Once Cheap, Always Cheap: Why McDonald's Can't Raise Its Prices

McDonald's (MCD -0.42%) appears to be permanently joined at the hip of its Dollar Menu. Sluggish sales over the past two years suggest that its push into premium sandwiches, salads, and beverages isn't resonating with hungry patrons that associate the golden arches with a meal that's quick and cheap.

The world's leading burger flipper has admitted as such. It has conceded in recent conference calls that straying from its value message has hurt more than it has helped.

This is happening at a very unfortunate time for McDonald's. Dining trends haven't been kind to fast food given the widening income gap in this country. The rich are eating out more. The poor and middle class? Not so much. Industry tracker NPD Group put out a sobering report showing that overall restaurant traffic in this country has been flat from June of last year to June of this year. 

Things get uglier for McDonald's and its fast food peers when we break down that flat showing by pricing category.

Source: NPD Group. 

The trend is encouraging for chophouses, foodie joints, and high-end casual dining chains. However, it's not so hot if you're McDonald's and one of its countless smaller peers trying to feed the country on the cheap. That's a pretty big category. A whopping 80% of all restaurant visits are going to eateries where the average check per person is in the single digits. That explains why year-over-year traffic gains of 5%-11% at pricier establishments merely offset the 1% decline at quick-service chains to arrive at the flat overall showing.

Hold the lettuce
Things are bad for the fast food industry in general, but it's even worse for McDonald's. It posted a 1.5% year-over-year dip in domestic comps during the second quarter, and things have only gotten worse. Store-level sales plunged 3.2% in July and 2.8% in August. Comps have fallen in nine of the past 10 months through August.

In a perfect world, McDonald's would go upmarket. It would price its way out of the low end with filet mignon sandwiches, truffle fries, and kobe burgers. However, it has a long way to go before it earns that right because a lot of people think that the food at McDonald's is lousy.

A Consumer Reports survey earlier this year -- polling tens of thousands of fast food regulars -- ranked McDonald's at the very bottom of the 21 burger chains based on the taste of its signature sandwich. 

The brand tarnishing doesn't end there. Complaints of employee unfriendliness are on the rise and drive-thru waits are getting longer. It's probably not a coincidence that some of these service lapses have coincided with the chain's foray into fancy beverages and fancier sandwiches.

Does this seem like a restaurant operator that can bump its way up to a higher pricing class? Of course not. McDonald's seems to think so. It's been installing deeper prep tables to offer a broader variety of sandwich toppings. The Dollar Menu became the Dollar Menu & More late last year, affording the company to provide deal items at price points north of a buck.

With fast food chains scurrying to set themselves apart as value chains, McDonald's has a higher image of itself than the market. This is opening the door for a price war that McDonald's may not realize is taking place. Burger King Worldwide (BKW.DL) has quietly copied the McDonald's menu, complete with knockoffs of its iconic Big Mac, Egg McMuffin, and oatmeal. Its latest promotion is 10 chicken nuggets for $1.49, just as McDonald's is promoting 20 for $5. Being hungry isn't going to eradicate basic math skills. 

The truth is inescapable. The identity crisis at McDonald's has come as traffic is drying up and customer dissatisfaction is on the rise. Once McDonald's makes the connection -- and it will, inevitably -- it will realize that it will be boxed into the cheap category forever.