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June 4, 2024
Can McDonald’s Solve Its Price Perception Problem?
In an open letter to “our U.S. fans,” Joe Erlinger, president of McDonald’s USA, said the fast-food chain remains “laser-focused on value and affordability” while refuting charges that its menu prices have skyrocketed over the inflationary period.
“Recently, we have seen viral social posts and poorly sourced reports that McDonald’s has raised prices significantly beyond inflationary rates,” Erlinger wrote. “This is inaccurate. And for a brand that proudly serves nearly 90% of the U.S. population every year, we feel a responsibility to make sure the real facts are available.”
He particularly took issue with a Twitter post from last July regarding a Big Mac meal priced at $18 that went viral and earned extensive media coverage.
Erlinger explained that franchises, which operate more than 95% of McDonald’s U.S. restaurants, set menu prices for their establishments, and the $18 Big Mac meal was offered at only one location in Connecticut out of more than 13,700 U.S. locations. He added, “More worrying, though, is when people believe that this is the rule and not the exception, or when folks start to suggest that the prices of a Big Mac have risen 100% since 2019.”
He said the average cost of a Big Mac in the U.S. is now $5.29 against $4.39 in 2019, an increase of 21%.
The “100%” references a study from FinanceBuzz that came out in April — and also met major media coverage — that found McDonald’s prices on a group of popular menu items had increased 100% on average since 2014, triple the inflation rate over the period. McDonald’s price hikes were found to be higher than all the other major chains in the QSR (quick service restaurant) space.
Erlinger said that overall menu price increases at McDonald’s reflect “historic rises in supply chain costs, wages and other inflationary pressures” and “remain well within the range of other quick service restaurants.” Franchises, he added, are working “hard to minimize the impact of price increases on our fans,” with many menu items having risen less than the rate of inflation and more than 90% of U.S. franchisees offering meal bundles for $4 or less.
A “Myths vs. Facts” chart presented at the bottom of the letter addresses other specific claims in media reports, including the pricing of particular menu items (the cost of a 10-piece nugget meal has increased 28%, not 95.5%, since 2019) and more general assertions (the average McDonald’s item has seen a price increase of 40% over the past five years, not double the national inflation rate).
Fast-food prices have increased by 4.8% over the last year and 47% since 2014, while general inflation has risen 24%, according to the Bureau of Labor Statistics.
The letter comes amid signs that at least some Americans are reducing their fast-food consumption because of rising costs.
A January poll by Revenue Management Solutions found that roughly a quarter of consumers who earn less than $50,000 a year were cutting back on fast food because of concerns about the price. An April LendingTree survey also found that nearly 80% of U.S. consumers now consider fast food a “luxury” because of rising prices.
McDonald’s in recent months has been promising to bring back investments in value meals, promotions, and freebies to revive traffic, and last week it announced a new $5 value meal. The offer features a bundle of four items: a McDouble or McChicken sandwich, small fries, a small soft drink, and a four-piece Chicken McNuggets for $5, starting June 25 for a limited time, as first reported by the Wall Street Journal.
Erlinger concluded in his statement, “I fully expect the prices at your local McDonald’s to be an area of conversation and focus in the coming months. As it does, I hope you’ll see the programs we’re launching nationally and locally as meaningful to you. At the same time, I hope it’s helpful to see some of the common myths that I’ve encountered, and the facts that go along with them.”
Burger King, Wendy’s, KFC, Taco Bell, and others in the fast-food space have been promoting value menus or deals for the first time largely since before the pandemic, causing some investor concerns that a price war will only reduce the QSR industry’s margins without significantly boosting traffic.
Referencing McDonald’s deal, Cowen analyst Andrew Charles wrote in a note, according to CNN, “We believe this represents a tipping point in the [quick service restaurant] industry’s intensified push on value that we worry will extend beyond the promotion’s scheduled run as competitors look to protect share.”
Discussion Questions
Is the return of value meals the best path for McDonald’s to win back inflation-weary customers?
Should McDonald’s and other fast-food chains be doing more to explain their price increases and dispel “myths” about their pricing actions?
What advice would you have about optimally employing discounts to revive traffic?
