There's good reason to believe McDonald's (MCD +1.21%) is finally in tune with its customer. The latest example that the fast-food king "gets it" is the announcement the burger chain will be testing a fresh beef burger called the Archburger.
Where's the beef?
Although its name harkens back to the chain's failed Arch Deluxe that was introduced in the 1990's, this new burger proves McDonald's is intent on winning back the half-billion customers it's lost over the last five years.
Image source: McDonald's.
McDonald's made a commitment last year to go national with fresh beef Quarter Pounder burgers even though it was reportedly a logistical nightmare that required two years of planning and dozens of people from in and outside of the company to make it happen. By mid-2018, the rollout should be complete.
Now the burger king is testing out a new fresh beef burger that should have wide appeal because of the better ingredients it includes, which has become a hallmark of McDonald's positioning lately, and a cheap price. It's reported the Archburger with cheese, pickles, onions, and its unique Arch sauce -- a mustard and mayo combo -- will retail for $2.19, favorably priced compared to a Quarter Pounder with cheese that goes for $3.79 or a Big Mac at $3.99.
Fleeing the makeover
McDonald's estimates it lost some 500 million customers between 2013 and 2016, as traffic at its restaurants declined for four consecutive years, something not even its vaunted all-day breakfast menu was able to reverse. Yet through the first three quarters of 2017, guest counts are 2% higher than they were in the year-ago period and the burger shop looks ready to end the year with an increase.
While McDonald's has in the past sought to emulate the likes of fast-casual chains like Shake Shack and In-n-Out Burger, much to its detriment because it introduced esoteric items like kale bowls, lobster rolls, and pricey sirloin burgers, the Archburger has the potential to succeed because it can appeal to a wider audience, those with more refined tastes as well as those simply looking for a good meal at a reasonable price, which has always been McDonald's target demographic.
While the Arch Deluxe was similarly positioned for the most part, it failed because it was more expensive than most of the items McDonald's offered at the time. Now the Archburger fits neatly into its tiered value meal strategy that offers menu items at $1, $2, and $3.
These types of bundled options are popular with customers not only at McDonald's, but also Burger King and Wendy's (WEN +3.03%), which just expanded its own 4 for $4 menu to include eight different items.
Overarching opportunity
There are still risks associated with expanding fresh beef to more products. Although the Archburger will be a burger that's one-sixth of a pound -- a move that lets McDonald's stretch just how many burgers it can get out of the meat -- inflation is starting to creep back up and ground beef prices are moving higher, even if they're lower than they were a year ago. While no one is expecting prices to soar like they did several years ago, it could still crimp profits.
Nevertheless, Wendy's gained sales with its bundled offerings and added to them items like the Double Stack, regardless of the price of beef, because it said it wanted to create "compelling reasons" for people to visit. McDonald's can do the same with its fresh beef Quarter Pounder and Archburger.
It seems to have taken McDonald's a few years and several false starts to align itself with its core customer, but as it continues to drill down into the value end of its menu, it's managed to find more than a few winners. The Archburger should appeal to those who frequent fast-casual chains for their own fresh beef burgers as well as those who are price sensitive. It could be a hit for the chain, and could lead McDonald's to take it national too.
