Fast-food franchise owners and squeezed customers test the limits of the value meal economy

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Fast-food restaurants are caving to consumers' inflation-weary wallets by returning value pricing to their menus — for a limited time. McDonald's is offering a $5 value menu this month. Wendy's is rolling out a $3 breakfast. Burger King is adding value deals that it says will be offered "for several months." There is a reason the value meals are only returning on a limited basis, says Shubhranshu Singh, associate professor of marketing at the Johns Hopkins Carey Business School, who has studied the economics of fast-food value meals. In a world where ownership also has been hit hard by inflation, it's at best an "at cost" offer, and at worst, a money loser. "That $5 meal is not an item that can be a permanent part of the menu; the cost has gone up so much that if franchisees are going to sell $5 value meals, they will lose money on every customer that buys them," Singh said. Indeed, while a national association of McDonald's franchisees cheered the news, it said corporate needs to invest more to make it a permanent part of the menu. At McDonald's, options include a McChicken or McDouble, four-piece chicken nuggets, fries, and a drink. Wendy's deal consists of a bacon or sausage, egg, Swiss cheese, and croissant sandwich, along with a small order of crispy seasoned potatoes (drink not included). Burger King is offering one of three sandwiches or nuggets, plus fries and a drink. What all the restaurants need is diners adding more to the orders. "They want customers to get the value meal and then buy more, the idea isn't that the consumer will buy a value meal and walk away," Singh said. "If consumers do that, selling that value meal will be such a bad idea." In major markets like California, where the minimum wage for fast-food workers is now $20 — and inflationary pressures on ingredients and packaging persist — the only hope restaurants have of turning a profit on a value meal is if a customer buys the meal and also adds an apple pie or other items that have higher margins. "How can they serve $5 value meals with that minimum wage and still make a profit? It's impossible any more unless consumers buy other things," Singh said. Scott Rodrick, who owns 18 McDonald's in Northern California, recently told CNBC it's been "quite a rollercoaster" since the new minimum wage went into effect on April 1. "The impact of this inflation on the customer is the most clear and present concern I have as a franchisee today," he said. "It has impacted margins." Margins are smaller for franchisees to begin with because of royalties that are paid monthly to corporate headquarters, often in the range of four to five percent. A 'break-even' menu proposition, with free sauce thrown into the bargain To Nick Snowberger, who owns 16 McDonald's restaurants in Montana and Wyoming, says focusing only on a particular menu price misses the point. "I focus on holistic value, the total experience: the hospitality, the speed, the accuracy, the cleanliness of the restaurant," said Snowberger, who noted that over 95% of McDonald's franchisee's voted in favor of the $5 bundle. The value meals are pretty much a break-even proposition when it comes to profit, Snowberger said, but it's good for the customer. "This is an opportunity to do business at a cost to our customers that is as competitive and incentivizing as we have had in a long time." He is trying to throw a lifeline to customers in other ways too, using the latitude and independence he has as a franchise owner. "We made a decision that we will no longer charge for extra sauces, we will give that to you free. If an order is wrong, we will make it right on us, and we will accept all coupons and accept competitors coupons," Snowberger said. These are his locally tailored decisions, along with supporting high school athletics, local fairs, and booster clubs. The price of doing business has "gone through the roof," he said, with everything from meat, lettuce, fuel, the labor, condiments and wages going up. But he added, "We are not upset about the value menu, but I don't speak for those that have higher cost pressures than I do." McDonald's corporate declined to comment on the impact of value meals on franchisees profits.