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McDonald's New Value Menu Keeps the Pressure on Rivals

By Demitri Kalogeropoulos – Dec 14, 2017 at 8:01AM

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The fast-food giant hopes an aggressive value offering will help it steal more market share in 2018.

McDonald's (MCD -0.12%) opted for variety in its latest value menu launch. The fast-food titan this week announced over a dozen new dining choices for 2018 that are priced at either $1, $2, or $3. They include breakfast buys like a $1 egg and sausage burrito, classic burgers like the $2 Bacon McDouble, and a new premium chicken sandwich that will set you back just $3. Premium McCafe drinks are on sale, too.

This promotion follows a string of unusually strong operating results for the fast food chain. After dropping market share in each of the last three fiscal years, McDonald's booths are filling up more regularly now. In fact, customer traffic growth was positive -- and accelerated -- in each of the last three quarters. 

Winning market share

Rising customer traffic helped sales at existing locations rise by 6% last quarter, which put McDonald's ahead of just about all its fast-food peers, including Restaurant Brands' Burger King and Yum! Brands' (YUM -0.85%) Taco Bell. Mickey D's is also outpacing casual dining upstart Shake Shack, where sales at existing locations are ticking lower this year despite a fast-expanding store base.

CEO Steve Easterbrook and his team want to build on that momentum by grabbing more market share in 2018. Burger King and Taco Bell might find it hard to compete against its growing all-day breakfast menu. Shake Shack's premium sandwiches could struggle against comparisons with McDonald's lineup of signature burgers, too. Even Starbucks (SBUX -0.63%) could shed a few customers to a drink menu that includes small cappuccinos, lattes, and espresso beverages all priced at $2 each.

A customer holds a McDonald's breakfast sandwich.

Image source: McDonald's.

The coffee giant trailed Mickey D's sales growth last quarter by a wide margin, and investors can expect more clashes ahead between these two companies. McDonald's is hoping to expand its premium coffee sales this year and Starbucks believes a bigger food offering will bulk up its lunchtime business and help it accelerate sales growth. Success by one of these companies could mean disappointment for the other.

Keeping the momentum going

McDonald's shareholders would love to see the company extend its market-thumping growth pace well into 2018. That will depend on guests embracing changes both on the value and premium sides of its menu.

In any case, the chain should post significantly higher profits thanks to a re-franchising initiative that's set to push operating profit margin up to a record 45% of sales by 2019. Yum! Brands and Restaurant Brands are pursuing in a similar strategy, but since their store bases are already almost 100% franchised, they don't stand to gain as much in the way of rising profitability.

McDonald's is choosing to direct a big portion of its earnings haul toward investing in future growth. Major 2018 spending priorities include remodeling and adding technology like ordering kiosks to its stores while building out a national home delivery service.

These huge capital outlays mean investors will see lower direct cash returns over the next few years compared to what they enjoyed in the three years ended in 2016. But they reflect a more aggressive growth posture that flows from McDonald's having finally recaptured the leadership position in the industry. After years of playing catch-up, the fast food titan is eager to defend that spot against rivals.

Demitrios Kalogeropoulos owns shares of McDonald's and Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool is short shares of SHAK. The Motley Fool has a disclosure policy.

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McDonald's Corporation Stock Quote
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Yum! Brands
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Starbucks Corporation
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