Poll
Loading …BrainTrust
Clay Parnell
President and Managing Partner
Bob Phibbs
President/CEO, The Retail Doctor
Dave Wendland
Vice President, Strategic RelationsHamacher Resource Group
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The issue for McDonald’s is that its prices have become high. What used to be a relatively cheap indulgence has become quite an expensive meal out, especially for a whole family. There has certainly been misinformation about pricing – including the level of increase, the ultra-high price of some items, and the reason for the price hikes – and it is reasonable for McDonald’s to try and explain these things via an open letter. But the bottom line is that customers don’t really care about the ‘why’, they just care about the fact they are paying a lot more. Some price promotions and investments in value means may help move the dial, but as many are being run for a limited time they won’t shift perceptions.
It helps, too, when your “explanation” is grounded in reality: “Fast-food prices have increased … 47% since 2014, while general inflation has risen 24% “, doesn’t sound like that’s the case.
It really just opens a whole can of worms. In the open letter McDonald’s said that the average price of a McDonald’s menu item has risen by 40% over the past five years. However, over the past 5 years average fast food inflation is 31.7% according to the BLS data. So, McDonald’s has gone up by more than the prevailing rate of inflation for the sector…
Precisely; and the sector itself has gone up more than the overall numbers. The sectors that need to tout their numbers are those that are below the average, whoever they are.
40% is exactly why I wonder if they’ve left food and supply costs on the table. In some cases these costs have gone back down along with inflation. And so is their supply chain not responsive too? Or are they, or McDonalds pocketing some margin?
This industry has gone crazy with pricing. McDonalds has been one of the worst, its franchisees are completely out of line and out of control on pricing. The same can be said for various other brands. In Sacramento and Fresno, CA there is a Wendys franchisee who charges $4.45-$4.55 for a large drink and $7.45-$7.65 for a single.
If you look at a value equation, the quality of the product has not matched the increased price of the product. Additionally, they have taken (or in the process of) away, free refills and play centers so it’s no longer a family option to go and eat at Mc Donald’s. They may have tried to temper the cost increases, but to the average consumer, it’s hard to explain away a double digit percent cost increase no matter if it’s 10% or 40%. I believe it will be difficult to change the direction with promotions, especially if they only last a few short weeks.
Great observation. Consumers can sense when the value equation for some fast food options are too high. If the family can find savings of another $10-$15 off what would be a $50 meal by getting dinner from a McDonalds competitor, they’ll do it. It’s not like the food quality can justify the higher cost.
Something doesn’t add up here…literally! While many of the headlines seem like garbage “reporting” – and I don’t think much attention should be paid them, the “widely shared” claim notwithstanding – if consumers have truly cut back, it seems unlikely there’s some kind of mass deception going on. Will lower prices bring people back? Perhaps…if they’re permanent. But profits, not sales, are what count the most, and I didn’t (even) see that word mentioned.
Good point. No matter what industry, profits are hitting record levels. Historically companies use inflation as cover for keeping margins and increasing profit. I wonder how much of the inflation rate is margin.
Consumers know that food companies are raising prices because they can, not because they have to. Customers are pushing back against $7 boxes of cereal, pricey coffeeshop coffee and $5.29 fast food sandwiches. The collective consumer voice is the only defense we have against providers making record profits.
Let’s start by agreeing that the “open letter” concept wasn’t the best idea, and certainly wasn’t executed well. And if 95% of restaurants are franchises that are able to set their own prices, then how does McDonald’s try to control their price perception, much less their overall marketing message? As with other restaurants and retailers, the price equation is tied to both the assortment and the experience. The merchandise may not have changed much, but the experience is not what it used to be.
Clay, good point on the franchisees controlling the pricing. Beyond the increased prices, the inconsistency in prices can be frustrating for customers when one location charges noticeably different prices than a location a couple miles away. McDonald’s has built its brand on consistent product quality and that consistency doesn’t include pricing. Some of the price increases in certain locations has been driven by minimum wage hikes, but it certainly feels like some franchisees are just trying to maximize profits. I say yes, to bringing back value meals, as it gives customers an inexpensive option.
