Back when McDonald's (NYSE:MCD) began offering its Dollar Menu, franchisees complained that it drove down their margins. The problem was that the menu offered extensive $1 choices that made it too easy for customers to construct a full meal from it for just a few bucks.
Now, after multiple tries, it appears the fast-food chain has found the right mix with its $1, $2, $3 value menu. This new strategy is, according to CFO Kevin Ozan's remarks in the company's last earnings call, part of why comparable-restaurant sales rose by 2.9% in the United States in the first quarter.
"Sales were fueled by higher average check, driven by two primary factors: menu price increases as part of a broader strategic pricing reset of the menu board, and favorable shifts in product mix, consisting of trade-up to new premium products and a higher number of items per order for $1, $2, $3 Dollar Menu transactions," he said.
It's not just McDonald's
McDonald's may be a pioneer when it comes to value menus, but it's certainly not the only game in town. The value menus of Jack in the Box and Yum! Brands Taco Bell are also driving traffic increases in an otherwise flat fast-food market, according to a new study from The NPD Group.
Value menu traffic grew by 10% across the three major brands in Q1, and total consumer spend at restaurants with value menus climbed by 13%, according to NPD. In addition, the report showed that while the numbers varied by chain, across the three brands, 72% of diners who bought something off a value menu also purchased an item from the full-priced menu.
"A value proposition is definitely warranted to increase customer visits and drive frequency in today's marketplace as the recent crop of value menus bear out," said Bonnie Riggs, an NPD restaurant industry analyst. "But it's important to fully understand the impact and effectiveness of these promotions, whether it's understanding value-seeking customer behavior or loyalty erosion."
Why is this working?
Value isn't just getting something for a cheaper price. The behaviors consumers are demonstrating at McDonald's and other chains show that people recognize value is both about what they spend and how much they get for the money.
For companies, that means threading the needle a bit. They need to offer enticing value options, but in a way that won't provide a complete meal solution for the majority of their customers. That's a challenge but it's one that McDonald's has clearly solved.
The fast-food giant has $1 items, just not so many of them that most customers will stick to ordering from that section of the menu board. Instead, those value items are more often being picked up as affordable add-ons to regular orders.
The $1, $2, $3 menu may become even more successful as McDonald's rolls out kiosk-based and mobile ordering to its U.S. restaurants. Customers who take advantage of machine-assisted ordering may be more apt to add on value items to their orders, given that it frees them from the possibility of facing any subtle judgment from a human cashier over their choice to splurge on a extra second burger or a shake.
Doubtless McDonald's and other chains will to continue to tweak their value menus, but they've created blueprints for what works. That should continue to pay off for all three of these chains for the foreseeable future.