A Tale of Two Earnings Calls

Chili's & McDonalds Have Very Different Stories to Tell About 2024

Introduction: A Tale of Diverging Paths

The recent earnings reports for Chili’s and McDonald’s highlight the shifting dynamics in the restaurant industry. While Chili’s stunned the market with a remarkable 30% increase in comparable store sales to close out 2024, McDonald's reported negative traffic counts despite heavy media investment in its value offerings. These contrasting performances underscore a critical insight: “Value” is about more than just price.As consumers become more discerning about how they spend their food dollars, dining choices reflect a growing emphasis on experience quality, menu differentiation, and perceived value rather than affordability alone.

Price/Value Dynamics and Consumer Behavior

The restaurant industry is seeing a decline in total customer visits, with a consumer base that is more selective about how they spend their money – they are not necessarily responding to the biggest discount, but rather weighing the quality of the experience for the price paid. The price gap between Quick Service Restaurants (QSR), Fast Casual, and Casual Dining has narrowed, influencing customer choices. While overall restaurant visits are down, foot traffic trends vary by segment.

• QSR has lost 2.2% foot traffic share since 2023, while Casual Dining has increased by 1.5%.

• Fast Casual also ticked up in share, indicating its relative strength versus lower price QSR.

• The trend suggests that consumers, despite price pressures, are choosing higher-quality dining experiences over traditional QSRs.

Income Bracket Trends: Who is Cutting Back?

Since 2021, customer visits have been declining, led primarily by lower-income brackets. However, in 2024, visit-share for these brackets appears to have stabilized, though mid-to-higher-income consumers are reducing visits as well.

• Lower-income brackets (<$50k) are stabilizing after meaningful declines in ‘23.

• Middle and higher-income brackets are now showing reduced visits.

• Casual Dining’s increase suggests higher-income consumers are shifting away from QSR.

Price Compression and Consumer Trade-Ups

In the past several years, aggressive price increases have narrowed the gap between QSR and higher-tier dining segments, making trade-ups more feasible for consumers.

• The price gap between QSR and Fast Casual shrank from 63% to 44% in four years, encouraging consumers to trade up.

• Casual Dining remains more expensive but is also closing the gap, reinforcing its ability to attract more customers.

Chili’s Success Story

Chili’s has capitalized on a differentiated menu with signature items, avoiding generic offerings. This strategy, coupled with consistent service and quality, has cemented its relevance in a highly competitive market.

Chili’s maintains a consistently high satisfaction score, reinforcing the importance of experience quality in value perception.

McDonald's Challenges

Despite pushing discount-driven strategies, McDonald’s continues to struggle with traffic counts. A 2024 foodborne illness outbreak contributed to declines, but the downward trend began earlier.

• The focus on deals attracts bargain-seekers but fails to drive long-term loyalty.

• Meanwhile, Fast Casual is winning customers despite higher prices, suggesting consumers prioritize quality over deep discounts.

The Weight of Cumulative Price Increases

The industry measures itself on a year-over-year basis, as if the world resets at the end of each fiscal year and starts all over again. The consumer, on the other hand, has longer term memory. Often consumer resistance to price increases have less to do with a single price change that went poorly than the culmination of changes that distort the consumers’ value perception over time. Chili’s and McD’s have both grown their customers’ average spend significantly over the past 5 years, but McD’s has outpaced Chili’s by nearly 5pts. That alone is not necessarily negative, but McD’s is now in a position where consumers may be more willing to trade OUT to grocery or UP to Fast Casual & Casual Dining than they are to pay full price for a Big Mac.

Value Dining

The definition of value is evolving beyond just price points. As Chili’s growth demonstrates, a strong brand experience, menu differentiation, and service quality matter as much as affordability. McDonald's faces a tough road ahead, needing to either redefine its value proposition or risk further erosion from Fast Casual and Casual Dining.

The question remains: Will QSRs innovate beyond discounts, or will they continue losing ground to higher-tier dining segments? The answer may define the industry’s trajectory in the coming years.

The definition of value once again proves to be more than just price points. As Chili’s growth demonstrates, a strong brand experience, menu differentiation, and service quality matter as much as affordability. The momentum that Chili’s is showing is making it the envy of the industry.

McDonald's has clear challenges, needing to redefine its value proposition or risk losing further ground to Fast Casual and Casual Dining. However, we should never forget the power of McD’s marketing war chest. They have not gone as aggressively into discounting as we’ve seen in the past & if there is any brand that has the ability to change the paradigm of the QSR industry, it’s certainly McDonald's.

The question remains: Will QSRs be able to innovate beyond the discounting playbook? The answer may define the industry’s trajectory in the coming years.

The full version of this originally appeared in QSR Magazine.

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