A good case can be made that when McDonald's (NYSE:MCD) eliminated its Dollar Menu, it was the root cause of all the problems that followed. By bringing back the deep-discount menu, it could be an even bigger catalyst for growth than when it introduced all-day breakfast.
A domino effect
Falling sales, lost traffic, and lagging behind the fast-food competition all flowed from the company's decision to first "break the buck" and include higher-priced items on what it called its Dollar Menu & More option, then with abandoning the concept altogether. Customers who had considered McDonald's the destination of choice to go for a value meal suddenly had a lot of other options available to them, from Restaurant Brands International's (NYSE:QSR) Burger King and Wendy's (NASDAQ:WEN).
McDonald's estimates it lost half-billion customers in the four years since those fateful decisions were made, and that's why the announcement the burger joint is bringing back a version of the Dollar Menu is big news. Where introducing all-day breakfast was seen as the moment McDonald's stopped its slide in sales, a new dollar menu may be what propels customers to flock back to the fast-food chain.
It's been a long ride down, but McDonald's has set the wheels for recovery in motion. For the first time in years, customer traffic is higher after three-quarters of the way through the year. Previously it was able to report higher comps because of price hikes and menu mix, meaning fewer customers were choosing a blend of higher-priced items, but its recently released third-quarter earnings showed both comps and traffic higher. This could be the first year out of the past five where McDonald's actually has more customers than it did the year before.
Now with a discount menu coming in 2018, the momentum could build to return the burger champ to its preeminent position.
Ready for change
Reportedly, almost all McDonald's franchisees have signed up for the new menu, which is a switch from the past when they grumbled about discount deals like the McPick 2 bundled meal because it had too many items included, which cut into profit margins. Being independent business owners, they're often able to opt out of promotions, and we've seen them resist changes in the past.
Some are reportedly balking at the changes headquarters is pushing, such as kiosks, curbside service, delivery, and mobile ordering. Its suggested smaller franchisees are being pushed out of the system because they don't have the profits to support making the investments.
The new value menu should help. Although it seems more like the Dollar Menu & More menu of a few years ago rather than a true dollar menu, since it will also have items costing $2 and $3 on it, with both Burger King and Wendy's heavily promoting their own discount deals, it's essential that McDonald's is able to respond in kind. And arguably, that's what's been holding the restaurant back all this time.
CEO Steve Easterbrook went off in pursuit of the millennial customers who left the chain and had switched over to fast-casual outlets like Chipotle Mexican Grill and Panera Bread. In trying to transform McDonald's into a "modern, progressive burger company," the core customer looking for a tasty meal at a good price was forgotten.
Returning to its base
To his credit, Easterbrook relatively began paying much more attention to what his customers wanted, and the addition of all-day breakfast was one of the things they had clamored for most. Almost immediately after its introduction, the two-year slide in sales stopped. While there was always a limit on just how much the promotion could reverse the decline, and the positive effects of it mostly wore off in the intervening quarters, a deep-discount menu focused on a select number of items has the potential to have an enduring impact on performance.
During the conference call with analysts the other day, Easterbrook admitted that McDonald's hasn't been as competitive on the value end since ending the Dollar Menu, and they realize "that customers motivated primarily by value and deals come more often and spend more."
While that alone makes you wonder what took them so long to decide to bring it back, now that McDonald's has done it -- or a version of it, anyway -- not only will the burger joint be more competitive, but it may very well catapult the restaurant to the forefront once again.