The Terrible Twos in Menus

The dollar is worth a lot less than it was back when "I want my $2" became a pop culture catchphrase from the '80s movie Better Off Dead. However, "a buck or two" still holds some fascination, not to mention key psychological significance: Starbucks (Nasdaq: SBUX  ) and McDonald's (NYSE: MCD  ) are both experimenting with some pricing strategies that fall within a $1-or-greater-but-not-more-than-$2 range.

Double dollars
Until Sept. 2, Starbucks customers can bring their morning drink receipts back into Starbucks after 2 p.m. and get a grande iced drink for just $2. Seeing how two is the magic number here, it's worthwhile to note that while margins will take a hit for the $2 drinks, it also doubles the daily trips some loyal Starbucks customers might make to get the deal, thus sparking extra foot traffic during a slower time of the day.

While Starbucks flirts with low-priced fare nearing McDonald's levels, Mickey D's itself faces a conundrum with its Dollar Menu: most notably, the popular double cheeseburger. Like many food items, cheese has gotten expensive, so the chain's tinkering with some ideas, according to The Wall Street Journal: a "double hamburger with cheese," which is two patties and one lonely slice of cheese; there's also a double hamburger without cheese (that's right, a "double hamburger"), or, maybe most logically, not skimping on the cheese and simply charging $1.09 to $1.19, which might be the most rational course of action.

Flash back to late 2007 and to this tidbit I referenced when discussing McDonald's rather meaty momentum: Apparently, rival Burger King (NYSE: BKC  ) referred to the dollar double cheeseburger as McDonald's "most powerful weapon … to continue their growth and steal disproportionate share from the category." So you can see why tinkering with that particular product may be a big deal; however, franchisees are apparently none too happy with how much unprofitable business the dollar menu is attracting.

Meanwhile, McDonald's is also looking at expanding what it considers mid-tier menu items, which are priced from about $1.30 to $2. 

Eating for less than two (dollars, that is)
All this tiptoeing around the $2 range may sound silly, but for both Starbucks and McDonald's, it's a fight to provide customers with compelling value in tough economic times while also protecting profit margins. There's most certainly a sweet spot there, where you're driving stellar traffic but not sacrificing profitable operations too much.  

Personally, though, I think most consumers have seen prices rise at every other restaurant and know a double cheeseburger for a tad more than a dollar is still a good bargain. Penny-pinchers aren't going to get a deal that cheap at restaurants like Panera (Nasdaq: PNRA  ) , Darden's (NYSE: DRI  ) many concepts, or Ruby Tuesday (NYSE: RT  ) , and would be hard-pressed to match that kind of rock-bottom cost by coming up with a home-cooked option after a shopping trip at low-priced Wal-Mart (NYSE: WMT  ) .

The word was already out that McDonald's was pondering its dollar menu, and a couple weeks back I noted that since many restaurants are charging at least $10 for a simple burger and fries platter, McDonald's quick, cheap eats look awfully good to consumers with constrained budgets.

Let's close this with that $2 iced drink concept. The Wall Street Journal article on McDonald's prices revealed another interesting fact, and that's that its espresso drinks, priced at $2 to $3, have declined in popularity in some major markets as customers defer to lower-priced beverages on the McDonald's menu. So it could be that what looks too pricey to a McDonald's customer will look like a major bargain to a Starbucks customer.    

Times are tough, so investors will be watching certain consumer companies to learn just how important it can be to see what a dollar -- or two -- might buy.

Panera Bread is a Motley Fool Hidden Gems PayDirt pick. Wal-Mart Stores and Starbucks are Inside Value selections. Starbucks is also a Stock Advisor pick, and the Fool owns shares of Starbucks. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax owns shares of Starbucks. The Fool has a disclosure policy.


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