McDonald’s franchises nearly all of its restaurants in the United States, which means franchise operators have a significant say in operational changes. In some cases, for example, they can reject deal pricing.
Usually, when McDonald’s rolls out a promotion such as $2.99 Snack Wraps or $4 breakfast meals, only select franchise operators will not adopt the deal. Maybe franchisees operating in airports, rest stops, and other expensive real estate will pass on the deal, but most franchisees generally get on board.
That seemed to be what was happening with the chain’s new $3 Value Menu.
CFO Ian Borden noted during the chain’s first-quarter earnings call that franchisees overwhelmingly supported adding the promotion.
“With unanimous approval through the franchisee field votes, we launched the revamped McValue platform in mid-April. The new under $3 menu features well-known a la carte items available throughout the day,” he said.
“Unanimous” sounded encouraging, but in reality, something else happened that put customers in a challenging position.
McDonald’s franchisees passed on the $3 menu
As a retail and restaurant writer who has covered these industries for more than 30 years, I generally expect heavily promoted deals to actually be on the menu when I visit a chain. That has not always been the case for McDonald’s $3 Every Day Affordable Price (EDAP) menu.
CEO Christopher Kempczinski explained the menu during the Q2 earnings call.
“That is the EDAP menu. You could call that 10 items for under $3. That was sort of the last piece that we felt like we needed to get done in the U.S., and that was what McValue 2.0 was, as we referred to it. That’s what we introduced in April of this year,” he said.
The $3 menu “has not delivered against our expectation,” the CEO noted.
“Part of that was due to the fact that we’re getting really inconsistent execution. Only about, call it, 60% to 65% of our system is currently executing the recommended pricing architecture with the 10 items for under $3,” he added.
That’s a large number of McDonald’s restaurants not delivering on a promise the chain has made to its customers.
McDonald’s actually pulled other deals
While Kempczinski was careful to not blame franchise operators for the failure of the $3 menu, he did share that the chain had pulled other promotions to clear the way for its adoption.
“We compounded that unintentionally by our system pulling off a lot of digital offers. And digital offers for us is something that is core to kind of our loyalty program. It’s something that’s valued by our most loyal customers. And so that ended up being a bad trade,” he said.
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He blamed much of the company’s weak 0.8% Q2 U.S. same-store sales growth.
“Putting in an EDAP program that didn’t deliver and taking away a lot of digital offers and the Buy One, Add One program that was the point I referenced or Ian referenced in the call, which is 2/3 of our miss in the quarter was related to that bad trade,” he shared.
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McDonald’s needs buy-in from franchise operators
The chain’s franchise operators do not have to implement promotions created by corporate.
“McDonald’s prices vary by location. Ninety percent of McDonald’s restaurants are independently owned and operated by franchisees, who have the ability to set their own prices,” the company shared on its website.
That’s something the chain has to manage actively, according to RTM Nexus CEO Dominick Miserandino.
“McDonald’s corporate can spend millions on national ad campaigns promoting $5 meal deals, but the franchisee owns the register — and that’s where the strategy falls apart,” he told TheStreet.
Franchisees, however, don’t have to listen, and many have good reasons not to.
“Corporate can set a recommended price, but these operators are independent business owners fighting local wage spikes and rising food costs. When a franchisee looks at a low-margin national promo and realizes it eats into their bottom line, they simply opt out or jack up prices elsewhere on the menu to offset it,” he added.
Consumers, however, don’t always understand why the commercials they see don’t match the reality in their local McDonald’s.
“That creates a massive disconnect for consumers. You see a dollar deal on TV, drive up to the window, and get charged full price because the local owner refused to take the margin hit. McDonald’s biggest pricing battle isn’t with food inflation — it’s with its own franchisees protecting their unit economics,” Miserandino shared.
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