McDonald's Stock: Are Value Menu Items Really Valuable?

A newly released study looked at three trends affecting fast-food restaurants. In a previous article, I examined the effectiveness of advertising on new menu item sales. I'll address how health influences fast-food visitation in a future article. Today I'll look at trends in attracting cost-conscious consumers.

Study findings
Placed
surveyed visitors of McDonald's (NYSE: MCD  ) , Burger King Worlwide (NYSE: BKW  ) , and Wendy's (NASDAQ: WEN  ) about their purchasing behaviors toward value-menu offerings. With more than 77% of visitors to the Golden Arches ordering off the Dollar Menu in April, McDonald's proved to be the most successful of these three burger rivals at luring the value-conscious consumer.

Source: Wikimedia Commons.

By comparison, less than 60% of Wendy's patrons ordered from its recently rebranded Right Price Right Size menu, which includes a smattering of items ranging from about $1 to $2. Fifty-eight percent of Burger King visitors selected an offering from the BK Value Menu, which consists of iced coffee drinks and breakfast sandwiches.

After seeing same-store sales drop since early 2012, Mickey D's finally posted 2.6% same-store sales growth in May. Comps were up because of breakfast, and its Dollar Menu also fueled growth in the United States. While this is certainly a plus for McDonald's, it underlines a problem the company is squarely facing: not generating enough sales despite its focus on lower-priced menu items.

Focus on value: Tasty, or downright unsavory?
The drive toward the value-centric consumer has hurt McDonald's. With greater emphasis on this consumer through lower-priced offerings, the fast-food giant is sacrificing margins. Case in point: McDonald's saw profit margins shrink in 2012 and drop further in the first quarter of this year, and it observed weak earnings growth in the most recent quarter .

Wendy's has also beefed up its number of value offerings. Even though management acknowledges the value side of the business as challenging, Wendy's plans to ramp up promotions of its offerings aimed at the cost-conscious consumer. Because of increased dependence on these items, profit margins have gotten hammered at Wendy's, too, shriveling from about 2% in the first quarter of 2012 to a paltry 35 basis points in Q1 of this year. Wendy's saw company-operated restaurant same-store sales rise 1% and franchise same-store sales increase 0.6% in the most recent quarter. 

Even though the home of the Whopper saw same-store sales shrink 1.4% in the first quarter of this year, comparable sales growth in the U.S. was positive in March. The company credits the growth to its "balanced approach to premium and value-oriented offerings," such as its Whopper Jr. and "2 for $5" specials. 

Foolish takeaway
Clearly, gaining the value-centric consumers' wallet share is important to these big burger rivals. But is the winner really the loser here? Unless these companies can generate enough sales from lower-priced items, it's doing more harm than good.

McDonald's turned in a dismal year in 2012, underperforming the broader market by 25%. Looking ahead, can the Golden Arches reclaim its throne atop the restaurant industry, or will this unsettling trend continue? Our top analyst weighs in on the future of McDonald's 0in a recent premium report on the company. Click here now to find out whether a buying opportunity has emerged for this global juggernaut.


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