Subway began phasing out its $5 sandwiches ten years ago, but other fast-food chains have since revived the $5 price tag in hopes of winning over customers who’ve in the reduction of on spending.

As many restaurant corporations prepare to release their second-quarter results, investors expect that diners will visit their establishments less continuously and that sales have been sluggish, with just a few exceptions reminiscent of ChipotleHoping to enhance their results for the following quarter, chains like MC DonaldsTaco Bell, Burger King and Wendy’s have introduced or revived menu offerings with a $5 price tag.

McDonald's reported a rise in customer traffic because of this, but Wall Street doesn’t expect the promotions to supply a serious boost to sales.

Fast food typically performs higher than the industry as a complete during times of economic recession. But price increases in recent times have led many consumers to conclude that fast food is solely not business anymore. More than 60% of respondents to a recent According to a survey by LendingTree They have in the reduction of on spending on fast food since it is just too expensive.

The skyrocketing prices on menus have scared away many fast-food customers, including those within the lower income bracket, who make up a significant slice of the sector’s customer base. Companies reminiscent of Brinker International Chili's has used its marketing to emphasise its own value relative to the price of a fast-food meal. Casual dining chains have taken market share from the fast-food sector, Restaurants Darden said CEO Rick Cardenas in June.

“It's a war for the less affluent customers,” says Robert Byrne, senior director of consumer research at Technomic, a restaurant research firm.

This change in consumer behavior has also spooked Wall Street. Shares of McDonald's, the parent company of Burger King Restaurant Brands International and Wendy's have all declined by double digits this yr. Taco Bell owner Yum Brands will fall by greater than 1% in 2024. The S&P 500 is now up 14%.

“Investors believe the second quarter will likely be one to forget – many large chains will likely miss consensus. [estimates],” KeyBanc analyst Eric Gonzalez told CNBC.

McDonald's is predicted to report its second-quarter results on Monday, while Wendy's is scheduled to report its results on Wednesday. Restaurant Brands and Yum Brands are expected to report their quarterly results the next week.

Generally, fast-food chains focus their discounts and low cost meals on the primary quarter, when consumers want to lower your expenses after the vacations and keep their New Year's resolutions. As temperatures rise, restaurant sales also increase, and operators don't often depend on special offers to draw customers.

But this summer all the things is different. Fast food chains need discounts to spice up customer traffic – and increase sales.

“The fact is that restaurants are running out of room to put higher prices on their menus,” Byrne said.

But Value Meals are usually not nearly increasing traffic.

“It's also about converting the consumer who comes for the offer into a higher-priced consumer by presenting them with other add-ons or other things they might be able to do,” Byrne said. “The risk is that they don't do it.”

If customers aren't persuaded so as to add a milkshake or other appetizer to their order, the discounts will eat into profits and turn out to be unsustainable in the long term. That's an enormous concern for investors who’re already skeptical that the chains won't see the client growth they've hoped for.

“The low-cost menus were introduced towards the end of the quarter. There is just a fear that it will not get better and it will be a race to the bottom,” Gonzalez said.

Subway's $5 footlong sandwich is a cautionary tale. Although the offering resonated with customers, it stayed with operators for too long, eating into their profits and exacerbating other brand problems, reminiscent of sales cannibalization as a result of its massive footprint. This led to restaurant closures, disgruntled operators and years of trying to find a brand new option to win back customers.

Not only investors are skeptical about these special offers, but franchisees also often resist price reductions because they reduce their profits.

Franchisees have also gained more power in recent times to withstand parent corporations' deal-making strategies. Many franchises at the moment are larger, have more restaurants and sometimes even private equity capital.

At McDonald's, franchisees joined together to form the National Owners Association in 2018, rebelling against the burger giant's unpopular discounts and plans to renovate its stores. Since then, the chain's operators have been increasingly resisting management's plans.

An initial proposal by McDonald's to supply a $5 menu was not accepted, so Coke Coca-Cola contributed marketing money to make the deal more attractive to operators. Coca-Cola CEO James Quincey said on Tuesday's earnings call that the beverage giant is seeing weaker take-out sales within the U.S. as quick-service restaurants struggle. To boost demand, Coca-Cola is working with foodservice clients to market food-and-drink combo meals, in response to Quincey.

McDonald's on Monday prolonged its discount meal offer beyond the unique four-week period. 93 percent of restaurants voted in favor of the extension, executives wrote in a memo to the U.S. system seen by CNBC.

The promotion is bringing customers back to restaurants, as executives and footfall data show. On June 25, the launch day of McDonald's $5 meal, there have been 8% more visits than any average Tuesday in 2024, in response to a report from Placer.ai. The pattern repeated itself in the times that followed, because the chain exceeded its annual average of every day visits. Placer.ai also found that discounts helped boost footfall at Buffalo Wild Wings, Starbucks and Chili's.

In his quarterly survey of greater than 20 McDonald's franchisees, analyst Mark Kalinowski of Kalinowski Equity Research asked respondents what percentage of their sales were increased by the $5 meal offer. The average answer was 1.3 percent.

“These responses may suggest that the $5 menu offer should be viewed as an initiative that may help dissuade some customers from going elsewhere, rather than as a means of increasing sales,” Kalinowski wrote in a research note on the survey results on Wednesday.

Looking for methods to cut back labor costs, restaurants are hoping that artificial intelligence can reduce the variety of drive-thru orders, but it can likely be years before the technology is widely available.

This yr, 16% of restaurant operators plan to take a position in artificial intelligence, including voice recognition, based on a survey by National Restaurant Association. Most of the high spending comes from large chains which have the capital and scale to leverage the technology for his or her business.

