Let's be frank: Value menus based on dollar price points are a loss leader in the quick-service restaurant (QSR) industry. Their primary purpose is to draw traffic into stores, where, if a restaurant's blend of core items and limited time offers (LTOs) works its magic, customers will spend more than a dollar or two.
McDonald's Corporation (NYSE:MCD) this week announced its long-awaited value menu revamp, which is slated to go into effect nationwide on Jan. 4. After a two-year run of promotions centered on $5 and $3 price points (the "McPick" 2 for $5 and 2 for $3 menus), the world's largest burger chain will offer a value menu spanning the $1, $2, and $3 levels.
Current McDonald's value menu aficionados will recognize continuity in that items such as cheeseburgers, McChicken sandwiches, and sodas, already typically sold for a little over a buck, will now anchor the $1 price point.
Have some spare change in your pocket? Sausage McGriddles, small McCafe espresso drinks, two buttermilk chicken tenders, and a double cheeseburger will all run patrons $2 each.
And if you think you've discerned a pattern here, you're correct: Customers will now be able to buy the "triple cheeseburger" for $3. Also gracing the $3 platform are the Sausage McMuffin with Egg, Happy Meals, and a new item, the Classic Chicken sandwich, made with a crispy buttermilk chicken filet.
A probable success, but why now?
McDonald's abandoned its $1-anchored value menu in 2013, and it floundered with a "dollar menu and more" iteration for two years before the McPick era. The resurrection of the dollar concept may be more successful this time around -- at least over the short term. Since the current lineup extends into the $3 range, franchisees should theoretically be able to offset some of the slim to nonexistent margins generated by single greenback items.
More importantly, McDonald's has better tools today to win incremental sales from the additional customer traffic value deals should generate, versus what it possessed a few years ago. All-day breakfast items, McCafe drinks, customizable "Signature Crafted" sandwiches, and a core menu that has benefited from generally higher quality under current CEO Steve Easterbrook -- each of these presents more potential for bigger average tickets if McDonald's can secure additional guest visits.
Shareholders likely have an interesting question in mind over the rollout. Why, of all times, is the company introducing the revamped value menu now? Traffic trends have already improved this year, and a U.S. comparable sales increase of 4.1% last quarter was due in part to the McPick 2 value promotion.
In part, expanding price points should help McDonald's keep or even add to the sales momentum the company has enjoyed this year. But the initiative can also be seen as part of a multi-pronged strategy to counter a trend that is distressing volumes at quick-service restaurants -- that is, a growing penchant for eating at home, especially among millennial customers. Restaurant research firm NPD Group estimated earlier this year that this trend would limit QSRs to a 1% increase in customer traffic in 2017.
McDonald's is already easing a slight bit of this pressure by expanding home delivery across the U.S. But to stay relevant, and entice core customers to drop into its restaurants instead of cooking at home on a given night, McDonald's must revert to its classic barbell menu strategy of value items on one side and premium items on the other. If all goes according to plan, mid-priced menu innovation like the Classic Chicken sandwich and buttermilk tenders will tempt customers, even when they're lured in at the thought of a one-dollar cheeseburger.
Contrary to appearances, the value menu evolution isn't really about McDonald's responding to rampant value meal competition spurred by Taco Bell owner Yum! Brands, Inc. (NYSE:YUM), Wendys Co (NASDAQ:WEN), and other worthy adversaries. Rather, it represents McDonald's attempt to maintain its edge despite fast-changing consumption trends. Management obviously believes that it can best achieve this by embracing value. This makes sense to me, as value is one of the primary characteristics customers have always attributed to the chain, and they'll likely continue to do so, even as McDonald's succeeds in burnishing its more contemporary, quality-oriented image.
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