the pandemic, including McDonald’s and Yum Brand’s Taco Bell, she said.




 

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