David, agree with you that a core of the McDonald’s promise is consistency. Pricing is just one area where this consistency promise is not being fulfilled. As noted in other comments, differences seem to have increased among McDonald’s units across a variety of areas. This covers service level, hours, product quality and guest experience. McDonald’s doesn’t seem like a franchise. More a collection of business owners doing what they need to do to survive in their market. Not a terrific customer proposition.
Returning to value meals is a strategic move for McDonald’s. It helps attract budget-conscious customers by offering affordable options, enhances perceived value, and fosters customer loyalty during tough economic times. This strategy also differentiates McDonald’s from competitors amidst rising fast-food prices.
McDonald’s and other fast-food chains should actively explain price increases and dispel myths to maintain customer trust, transparency, and loyalty, ensuring consumers understand the reasons behind higher prices and feel reassured about the brand’s commitment to value.
To revive traffic with discounts, it’s crucial to strategically target offers, use limited-time promotions, bundle deals, promote across various channels, monitor performance, maintain profit margins, and uphold the customer experience. Adjusting strategies based on customer response will optimize effectiveness.
Really? “McDonald’s and other fast-food chains should actively explain price increases…” Should they tell them that we add our normal margin or more on the increases we experience? Should they tell them that their costs increased 25 cents so, they are increasing prices forty-five cents to hit specific price points?
Explaining price increases and dispelling myths wouldn’t need to include actual food supply costs or GP% margins. It just needs to convey –
“We know times are hard on the family food budget, so we’re taking steps to make sure you continue to enjoy the McDonalds value you’ve always known –
McDonald’s is known for its value, which comes in the form of price and experience. The $18 Big Mac is a one-off, but those are the types of things that can make a social media post go viral. As a franchise organization, it is usually required to stay within guidelines in many areas, including price. Value is what has made McDonald’s successful, and changing that is a difficult and long-term project that may not turn out the way the company’s leadership hopes it will. Some brands may “lose their way.” Recently there have been articles (in RetailWire) about another major brand, Starbucks, that seems to have strayed from what “brought them to the dance.”
I’d like to know how many $18 Big Macs were actually sold, and to whom!
THIS would be very interesting to know.
People who are shallow-minded are blaming fast-food restaurants for the pricing problem. It would be better if I didn’t get political, but politics plays a major role in McDonald’s pricing problems.
Over the past three years, Bidenomics has increased the cost of everything by an average of 20%. Most consumers don’t realize that McDonalds pays at least 20% more for all of its food, materials, logistics, transportation, etc.
The consumer also sets aside the fact that activists demanded expensive benefits and salary increases that do not make sense with fast food business models, therefore causing consumers to pay more.
It doesn’t help when the president of the United States and members of his party give speeches about how fast-food restaurants and retailers are greedy. I think it adds to the erroneous public “perception.”
Despite hyped up discounts and promotions, the fast food inflation issue will not be easily solved. Those types of solutions are like band-aids, but they won’t fix the underlying problems.
Employees will eventually be replaced by robots, and fast food will find other ways to cut corners. The bottom line is to be careful what you vote for and what you ask for. Be prepared for the consequences, but don’t complain about them when they come. Db
You are right that the political environment since 2020 had caused a significant chunk of these price hikes. And at some point regardless of cause the value equation starts to fail for the consumer. That is what has happened here.
They pushed it when the Big Mac escalated from say 3.79 up to 4.19. They pushed it further to 4.99 and people kept paying. Somehow the later increasea to 5.29 5.49 5.99 6.19 and 6.39 and now the customers have had enough. They overplayed their hand.
Even corporate operated McDonalds units have gone way up on prices especially in Southern California. Those used to be noticeably cheaper than franchise units. Not so much now.
Hmmm…supply and demand. Free market and a booming economy and Bidenomics (whatever that is) is a factor? If the product is over priced consumers will not buy it. This applies to ANY product, especially in a highly competitive sector with many choices for the consumer. Operating expense in the form of salary and higher wages is a factor since overhead increases, but if you studied a McDonald’s or any other fast food chain you would clearly see LESS employees at the front of house as well as back of house. No one is better at operational efficiency in the fast food sector than McDonald’s. Don’t blame politicians on either side of the aisle for factors that a open market operates under.
