It is how direct competition works between rivals when they try to take market share from one another. McDonald’s (NYSE: MCD) started offering $5 meals. Within a few days, the much smaller Burger King did the same as it launched its “Have It Your Way” meals.
The McDonald’s deal will start on June 25 and last a month. It caused friction with franchisees who did not want to bear the burden of lower margins. Some said McDonald’s should have supported the decision financially. The protest did not seem to go anywhere.
The two fast food chains offer a “complete meal.” That means a sandwich, drink, and fries. People do not need to order anything extra. It may be one attraction of the plans to consumers.
Why the price cuts? The core reason is that consumers think fast food prices have gotten too high. McDonald’s said as much when it announced mediocre earnings. At the time, CEO Chris Kempczinski commented, “Consumers continue to be even more discriminated against with every dollar that they spend as they face elevated prices in their day-to-day spending, which is putting pressure on the [quick-service restaurant] industry.”
Food prices are among the most damaging and enduring aspects of the inflation that started two years ago. The Federal Reserve of St. Louis reports that food prices have risen 50% since the start of the COVID-19 pandemic. Americans are looking for ways to save on fast food consumption and grocery purchases. Target (TGT), Walmart (NYSE: WMT), and Amazon (NASDAQ: AMZN) have recently cut grocery prices to attract or keep customers. Amazon has just cut grocery prices.
What happens next? Burger King and McDonald’s will need to decide whether the drop in margins attracts enough customers. If so, the $5 meal may stay around.
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