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McDonald's Corp. Says Hello to Sirloin Burgers, Goodbye to Profits

By Rich Duprey - Apr 15, 2015 at 2:00PM

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Feeling the heat from premium burger shacks, the fast-food burger king is reintroducing its own pricey beef patty.

The Angus beef burger had a four-year run at McDonald's, but amid rising costs was pulled from the menu in 2013. Beef prices are at record highs today. Photo: McDonald's.

What makes McDonald's (MCD 1.27%) think a bigger, premium burger will be any more successful this time around than it was two years ago when the company pulled its one-third pound Angus from the menu?

At a time when the fast-food chain is supposedly committed to streamlining its menu, McDonald's recently announced a limited-time offering of three new "Sirloin Third Pound" burgers at a price of $4.99. They are scheduled to be available from mid-May through the end of June, though some markets are already serving the burgers.

It's a schizophrenic response to a sharp two-year decline in sales and market share to traditional rivals Wendy's and Burger King parent Restaurant Brands International, as well as fast-casual burger chains such as The Habit and Shake Shack that offer big, premium-priced burgers.

Where's the beef?
The Angus burger was launched in 2009, also in response to the rising challenge of the better-burger chains. The burger's four-year run was done in not only by soaring beef prices, which cut into profits, but also by the McDonald's Dollar Menu that undercut its value. Tightfisted customers could buy four or five burgers off the value menu for the cost of one Angus burger.

McDonald's core customer skews toward the lower- and moderate-income levels that, since the recession, have been buffeted by job losses and wage stagnation. McDonald's isn't their destination of choice because they want healthy fare, but because it offers food that is convenient, inexpensive, and consistent in quality, even if it isn't arguably the best-tasting.

Instead of targeting that consumer, McDonald's continues to chase the wrong customer, wooing instead higher-income millennials by offering McWraps, oatmeal, fruit, lattes, salads, and now big sirloin burgers.

Left behind and out of the equation are the price-sensitive customers who haven't benefited from the economic recovery, who have seen their purchasing power erode, and who likely won't pay $5 for a hamburger.

Build a personalized sandwich at McDonald's new ordering kiosk. Image: McDonald's Operators' Association of Southern California.

Adding to the confusion
The new burger also poses a problem for McDonald's franchisees that are struggling in this protracted period of lower sales. While a pricier burger could enhance profitability -- if it sells, that is -- the franchisees' profits might still be pinched as beef prices continue their inexorable rise.

The latest USDA data shows boneless sirloin steak selling for $8.19 per pound in February, up from about $8 a pound in January, and it's more than 17% higher than it was a year ago. Even regular ground chuck and ground beef is 18% to 19% higher than last year.

This already comes as franchisees have been complaining that McDonald's menu is too unwieldy. While the burger shop made a big deal out of slicing off some slower-moving products from its 100-item menu, it is still experimenting with ideas that create even more choice and confusion:

  • The "Create Your Taste" build-your-own burger menu;
  • Kiosk ordering options to customize virtually every aspect of your sandwich; and
  • A just-announced all-day breakfast menu option

If it's cooked to order rather than pre-made, the new burger could slow ordering time even further.

A new, better you
Newly installed CEO Steve Easterbrook recently said he wanted to turn McDonald's into "a modern, progressive burger company." We see a lot of that in many of its decisions, such as raising the starting wages of employees in company-owned stores, halting the use of antibiotics in its chickens, and the pursuit of the fast-casual burger crowd.

But McDonald's customers don't skew in that direction, and bringing out a high-priced burger to pander to those who have left the chain, while neglecting to bolster the value-oriented menu that its core customer gravitates toward, means the new effort will be just as successful as its last attempt at a premium hamburger, and that will give investors another bum steer.

Follow Rich Duprey's coverage of all the restaurant industry's most important news and developments. He has no position in any stocks mentioned. The Motley Fool recommends McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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