One party demonizes those who pick the potatoes and lettuce and butcher the cattle and chickens, and essentially shut down legal migration, leading to massive farm labor shortages and crops rotting in the fields, causing massive food price inflation. One party refused to invest in logistics and worker training, leading to massive port backups and long-forecasted shortages in conductors and truck drivers, creating material shortages and higher transportation costs. One party refused to follow common-sense science to protect people and animals, killing a million Americans as well as letting poultry disease run rampant (but advocated to use animal dewormers in humans, leading to shortages for legitimate farm use). There are many more examples about elections having consequences – so yes, be careful about what you vote for.
I agree with Cowen analyst that we are at a tipping point for QSR. Price-weary consumers in an inflationary economy does tend to sound the price/value alarms from a merchant perspective. Most QSR are touting value today. And so, McDonald’s will join the pact.
The problem is, after the promotions end, we will still be in an inflationary economy. And, consumers will go right back to protecting their price-weary wallets. In other words, these value (or price-driven) promotions are not likely to produce any long-term or sustainable gains. What they may provoke however, is chains competing with each other for the lowest priced meal instead of the most valuable customers.
There are no easy answers, silver bullets or quick wins. McDonald’s and QSR are sourced from discretionary income which is generally the first thing to go when consumers start tightening the belt.
However, one thing McDonald’s has to their benefit is equity in experience and nostalgia. The emotional connections McDonald’s can make with both existing and new customers is an advantage over their competitors.
The last four years have been hard for everyone. Seems like a good time to remind hard-working consumers, who are looking for a little light at the end of a long day that “You Deserve a Break Today.” Appealing to emotion during these uncertain times just might be more sustainable than price.
The emotional appeal is always a great one. It even makes them more relatable. All McDonalds has to say is that they’re in the fight to find you value and promise to give it… starting with x, y, z.
Yes they have a big price problem. Their prices are outrageous. $6+ Big Mac and close to $4 Medium Fries in my area. Drink is still $1.49 but no more free refills (crude signs posted in the locations). They’ve deactivated menu boards inside and direct you to the kiosk to see the menu. They don’t post dining room hours and close inside whenever they feel like it. They’re run horribly thanks to franchisees who want to skimp on labor but charge premium prices. Their locations are dead. Chickfila, Raising Canes, and In N Out are all creating traffic jams.
Smaller portions, higher prices. Sucks to be on the wrong end of the spin machine, huh?
This is a really interesting stance. In the UK McDonald’s recently announced their products were going to increase in size to deal with flagging sales. (https://www.telegraph.co.uk/business/2024/05/01/mcdonalds-plots-bigger-burgers-quarter-pounder/)
Making products bigger is easy – making them more healthy is difficult.
You see a lot of ‘chatter’ about the impact of ultra-processed food (UPF) – a potential medical timebomb. McDonald’s may be better served by focusing their efforts reducing the use of these.
It may well be that the UPF debate is a publicity timebomb that could explode in the face of food manufacturers and food outlets. Reducing UPFs could be a very smart mitigation for at least one of them – McDonalds may not have chosen the winning formula.
Everything is more expensive. You have a pandemic; half the people in retail/hospitality/food service quit, flood the economy with money, and inflation happens. This isn’t a political situation, though a few commenters here had to try to make it so.
This idea people are raising prices because “they can” belies the point everything is more expensive. With all the noise about “consumers are cutting back” the reality is they are spending more and more. All the price cuts are PR. Customers are still buying convenience – and they’ll pay for that privilege.
Exactly!
Spot on Bob!
What he said
In the mid 70s and early 80s. Therefore today’s inflation experience doesn’t bother me much. From 1973 to 1982, the inflation rate never dropped below 6%. For four of those years it was in double digits. In 1980 alone, it was 13.5%, bracketed by 11% and 10%.
I was raising a young family and trying to buy a home. Mortgage rates were well into the low double digits. So I am a bit numb to todays’ inflation experience. To me, it is a bump in the road. The recent one year high in inflation was experienced for ten straight years as I noted. In fact, I am impressed how quickly it came under control.
The historical average inflation rate in the U.S. is 3.3%. In the 12 months ending in April it is 3.4%. The cause is simple and classic. Record government spending related to the pandemic. Supply chain cost increases related to the pandemic. Record corporate profits under the cover of inflation. Now, costs have moderated for months. The May CPI was 0.08%.
