Taco Bell Goes After McDonald's (Again) with a Dollar Menu

Florida Miami Homestead Taco Bell fast food restaurant Mexican food outside exterior front entrance
Jeff Greenberg/Alamy

Taco Bell is gearing up for a price war. The country's largest Mexican food restaurant chain is rolling out a Dollar Cravings menu this week with 11 items all priced at a buck. The additions include mini chicken or beef quesadillas and a spicy potato soft taco.

Taco Bell parent company Yum Brands (YUM) knows that a lot of its core customers are cash-strapped Americans looking for a lot of food for a little dough. Many items on the new menu -- including cinnamon twists and cheese roll-ups -- were part of its even cheaper Why Pay More! lineup.

If Taco Bell setting up camp around the $1 price point sounds familiar, it's because the world's largest burger chain suffered by moving away from it. Once again, Taco Bell is trying to take a page out of the McDonald's (MCD) playbook.

The Buck Started Here

McDonald's rolled out the Dollar Menu in late 2002, stocking it with scaled-back burgers and sandwiches as well as sides and treats, including yogurt parfaits and cookies. It was a hit, and it's probably not a coincidence that McDonald's began a 10-year streak of positive same-store sales shortly thereafter.

%VIRTUAL-WSSCourseInline-1049%It's probably also not a coincidence that McDonald's comps began to suffer last year when it became a Dollar Menu & More featuring other value items priced at more than a buck. The deals were still there, but the perception of McDonald's as a dollar store for rumbling bellies took a hit.

The battlefront for both niche leaders comes down to value. Taco Bell and McDonald's aren't winning over diners based on the quality of their food. Taco Bell is never going to be Chipotle Mexican Grill (CMG). McDonald's is never going to be Five Guys or In-N-Out. A recent Consumer Reports poll asked more than 32,000 readers to evaluate the taste of the signature items of the leading fast food chains. McDonald's and Taco Bell ranked dead last in the burger and burrito categories, respectively.

But when it comes to price, with McDonald's coming off of three straight quarters of negative comparable-store sales growth, and Taco Bell checking in with positive comps in nine of the past ten quarters, it's clear which one consumers are siding with.

Food Fight

The Dollar Cravings menu isn't the first time that Taco Bell has gone head-to-head with McDonald's this year. Back in March, Taco Bell took its breakfast menu nationwide. This is a fast-food category that McDonald's has dominated with its breakfast sandwiches and coffee. In a bold marketing move in April, Taco Bell hired folks around the country named Ronald McDonald to endorse Taco Bell's new breakfast line.

Now Taco Bell is taking aim at the $1 price point. McDonald's may well regret straying from that territory last year in a push to market fancier sandwiches and big $5 boxes of McNuggets.

A dollar still goes a long way in the fast-food industry. We'll have to see if McDonald's decides to fight back before Taco Bell wheels out a McRib-stuffed burrito or a McGriddle-like breakfast treat.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill. Try any Motley Fool newsletter service free for 30 days.