$2 Is the New $1 on McDonald's Value Menu
Facing what it foresees will be a challenging holiday quarter, McDonald's is going national with the Dollar Menu & More menu that it has been testing in five markets. The rollout will officially kick off on Nov. 4, but may be available at an eatery near you before that.
McDonald's will make sure that you hear all about it. A national advertising campaign will kick off a week after its debut.
Bucking the Trend
The premise of Dollar Menu & More is simple. Instead of simple sandwiches, side salads, and dessert treats for a dollar, the new offerings will be slightly more robust and sell for $2. There will also be shareable items available for $5.
Franchisees are on board with the shift -- indeed, they'd been pushing for it, and it's easy to see why. The profit on a $1 McDouble sandwich is far less than what they can earn by merely adding bacon to the same burger and charging $2 for it. With labor and operating costs on the rise, the burger beast probably didn't have much of a choice.
%VIRTUAL-article-sponsoredlinks%Pricing flexibility is a big reason why rival Wendy's (WEN) moved away from a value menu where everything set patrons back just 99 cents. It now has more wiggle room under its "Right Price Right Size" signage. If poultry or beef prices shoot higher, it can adjust accordingly.
McDonald's now feels that it can offer different value items at dollar intervals. This would make it seem as if customers will wind up paying more when they head out to the Golden Arches next month, but there's more to offering bargains than meets the eye.
Too Much Gilding on the Golden Arches
McDonald's knows it has a problem. After nearly a decade of consistently rising same-restaurant sales, McDonald's has posted several negative months of unit-level activity since last October.
The company concluded that trying to move away from its low-price roots -- emphasizing premium-priced coffee beverages, chicken-topped salads, and artisan sandwiches -- was actually resulting in lower sales by keeping penny-pinchers away.
McDonald's put some more marketing muscle behind the Dollar Menu this year, and that's paid off with slightly positive store-level sales.
It's undeniable. A lot of folks pulling up to the drive-thru order screen are drawn to the Dollar Menu. McDonald's revealed on Monday that while Dollar Menu items make up just 13 percent to 15 percent of its total sales, a third of its customers do order at least one of the buck bargains.
The shift to Dollar Menu & More will be delicate. One of the test markets merely doubled the protein. The $1 Grilled Onion Cheddar Burger became a $2 offering with a second beef patty. But are customers that poor at math? Who wouldn't merely order two of the dollar sandwiches?
McDonald's also risks seeing customers who would normally order higher-priced combo meals cherry-picking items off the expanded Dollar Menu & More slate and spending less. The last thing that franchisees want to do is lose out on orders for soft drinks and fries: That's where their largest markups can be found.
Ronald McDonald may be grinning, but everyone knows that smile's painted on. A defining moment is coming, and McDonald's has to be feeling nervous.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. Try any of our newsletter services free for 30 days.