McDonald’s has full control over the supply chain. Franchisees do indeed have the latitude to vary prices so that when you get a Big Mac at the Ohare Chicago International Terminal you get sticker shock on the cost vs. a suburban location in the same city. McD’s is their worst enemy when it comes to promotions. Highlight breakfast sandwiches but leave the egg out of the recipe. It is a ploy to get you to pull in and then realize a muffin with sausage is not the deal nor protein you had in mind. The mobile only strategy to provide “savings” via the app also hurts their price:value equation but it does support their efforts to achieve customer engagement, tracking, push notifications and with advance ordering cut down on time/action at the register. Profit per location is impacted by labor costs and over time the average customer will be placing their order at a kiosk to then wait for it at the side counter. Finally, highlighting value meals that pile on the fat, salt and calories is not a healthy choice but it does satisfy higher average order value. And in honor of Morgan Spurlock no Super Size me here ;-).
McDonalds with $5+ items is like Starbucks with $1.00 coffee…price is a key part of the brand. So yes, they need to be as transparent about pricing as possible, and do everything they can to negotiate with their suppliers to keep prices as low as possible. In this sense they might look to firms like WalMart for “pointers” on price control.
Past that–assuming everyone has to raise prices, then as long as McDonalds stays low vis a vis everyone else, well, that would be another path. I worry about “perception being reality” here, and with that being the issue they need to defend their price increases with information.
Methinks McDonald’s doth protest too much! It doesn’t matter what the reality is — including increases in the cost of labor, not just ingredients — as long as McDonald’s and its fast food rivals are dealing with a strong perception that their food is expensive. McDonald’s has been less aggressive than its competitors at pushing value bundles and opening-price menu items, and that needs to change.
This conversation needs to include a profile of profit and market share dynamics to help make sense out of everything. There is a big difference between price gouging that generates profits and price increases that are simply trying to stay abreast of raw material and supply chain issues. Turns out that people on the run have to eat. And fast food expenditures might not be as price elastic as pure pricing would dictate. So absolutely people are crying foul. A meal on the run used to be easy, and now it’s pause for thought. Would love to see a deeper dive on pricing, market share, and profits. And surely Placer.ai has data that would provide deep insights into the competitive dynamics here.
All I know is that a decade ago, 2 burgers, 1 small order of fires, and 2 sodas at Five Guys was about $16-$18. Then it was $22-$23. Now it’s about $28. Frightening.
I took my 2 stepsons out for lunch at Five Guys a few months ago. It was almost $75! For lunch. I’m aghast. Granted they are teenage boys, but $25/person?
Try taking two teenage grandsons anywhere to eat.
Your headline posed a simple question, Tom, “Can McDonald’s Solve Its Price Perception Problem?” My answer is a resounding not easily. When perception becomes reality (quality of food is not outstanding, value of meals is less competitive, and money out of my wallet is increasing), recovery is a very steep slope. In the Open Letter Mr. Erlinger strives to justify the means. Bottom line, McDonald’s has lots of work to do to regain public trust and favor.
Over decades of its existence, McDonalds has been about providing fast food at a good value. Rarely have they consistently been about the lowest priced food, even during long stretches of promotional efforts. Nor have they been about higher quality food even while testing higher priced limited-time sandwiches, greater food portions or better flavors beyond the main menu.
McDonalds is not alone in menu price increases across the nation. We’re all paying much more for dining in or food to go. Yet, if anyone should be leading with deals and promotions right now, it’s McDonalds. They’ve been dominant in tv ad spend over the years, and social media is inexpensive. Time to light a fire and go.
Another question is can they dig deep into the food supply chain to find any cost opportunities which rose from inflation but have yet to come back down?
It’s completely outrageous that a small mocha frappe and a small caramel sundae is $6.80!!! McDonald’s, get real!!! Your profits have to be through the roof!!
I travel a lot for work – most McDonald’s locations I pass are empty or only have 2 or 3 cars in the lot. Driving to Chicago this week, I passed a McDonald’s in Northern Indiana at 5:00 PM – the place looked closed – two cars in the lot – zero in the drive-thru.