Restaurant CEOs focus on value as they try to win back customers

Restaurant CEOs have been fixated on the word “value” as they explain to investors why their sales fell this quarter while sharing plans to revive traffic in the coming months.

In McDonald's On a quarterly conference call last month, executives said the word “value” nearly 80 times, underscoring the fast-food giant's top priority.

And McDonald's is not alone. Other restaurant business leaders, from the owner of Taco Bell Yum Brands To the pizza chain Papa John's They also used the word dozens of times in their recent conference calls.

“The word 'value' has gotten a lot of attention in recent months,” said Josh Kobza, chief executive of Burger King's parent company. International restaurant brandshe said on Thursday.

There’s a reason for that emphasis. Prices for eating out have risen 27.2% since June 2019, according to the Bureau of Labor Statistics. In response, restaurant traffic has declined and sales are lagging as consumers spend less money on eating out, no longer convinced it’s a good deal.

Many chains hope to win back customers through discounts and promotions, such as the $5 meal deals found at McDonald's, Burger King and Taco Bell.

“In the current economic cycle, consumers have become more deliberate in managing their overall ticket and are showing preference for brands that offer attractive value,” Papa John's Chief Financial Officer Ravi Thanawala said on the company's conference call Thursday.

Many restaurant executives acknowledged that their chains were not meeting their expectations.

For example, McDonald's CEO Chris Kempczinski said his company's reputation for value has been tarnished recently. In the second quarter, the burger giant reported that its U.S. same-store sales declined 0.7% year over year.

“There were also factors within our control that contributed to our underperformance, particularly our value execution,” Kempczinski said on the company's July 29 conference call. “For 70 years, McDonald's has defined value in our industry, and we are taking significant steps around the world to affirm our leadership.”

McDonald's $5 Meal Deal promotion launched just days before the end of the second quarter, but the value-priced meal offering had attracted lower-income consumers and exceeded expectations, executives said. The chain is extending the promotion through August in most markets and is working with franchisees on a longer-term discounting strategy.

Meanwhile, unlike McDonald's and many other restaurants, Chipotle Mexican Grill reported strong same-store sales growth and increased traffic in its latest quarter. But the burrito chain remains focused on price as it has faced backlash from some customers who allege the company has been cutting portion sizes.

While CEO Brian Niccol denied there was a corporate plan to make burrito bowls smaller, he did say the chain will once again emphasize generous portions to its workers. After all, those sizable portions have helped Chipotle earn its reputation for good value.

“The good news is that we are already starting to see our actions reflected positively in our consumer scores and our value proposition remains very strong,” Niccol said on the company's July 24 call.

It's not just fast food executives who are focused on value.

Dine Brandsowner of Applebee's and IHOP, is also seeing lower-income consumers cut back on spending, CEO John Peyton told CNBC.

Customers who make less than $75,000 a year aren't visiting Dine's restaurants as often as they used to, and if they do, they're sticking to the value menu. Both Applebee's and IHOP reported surprising declines in same-store sales this quarter.

“It will certainly be a tough second half of the year and it will be a fight for market share for our increasingly value-conscious customers,” Peyton said.

Companies are not only thinking about delivering value to customers, but also about shareholder value. Restaurant stocks have been under pressure this year as investors are increasingly concerned about the health of the industry. Shares of McDonald's and Restaurant Brands are down 10% so far this year, while StarbucksShares of ' fell 21%. S&P 500 Index has increased by 11% during that period.

Concerns about the financial health of chains are not limited to top line revenue. They also concern profits, particularly as companies turn to discounting. While cheap deals may attract customers, they can hurt restaurant profitability, which eats into profits and hurts franchisees' financial health.

And so-called value wars — where chains try to outbid each other — only intensify those concerns, as investors fear a race to the bottom.

While this concern has yet to bear fruit, it is still very early days. For now, it seems that talk of value and discounts is attracting some customers.

For example, Burger King was one of the first chains to introduce a $5 meal this summer. Its U.S. comparable-store sales were virtually flat during the quarter, but executives said the offering is attracting customers. Burger King now plans to offer it through October.

When rivals followed suit with their own $5 off offers, Restaurant Brands saw no clear impact on its business.

“There are actually some positive aspects to the industry-wide focus on value,” Restaurant Brands' Kobza told CNBC. “I think it has the ability to improve the perception of value for money in the category among our customers as more people talk about the incredible value our industry offers. I think that really helps everyone.”