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The Latest Weapon in the Restaurant Wars: Free!

Source: McDonald's.

So, you don't want to go to McDonald's (NYSE: MCD  ) , Burger King (NYSE: BKW  ) , or Wendy's (NASDAQ: WEN  ) ? Given the reputations for these quick-service restaurants regarding unhealthy fast food, that's understandable. After all, consumers are more health-conscious now than at any point in human history. However, all three of these restaurants have recently launched their most powerful weapon available: free stuff!

If you're keen to standard business practices, then you might already know that free isn't a good way to drive sales. At least you might think you already know that free isn't a good way to drive sales.

The truth is, the consumer environment has changed. The three aforementioned companies are changing along with this trend, at least to a certain extent. Believe it or not, Burger King might have already proven that free works. McDonald's might have picked up on this, then decided to offer its own and more powerful version of free.  

Satisfrying the king
In October 2013, Burger King announced an unprecedented move, which was to give away free Satisfries for an entire weekend. The only restriction was one order per customer. Via marketing, Burger King suggested customers bring along family and friends.

This initiative might have led to improving comps numbers in the fourth quarter. For instance, first look at global comps results for 2013. Though comps improved 0.5% over 2012, this wasn't as impressive as 2012 over 2011: 3.2%. Additionally, comps in the U.S. and Canada declined 0.9% in 2013, considerably weaker than the 3% comps gain Burger King delivered for the U.S. and Canada in 2012.

On the other hand, if you only look at the fourth quarter, global comps jumped 1.7% on a year-over-year basis. And while a comps increase of 0.2% in the U.S. and Canada isn't overly impressive, it's still "north of the border." It's possible, if not likely, that Burger King's free promotion drove a lot of new customers to Burger King restaurants, who then enjoyed their dining experiences and opted to return later that month as well as in November and December. 

This is all positive news for Burger King, but it might have led to similar moves from its peers as well. For example, Wendy's is also offering its own version of free, but this is less publicized and not likely to have as much of an impact.

A flyer on the door
Yesterday, I noticed a flyer on my door from Wendy's. The flyer read: "A Grand Reopening with Great Savings! See what's new and celebrate the savings. Don't forget to try our flavorful Redhead Roasters coffee." This was followed by four coupons.

First coupon: Free Dave's Hot 'N Juicy Single Cheeseburger (with purchase of small or larger fries and drink)

Second coupon: Free Medium Iced Coffee (vanilla, caramel, mocha, or skinny vanilla) with any purchase

Third coupon: $1 Off any Full Size Salad

Fourth coupon: $1.99 any Wendy's Kids' Meal (limit 2)

As you will see below, McDonald's is currently running a free coffee campaign (without any strings attached). Therefore, if I'm going to try a new coffee, it will be at McDonald's, not Wendy's.

Whether the other promotions look enticing or not is up to you. If you feel they are, then it's likely other consumers will as well. If you don't feel these promotions are enticing, then it's likely others won't, either. Wendy's has done a good job rebranding itself, but Burger King and McDonald's are now upping their games with aggressive promotions, which have the potential to drive significant foot traffic to their restaurants and away from Wendy's. 

Nothing beats free
Now through April 13, McDonald's is giving away small cups of McCafe coffee. There are several reasons for this move. One reason is to steal customers from Burger King and Wendy's. That's the most obvious reason. A second reason is to fight off Taco Bell's waffle taco launch. While there might be a lot of hype about this launch, and while potential exists, McDonald's still has an enormous advantage. Not only does McDonald's own a 31% share of the breakfast category, making it the clear leader, but many consumers go to McDonald's for their morning coffee, which isn't the case for Taco Bell. The third reason for this initiative is to gain share from Starbucks and Dunkin' Donuts.

McDonald's might not be seeing the same kind of growth it did in the past because of the rise of the health-conscious consumer, but the caffeine-loving consumer hasn't gone anywhere. McDonald's is playing to this trend. Approximately 20% of McDonald's sales comes from breakfast. It wouldn't be surprising to see this percentage increase over the next several years. And promotions like limited-time free coffee are an excellent way to get the word out. It might not help margins in the near term, but it could lead to new customer retention and have a positive long-term impact.

The Foolish bottom line
McDonald's is dealing with competition from every angle, but it's heading in the right direction by committing more energy to its McCafe brand. Giving away free small coffees for a limited time should definitely increase foot traffic and will likely lead to new customer retention. If this promotion is effective, then McDonald's can leverage its massive brand strength and marketing power to implement similar promotions in the future, providing the company with an opportunity to steal share from all aforementioned rival brands.

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  • Report this Comment On April 05, 2014, at 7:21 PM, Disgustedman wrote:

    I made friends with a cashier at 7-11 and now I get my coffee for free anytime I buy some food item. I also use a thermos and get 3 cups of coffee (at 24 oz each) for $1.57 instead of the single 24 oz at $2.11

    I'll regret when they the store goes franchise. Then the owner will be a tightwad.

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Dan Moskowitz

Dan Moskowitz spends the majority of his time researching stocks. He believes that fundamentals, and logic pertaining to industry trends, win out over the long haul.

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