It's going to get a lot cheaper to get your drink on at McDonald's (MCD -0.05%). Bloomberg is reporting that the chain is gearing up for a springtime promotion where it slashes prices on some of its more popular beverages. Soft drinks of any size will sell for $1 come April. McCafe beverages -- including smoothies, frappes, and espresso drinks -- will set customers back just $2 for the length of the promotion.
Offering discounted beverages isn't new for McDonald's or its peers. It's the highest margin product that a chain can offer, giving it the most pricing flexibility. This is the kind of thing that can drive store traffic, something that Mickey D's needs these days to keep its turnaround on track. Offering $2 coffee-based beverages is also the kind of cutthroat pricing move that can sting Starbucks (SBUX 1.00%) and other barista barons that need to get away with charging twice as much (if not more) for similar offerings.
April's price war on beverages may help draw attention to the world's largest burger chain, but it can also backfire if McDonald's is not careful.
Image source: McDonald's.
McDonald's started to bounce back in late 2015, posting positive comps after two years of declines. Offering select breakfast items later in the day helped spark the renaissance, but keeping that momentum is harder now that its results are pitted against the prior year's results. Global comps may have risen a hearty 2.7% at McDonald's during the holiday quarter, but there was actually a 1.3% decline in stateside comps.
We naturally won't know how this plays out until this year's second quarter is tallied, but it's not likely to be pretty. Offering sodas for $1 and fancier coffee or fruit beverages for $2 may drive incremental sales, but it will also be gnawing away at the money that it would've made from customers that would've bought drinks anyway. The drink sale also throws the value of combo meals into question. It wouldn't be a surprise if McDoanld's runs through fewer fries in the second quarter as folks just order the burger or sandwich and add a drink instead of going the Value Meal route.
Shaving prices on its highest-margin offerings will also sting on the bottom line, but it won't necessarily be the bottom line at McDonald's. The move can be a bigger drag on earnings at Starbucks than at McDonald's, as more than 80% of the Mickey D's out there are franchisee-owned. McDonald's collects its royalties on sales, putting franchisees on the hook for the hit on margins.
Starbucks doesn't have that luxury, as it relies on company-owned stores to drive its results. If Starbucks sees espresso and Frappuccino customers flock to McDonald's -- or if it has to respond with a pricing promotion of its own -- it will feel the pain on both ends of its income statement.
McDonald's is starting a price war, and it's a battle that is unlikely to leave any winners outside of the customers scoring cheaper drinks. Cheaper prices and dissatisfied franchisees is rarely the right strategy.
