What’s News in Earnings: The Restaurant Watchword Is Affordability

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Laura Cooper (0:33)

Hey, listeners. It is Wednesday, August 5th. I'm Laura Cooper, a reporter covering beverages and tobacco for the Wall Street Journal. This is What's News in Earnings, our look into some of the biggest themes standing out this earnings season. This quarter's restaurant and food company earnings had one thing front and center, affordability. Americans are tightening their purse strings, and companies are trying to find ways to get them spending. For everything from value meals to fancy custom drinks.

We're going to be talking about McDonald's, which is bringing in a new US head to boost sluggish sales. There's also fallout from the cyclospora outbreak, and why these companies are experimenting with dirty soda and other high-margin drinks.

Here with me to dissect the recent earnings is Heather Haddon, who covers restaurants for The Journal. Thanks for being with us today, Heather.

Heather Haddon (1:29)

Hey, thanks so much.

Laura Cooper (1:31)

A lot of these companies are focusing on promotions, value deals, and doing smaller price increases. How's that working out for them?

Heather Haddon (1:39)

Yeah, I'd say it's a mixed bag. So the restaurant companies have been pumping out all these promotions since 2024, when people really started scaling back going out to eat. And McDonald's has been really front and center with this. And the guy who said, we got to do something about this was Joe Erlinger, the US president. And he's the one who steered the introduction of the $5 meal deal and a lot of other promotions. In the spring, they said, you know, we're going to add even more value to our menu. We're going to offer this under $3 menu.

And so the company on Tuesday actually said that menu didn't quite do what we thought it would do. So it seems that some franchisees weren't offering it just quite as intended and that they had scaled back on digital deals to be able to afford to offer that menu.

So it was a really interesting example of, yes, you can have deals and promotions, but it's got to be the right ones. You got to market it really well, otherwise it just might fall flat. And on Tuesday, Joe Erlinger said he's leaving the company after more than 20 years, and they're replacing him with Sky Anderson. And the company wants her to really focus on marketing and value and operations and just bring a new fresh face to the US business.

Laura Cooper (3:00)

Heather, another big issue that came up this summer was the tainted lettuce situation, something that you reported on extensively. How are companies addressing this and what has been the impact so far?

Heather Haddon (3:11)

So yeah, this has come up in a lot of earnings calls, even companies that haven't directly been impacted. So Chipotle, they don't have this lettuce in their supply chain, but still customers pulled back on their visits recently because people have just been freaked out about lettuce. Taco Bell and its owner, Yum Brands, said that in the US.,

the same store sales for Taco Bell fell 2% from mid-June through July 27th. And they have come up with a battle plan to respond. They've done these dollar product offerings that they're offering on Tuesdays to loyalty members like Dollar Mexican Pizza and Dollar and Churritos to try to get people back. It seems to be working, but that's expensive. When you discount food that much, you have to pay for it.

Laura Cooper (3:59)

Absolutely.

So on to one of my favorite topics, beverages. Beverages are high margin and obviously that's what I cover. It's close to my heart. All the companies out there are trying to concoct new ones. McDonald's recently had a bunch of dirty sodas come out that seem to be doing pretty well so far. Why are people willing to spend money on drinks when they're not willing to, perhaps, spend money on food? Why do restaurants love them?

Heather Haddon (4:25)

Yeah, I think it has to do with treat culture. So you buy a $5, $6, $7 drink, and maybe that feels like a little sweet indulgence for yourself as opposed to buying a $15 meal. You know, it's colorful, it looks good on Instagram. And especially for young people, I think there is this sense that in the afternoon, you can go get yourself a pick me up, you're not committing to a whole meal. So McDonald's really said that beverages was a bright spot for them in the US, that it helped increase sales. People often buy them and food, which they love because that means it's a bigger check.