Fast food giant McDonald's (NYSE:MCD) has a problem on its hands, especially in the United States. As Americans increasingly opt for healthier dining options, customer traffic has declined for McDonald's. It's still doing well abroad, particularly in the emerging markets, but domestically McDonald's is really struggling.
This is an industrywide problem that doesn't just affect McDonald's. After a robust turnaround, even smaller competitor Wendy's (NASDAQ:WEN) is seeing its own momentum slow down considerably.
In response, both companies are shaking up their menu offerings to try to reenergize their customers. Wendy's is seeing strong results from its 'Right Price Right Size' menu, which provides customers a choice of many varying offerings at different price points.
McDonald's is following suit with its own new offerings. Recently, McDonald's unveiled the Dinner Box promotion. One example, the Family Value Dinner Box, includes two Big Macs, two cheeseburgers, four small fries, and 10 Chicken McNuggets for $9.99. Customers can purchase another box that includes drinks, which costs more.
Here's what McDonald's is hoping to accomplish with the promotion, which might not be what you expect.
It could be all about traffic
If selling such large amounts of food for less than $10 per box doesn't sound like a profit-making venture, you may be onto something. Indeed, the Dinner Boxes cost much less than each item sold separately. But profiting from the Dinner Box promotion may not actually be the goal for McDonald's. Instead, McDonald's may simply want the promotion to get people in the door, and it may be willing to take a tiny profit (or perhaps even a loss) if it means higher traffic.
McDonald's real problem over the past year hasn't been that customers are ordering less often, it's that they aren't showing up at all. For a variety of reasons, including a more health-conscious consumer in the United States, McDonald's is experiencing a customer exodus. Its remaining customers are still spending, which means average check size isn't the problem.
For instance, consider that McDonald's comparable-restaurant sales, a measure of sales at locations open for at least one year, fell 1.7% in the first quarter. At the same time, management stated that the company's global comparable sales benefited from a higher average check. In the United States, management noted that one of the biggest factors weighing on its results was falling guest traffic.
Close rival Wendy's is seeing many of the same conditions affecting its own results. After an impressive turnaround, Wendy's growth has slowed significantly in recent periods. Its franchise-operated same-restaurant sales increased just 0.6% last quarter in North America.
As a result, McDonald's management is likely hoping that if it can just get customers in the door, it's willing to accept a tiny profit or a small loss on the Dinner Box if it means those customers return one day.
Customer acquisition is the name of the game
McDonald's has a global brand, which the company is clearly trying to leverage to acquire new customers. Increasing average check size from a shrinking group of customers isn't a strong long-term strategy. McDonald's noted as much in its last quarterly report, when it acknowledged the fairly tepid U.S. results and its efforts to stabilize its domestic operations.
In all likelihood, McDonald's is probably hoping to get customers in the door and let its brand do the rest. That's why, although the Dinner Box might not be a highly profitable idea in itself, it's worthwhile for McDonald's to try it out if it can get customer traffic going in the right direction again.
As the economy recovers in the United States and consumers' financial situation gradually improves, they have more money to spend on dining. This is being reflected in McDonald's higher average check size. But McDonald's has a more structural problem which it's trying to fix, a smaller number of customers. To try to boost this, McDonald's is turning to the Dinner Box.
Bob Ciura owns shares of McDonald's. The Motley Fool recommends McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.