McDonald's (NYSE:MCD) recent turnaround has involved various companywide changes. Two of these include implementing a 10-year transition into only using cage-free eggs and sourcing only chicken without antibiotics. These choices signal the fast-food chain's attempt to make food healthier, and while more expensive ingredients will force either higher prices or slimmer margins, more health-conscious food is a good idea.
Why McDonald's should raise its prices
One way that McDonald's carves a niche in the quick-service food industry is through offering food at prices cheaper than its competitors . They achieve this in part through standardization and inexpensive inputs, and therefore, more expensive ingredients could raise prices and be seen as a negative for McDonald's competitive advantage.
However, as CFO Kevin Ozan recently highlighted, higher-priced healthy options appeal to low-price consumers. The reasoning: there's more than one type of price-sensitive consumer.
"There's a few different types of customers. There are some value seekers that look for kind of an entry-level price point value and want to make sure they're getting a deal at that point, and there are others, what we call deal seekers, that kind of go around and look for the best deal around. And so we've got to be able to attract both of those customers in order to grow."
Ozan clarified that not every McDonald's customer is looking for the lowest price. Only value seeking customers look for the cheapest item. Deal seekers, on the other hand, are looking for an item that provides a certain level of quality for the lowest price that exists in the market. They're still price-sensitive customers but in a different sense than value seeking customers.
If McDonald's is looking to target a value seeking customer, targeting based on health isn't a bad idea. According to the 2015 Nielsen Global Health and Wellness Report, 43% of people consider food with all-natural ingredients and no genetically modified organisms very important -- more than any other attribute examined in the study. While McDonald's will likely never provide the highest-quality food, utilizing cage-free eggs and antibiotic-free chicken can increase their food's quality and appeal to value seekers looking for better food at lower prices.
The One Reason I'm Not Loving It
If targeting both value seekers and deal seekers really is McDonald's goal, they're making one mistake: not creating products that target both customer bases. Value seekers won't respond well to higher prices due to higher quality products, as they're seeking the lowest price.
We've seen price-sensitive consumers respond poorly to menu changes before. In mid-to-late 2014 when McDonald's raised its prices, outlets like Bloomberg and Business Insider reported that the move lead some customers to pursue other options. This is particularly harmful for McDonald's in relation to Wendy's (NASDAQ:WEN) — the golden arch's quick-service rival that targets individuals willing to pay higher prices for higher-quality food.
According to Fast Food Menu Prices, McDonald's artisan grilled chicken is priced at $4.39 while Wendy's ultimate grilled chicken is $4.69. That's only a 30 cent price difference. Additionally, on the value menu, McDonald's charges $1.29 for a McChicken sandwich while Wendy's only charges 99 cents for its Crispy Chicken Sandwich. Since McDonald's antibiotic-free chicken policy is still in the implementation process, prices only have the potential to rise while Wendy's isn't making price-changing decisions on feeding chicken antibiotics.
If McDonald's wants to stay competitive, it can't charge similar or lower prices than Wendy's and give up its position as the low-cost option. Instead, if it really wants to target two customer bases, the company needs to create menu options that have health-conscious consumers pay for higher quality foods and reduce prices of lower-quality options for the other base.
Michael Schramm has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.