Now, the chains are hyping discounts to lure diners back. Burger King debuted its $5 Your Way Meal earlier this month, which equates to a roughly 30% discount. McDonald

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’s rolled out a $5 value meal Tuesday. Wendy’s, already selling its Biggie Bag meal at that price, launched a $3 breakfast deal in May.

“The simple, nationally advertised, price-pointed value offer remains important,” says Morgan Stanley analyst Brian Harbour. “Customers are not always that sophisticated, and most don’t use the app in traditional fast food, meaning a headline national value offer has much broader reach.”

But those promotions could cut franchisee profits. The top line might get hurt as well, if the smaller check size cannot be offset by increasing traffic or if customers flock to the restaurants only for the promoted items. Already, some franchisees are voicing concerns.

“There simply isn’t enough profit to discount 30% for this model to be sustainable. It necessitates a financial contribution by McDonald’s,” wrote the National Owners Association, an advocacy group representing more than 1,000 local operators, in a letter to its members.

“What’s happening now in the burger category is a race to the bottom, with all these companies discounting to try to retain market share,” says BTIG analyst Peter Saleh. “This isn’t a profitable venture.”

Still, the companies are hoping that the loss-making deals could show the public that they are still unbeatable when it comes to cheap meals.

“If you look at the news stories about McDonald’s over the past several months, it’s all about how expensive it’s gotten,” Saleh says. “They wanted to change that narrative.”

Since last year, budget-strapped consumers have blasted out social media posts about unaffordable fast food. While some of the high prices are extreme cases—franchisees have the freedom to set their own prices—consumer perception toward fast food is changing.

According to a study from LendingTree, 78% of respondents said they now see eating fast food as a luxury and 65% were shocked by the price of their orders.

Last month, McDonald’s released a public letter calling the online information “inaccurate” and said its menu prices have increased an average of 40% over the past five years—largely matching the rise of input costs like food and salaries—instead of the over 100% some internet users claimed.

Still, a 40% price hike is hard for many to keep up with. According to a Treasury Department report, weekly earnings of lowest-paid Americans rose by 23% from 2019 to 2023. Although that’s the strongest growth among all income groups, fast food is getting cut from the budget as rising living expenses continue to squeeze consumers’ wallets.

A race of promotions would be an expensive way to win back consumers. But compared with its competitors, McDonald’s is in better financial shape to pull it off.

McDonald’s has over 13,000 locations in the U.S., about double the number of Burger King and Wendy’s

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. The stores are also busier than rivals. In 2023, an average McDonald’s in the U.S. generated roughly $4 million in sales, while Wendy’s and Burger King had an average of $2.1 million and $1.6 million per store, respectively.

McDonald’s U.S. sales are more than four times the size of the other two, and U.S. sales only make up 40% of the giant’s total. The company plans to open 10,000 more new restaurants in the coming years, including many in international markets. This could help buffer any weakness in the U.S.

McDonald’s is also more profitable than its rivals, especially as it continues to add franchised stores and collect royalty fees with very little additional costs. In the first quarter, operating margin before taxes and interest was 44%—15 percentage points higher than a decade ago—beating Burger King’s 30% and Wendy’s 15%.

All that means the company should have much more cash and resources to help its franchisees sail through the difficult times if the value war were to drag on. “The [consumer] response could be pronounced if McDonald’s markets this adequately and sticks with the strategy consistently,” wrote Harbour in a recent note.

Besides the $5 meal, McDonald’s is also offering free fries on Friday with a $1 minimum purchase through the end of 2024, and various local deals across the nation.

The value-focused initiatives, plus marketing and new product launches over the coming quarters, should help boost McDonald’s U.S. same-store sales by two percentage points, wrote UBS analyst Dennis Geiger in a note on Friday. He expects the company to launch a permanent value platform later this year.

“Despite recent U.S. sales pressures and concerns around value perceptions, we believe McDonald’s is positioned to improve its value offering and sales trajectory in the second half of 2024 and into 2025,” wrote the analyst.

Getting the franchisees on board won’t be easy. But if the company provides enough support and shares the financial risks, it shouldn’t be a major hurdle. “Franchisees care about their cash flow, but also care about traffic and comp momentum,” says Harbour. “We never believed they were content to sit on their hands.”

McDonald’s could use its size to leverage negotiation with suppliers. Coca-Cola

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, a longtime partner, has reportedly pitched in to the firm’s marketing funds to subsidize the costs of the $5 promotion. It won’t be surprising to see other input costs come down as well, and the savings passed onto the franchisees.

“McDonald’s remains well positioned to weather external pressures while investing in growth due to our unique size and scale,” the company told Barron’s. “This, combined with the strength of our core equities, an industry-leading loyalty base, and strong franchisee alignment allows us to do so at scale.”

Wendy’s and Burger King parent Restaurant Brands International

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didn’t respond to requests for comment.

The fast-food sector saw this plot a decade ago, when inflation at restaurants outpaced that for at-home food, leading to falling sales. Many chains rolled out value offers to attract customers. McDonald’s fared better that time around. From 2016 to 2018, its domestic stores posted 2.6% annual average comparable sales growth, beating Burger King’s 1.7% and Wendy’s 1.4%.

McDonald’s is in better shape today than six years ago, as it has rolled out new menu items, renovated its stores, and launched self-service kiosks, mobile apps, and technology that enables employees to deliver food directly to customers’ tables.

Instead of its direct competitors in the burger category, McDonald’s should watch out for other corners of the restaurant industry. During the last value war, it lost market share—albeit less than Burger King and Wendy’s—to non-burger rivals like Chick-fil-A, Taco Bell, Domino’s, and Chipotle Mexican Grill

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.

Still, the addressable market for fast food continues to expand—especially in the global markets—even as more competitors are bidding for a bigger share. Despite some softness this year, McDonald’s earnings are expected to grow 8% in both 2025 and 2026.

McDonald’s shares have declined 13% year to date, and now trade at 20 times forward earnings, the lowest level since 2018. Even if the cheap valuation continues, the stock should reach at least $287 based on 2026 earnings. That’s 12% higher than the current price.

Wall Street is more optimistic: Analysts polled by FactSet expect the stock to reach $311, on average, in the next 12 months, indicating a 21% gain. In the world of fast food, scale still matters.

Write to Evie Liu at evie.liu@barrons.com