Is McDonald's In Trouble Because of Taco Bell's New Dollar Menu?

The burger joint has seen this threat before and the Mexican food palace didn't make a dent

Aug 27, 2014 at 9:12AM

If Yum! Brands' (NYSE:YUM) Mexican food chain takes any more pages from McDonald's (NYSE:MCD) playbook, maybe we should just start calling it McTaco Bell.

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Should we paint those cantina arches a nice golden color? 

Signaling it's serious about the incursions it's making on the burger joint's territory, Taco Bell has quietly unveiled yet another strategy its rival popularized: the dollar menu. Taco Bell this month began offering 11 different food items for exactly $1.00, which, for some of the items appearing there, actually represents a penny price increase. Items on the Dollar Cravings menu include spicy potato soft taco, triple layer nachos, shredded chicken mini quesadilla, and caramel apple empanada.

The dollar menu move follows Taco Bell's recent decision to start offering breakfast items, entering the daypart McDonald's has long dominated. The industry researchers at Technomic estimate the burger bastion has a 31% market share of the breakfast market, which generates 20% of its $28.1 billion annual worldwide revenue. With White Castle selling sliders for breakfast, and Starbucks (NASDAQ:SBUX) starting to sell burgers, McDonald's is feeling competitive pressures from all sides.

Yet even though the burger joint continues to see sales slip, and the deep freeze it has fallen into has failed to thaw, I'm not sure Taco Bell's new Dollar Cravings menu is as much of a threat to McDonald's business as some seem to make it out to be. After all, Taco Bell isn't winning the breakfast battle.

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McDonald's continues to serve up a winning combo at breakfast.

This also isn't Taco Bell's first run at the low-price menu. It previously ran a similar campaign with its "Why Pay More?" menu, which saw items priced at $0.79, $0.89, and $0.99. But over time, customers watched those prices creep well beyond the dollar threshold, so the twist this time seems to be that it's pricing the food items at a flat buck. That looks like little more than a rebranding effort of its menu.

Moreover, McDonald's faces a broad range of low-cost meals from the likes of Burger King Worldwide (NYSE:BKW) and Wendy's (NASDAQ:WEN), which last year unveiled its "Right Price, Right Size" menu that sells items between $0.99 and $1.99. Another competitor entering the market touting $1-per-item food isn't going to mean very much, at least not to McDonald's.

But Yum! Brands might feel the pinch. It's suddenly reeling again after yet another scandal broke out in China, its largest market for both sales and profits. Although Taco Bell is one of its smallest contributors to Yum's revenues and operating earnings,, and despite the chain enjoying rising system sales and comps last quarter, the Bell's restaurant margins still slumped 2.7 percentage points. Operating profits also decreased 2%.

Those few items on its dollar menu getting a penny-per-item boost aren't likely going to reverse that course, but if it proves popular, it could pinch profits further. 

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Data: Yum! Brands SEC filings.

McDonald's has enjoyed no benefit  from including higher-priced items among those that still cost a buck. The Dollar Menu & More has failed to increase sales, as have various promotions, like its Mighty Wings and BlitzBox. Although the burger shop is experiencing a tough environment, both from more competitors and from consumers eschewing fast food in favor of more healthful fast-casual restaurant offerings, don't think that just because Taco Bell is selling burritos for a dollar, burger sales at McDonald's will plunge more.

I'm expecting more blowback on Yum! Brands for the move rather than thinking McDonald's is going to end up in the frying oil because of it.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, McDonald's, and Starbucks. The Motley Fool owns shares of Starbucks. 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.

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