Robinson’s Take: The Franchise Challenge of the Fast-Food Price Wars

As consumers continue to face rising prices and economic uncertainty, many are bargain shopping and recent economic news points to an increasingly price-conscious consumer. That is being seen prevalently in the fast-food restaurant industry where many consumers are complaining of increased prices at restaurants like McDonald’s. Against that backdrop, McDonald’s, KFC, Subway, and other brands are turning to discount strategies like five-dollar meal deals and smaller, more affordable product packs to draw customers back to their doors.

“Consumers are tapped out right now and are looking for value in the marketplace, but increasing prices are not as simple as corporations being greedy when the business model for these fast-food chains are franchise-based,” said Benjamin Lawrence, the Aziz Hashim Professor of Franchise Entrepreneurship at Georgia State University’s Robinson College of Business.

Franchising is a distribution strategy that permeates every industry segment but is particularly dominant in limited-service restaurants. A franchise is a contractual agreement between a corporate brand (the franchisor) and an independent business owner (the franchisee) that allows the franchisee to use the franchisor’s business model, branding, and other intellectual property. In exchange, the franchisee pays the franchisor an upfront fee and ongoing royalties.

“The franchisee is caught in the middle of these price wars, and what many don’t understand is that they operate as a small business and they are struggling too,” said Lawrence.

Franchisors are focused on top line systemwide sales while franchisees really care about profitability at their local outlet. Franchisees are usually in control of pricing because they must manage unit level profitability. On the other hand. the franchisor makes money no matter what the prices are because they charge a royalty payment on total sales. Franchisees absorb all the operating costs and bear the brunt of costs when McDonald’s announces promotions like five-dollar meal deals.

“It’s hard in a franchise system to reduce prices once they have increased because food and labor costs have gone up with inflation and costs also vary depending on the market,” said Lawrence.

For instance, a McDonald’s in New York City faces much higher operating costs than one in rural Alabama, so their prices will be different. A one-size-fits-all pricing strategy doesn’t work. In some cases, franchisees push back against corporate-imposed promotions, like five-dollar meal deals, through independent franchisee associations, allowing them to collectively bargain for terms that better align with their financial interests.

Another layer of complexity arises with technological advancements like kiosks and automation, which are being introduced to improve efficiency and reduce labor costs. However, these investments come at a significant upfront cost, often borne by the franchisees. “Kiosks and similar technology investments are costly, and while they may offset some labor expenses, many franchisees are resistant to these investments because they have to pay for them,” Lawrence said, adding, “Franchisees need to communicate that they are local businesses, independently operated, and facing rising costs just like their customers.”

Franchisors must strike a delicate balance between providing consumers with value while also maintaining a franchisee’s profit margin. An effective way to do so is often five-dollar meal deals, and bundling where items like burgers, fries, and soda are bundled and discounted. This approach appeals to price-sensitive customers and helps franchisees maintain profitability by focusing on items with lower production costs.

“In general, $5 promotions are pretty effective, especially when consumers look for value during lunch hours. And soda is a low-cost item, so bundling it with a meal can create a perception of value,” said Lawrence. “Psychological price points resonate with consumers, and five dollars seems to be one of them.”

Success in the current economic environment requires a careful balance as discount-based pricing strategies meet head-on with the bottom line. “Franchisees and franchisors need to think creatively about menu choices and promotions,” Lawrence suggests. “Focusing on items with lower cost structures, upselling desserts, and strategically bundling products can help maintain the perception of value while ensuring long-term viability for franchisees.”