Even before the pandemic, labor costs for restaurants had been rising, prompting operators to depend on technology to extend their profit margins. Then got here Covid, which not only drove up labor costs but in addition led to a shift from dining rooms to drive-thru counters. California's decision earlier this yr to lift pay for fast-food staff to $20 an hour has only further prompted operators to depend on technology to cut back their labor costs, which until now has mostly helped automate behind-the-scenes tasks.

At the identical time, ChatGPT and other AI tools have created recent enthusiasm for generative AI within the hospitality industry, although the industry is usually slow to adopt technological advances.

A stumbling block for the emerging technology got here in June, when MC Donalds told its franchisees that it could end testing of Automated Order Taker, an AI technology for its drive-thru lanes, under a partnership with IBM. The fast-food giant, once a frontrunner within the voice ordering race, now plans to show to other vendors.

And then there's Presto Automationthe AI ​​drive-thru technology company, which disclosed in filings with the U.S. Securities and Exchange Commission last yr that it uses “human agents” in countries just like the Philippines and India to finish orders. Gee Lefevre, Presto's interim CEO, stresses that using humans is common within the AI ​​industry and helps train the technology without burdening the restaurant's workforce. The company unveiled a totally autonomous version in May. Still, the initial lack of transparency may deter some operators.

While some restaurants are currently skeptical about using AI within the drive-thru, acceptance could increase in the approaching months and years.

The tipping point for voice ordering is prone to be reached in 12 to 18 months, based on TD Cowen analyst Andrew Charles, who believes that by then at the least two of the country's 25 largest restaurant chains might be fully embracing the technology and expanding their small test runs to their entire catchment area.

“It's like third-party delivery a few years ago: everyone tested it, and then when McDonald's partnered with Uber, everyone else followed suit with their own partnerships,” Charles said.

This time, McDonald's will probably not be the primary provider to take this step.

Companies with voice ordering technology claim that their AI doesn’t replace jobs, but simply frees up employees for other tasks. They also tout fringe advantages.

Sound Houndan early leader within the space, said its AI can accept greater than 90% of orders without human intervention; the standard accuracy rate for humans is between 80% and 85%. SoundHound also said its AI can speed up drive-thru lanes by about 10% because it will possibly process orders faster. Additionally, the AI ​​tries to upsell customers with each order, increasing the common bill size.

In addition, AI could take orders from non-English speakers in the long run, which Charles says opens up great opportunities each internationally and domestically.

But despite all of the possible benefits, generative AI also has some disadvantages.

For one thing, restaurants risk damaging their reputations through the use of artificial intelligence, Bank of America Securities analyst Sara Senatore wrote in a research note Friday. For example, inaccurate orders can result in delays and frustration even when the AI ​​directs customers to a human restaurant worker.

While younger customers benefit from the increased efficiency and lack of human interaction, older age groups think in a different way. According to a study of the child boomer generation, nearly all of baby boomers would favor less technological options when eating out. Consumer survey from earlier this yr, conducted by the National Restaurant Association.

Additionally, the technology isn't perfect. Restaurants with weak Wi-Fi might want to speed up their web connections. In locations along noisy highways, voice ordering technology will likely take just a few years to catch up and higher understand customers. And restaurants with long, complicated menus will likely find that AI's problems are even greater.

For McDonald's, these risks should not value it – at the least not for now.

The fast-food giant's foray into AI for drive-thru restaurants began in 2019, when the corporate bought Apprente and renamed it McD Tech Labs. Two years later, McDonald's sold McD Tech Labs to IBM and announced a world partnership with the technology company on undisclosed terms. McDonald's had already been testing the technology at just a few locations within the Chicago area. Outsourcing the technology to IBM led to a large-scale test in around 100 restaurants.

But the outcomes of the test run fell wanting McDonald's standards. The technology had trouble interpreting different accents and dialects, which affected the accuracy of orders, amongst other things, based on two sources acquainted with the matter. told CNBC. McDonald's declined to comment on the time on the accuracy or challenges of the technology, and IBM didn’t reply to a request for comment on the tool's accuracy.

Despite the setback, McDonald's will not be giving up on its goal of using artificial intelligence to simply accept drive-thru orders.

“While there have been successes to date, we believe there is an opportunity to explore voice ordering solutions more broadly,” wrote Mason Smoot, senior vp and chief restaurant officer of McDonald's within the U.S., in a memo to franchisees.

The Golden Arches should not the one chain conducting a voice ordering test.

Yum Brands' Taco Bell is expanding its voice AI test from five locations to 30 restaurants in California “due to positive customer feedback,” executives said in early May. White Castle plans to make use of SoundHound's technology in greater than 100 of its restaurants by yr's end. And last yr Wendy’s announced a test in a company-owned restaurant in Columbus, Ohio, through a partnership with Google.

So far, the frontrunners have been primarily firms with lower average unit volumes, said TD Cowen's Charles. The industry metric refers to a sequence's average annual revenue per restaurant. Because these chains' locations have lower revenues, Charles said there’s a greater financial incentive to make use of AI to mitigate higher labor costs.

Panera Bread founder Ron Shaich told CNBC that the actual winners might be the “quick followers” ​​relatively than the primary to adopt voice ordering. Shaich, who’s currently chairman of Cava and CEO of his own investment firm, Act 3 Holdings, claims to have pioneered many technological advances within the restaurant industry: free Wi-Fi in Panera's restaurants, the mixture of the chain's mobile app and loyalty program, and the introduction of self-service kiosks.

In the case of phone ordering, nevertheless, Shaich says it's higher to attend until the technology matures and concentrate on ensuring the general customer experience can surpass that of the competition.

“Nobody runs into a restaurant because it has this technology,” he said.