McDonald's Adding Pricier Items To New Dollar Menu
McDonald's, seeing flagging sales growth and pressured by rising commodity costs, will revamp its Dollar Menu to include some items with higher prices.
McDonald's president and CEO Don Thompson announced the coming "Dollar Menu & More," to be supported by national advertising, during this week's third-quarter earnings call.
The new menu will reportedly retain some of the items on the decade-old Dollar Menu, while adding more sandwiches priced at up to $2, and some items (like a 20-piece McNuggets serving and burgers with two patties or pieces of cheese instead of one) priced around $5.
McDonald's beat analysts' third-quarter (ended Sept. 30) earnings expectations by a penny (showing a profit of $1.52 billion, or $1.52 a share), and its revenue rose 2.4%, to $7.32 billion.
However, its global and U.S. comparable sales growth edged up only slightly -- by 0.9% and 0.7%, respectively — even though it was running its highly popular Monopoly promotion in the U.S. during the quarter, as well as a limited-time promotion for a new item, Mighty Wings.
Furthermore, McDonald's said it expects flat global same-store sales for October -- despite, as The Wall Street Journal pointed out, what should be an easy comparison to last October, when McDonald's reported its first monthly same-store sales decline in nine years. It also expects its Q4 restaurant margins to how a decline similar to that in Q1, which was its largest quarterly margin decline in more than a decade.
The new menu, reportedly to be in place in U.S. McDonald's by Nov. 4, appears to reflect both margin pressures on franchisees due to the rising costs of beef and other menu staples, and what Thompson described as a "bifurcation" between struggling, lower-income customers and higher-income customers willing to pay more for value-added items.
On one hand, McDonald's' Extra Value Menu (featuring items up to $2), launched in 2012, has reportedly produced disappointing results, and will be dropped with the introduction of Dollar Menu & More. On the other, some of its more premium offerings, like the $4 Angus burgers recently dropped from its menu, have also failed to generate sufficient uptake.
Thompson acknowledged that the Mighty Wings, introduced in the third quarter, performed at the low end of McDonald's' expectations, noting that their price of $1 per wing was "not considered the most competitive" (some chains' wing prices are one quarter of that). However, he also indicated that the wings will return in the U.S. market at some juncture.
McDonald's hasn't had a blockbuster item launch since it introduced McGriddles in 2003, pointed out WSJ, in a piece in which some analysts contended that the chain is losing its brand focus and confusing its core customer base as a result of expanding its menu to appeal to healthier-minded consumers (such as the new McWrap, aimed at Millennials).
While its healthier offerings are important for its brand image — McDonald's recently announced it will offer a choice of a salad, vegetable or fruit side with value meals for those who prefer to forgo fries — salad menu items still account for only about 3% of U.S. sales, and it dropped its Fruit Walnut salads from the menu this year (although oatmeal and smoothies seem to be strong).
McDonald's won (qualified) praise from health groups for adding apple slices and reducing fries portions, and offering fat-free chocolate milk, low-fat milk and apple juice as alternatives to soda with its Happy Meals fries — as well as for its recent decision to cease featuring and promoting soda as a beverage option with these meals. The sales implications of not listing soda as a Happy Meal beverage option on its menu boards of course remain to be seen.
However, McDonald's (while not suggesting that it would eliminate its controversial Happy Meals toy giveaway promotions), is introducing a new program likely to please parents and critics, as well as perhaps help drive kids' meals sales.
During the first two weeks of November, starting on National Literacy Day (Nov. 1), McDonald's will insert 20 million copies of four original book titles, incorporating healthy nutrition/lifestyle messages, into Happy Meals. The self-published Happy Meal Books will feature characters and stories created by Leo Burnett, the agency that handles the chain's children's and family marketing efforts, reported Publishers Weekly. In addition, McDonald's will distribute 100,000 (non-promotional) books through Reading is Fundamental.
The initiative marks the start of a two-year publishing effort that will include interactive e-books throughout 2014 and another Happy Meal Books print effort in 2015. Free e-book downloads will be available through McPlay, the company's Happy Meal mobile app, on HappyMeal.com and in Spanish on MeEncanta.com.
Meanwhile, Subway continues to grow through its healthier-choice positioning, while Wendy's and Taco Bell are scoring with new items for the taste-is-paramount contingent —notably, Wendy's Pretzel Bacon Cheeseburger (currently a limited-time promotion) and Taco Bell's expanding line of Doritos Locos Tacos. (Wendy's also added some items priced above 99 cents to its value menu this year.)
"After many years of McDonald's beating up everyone else, we've seen that reverse," Sanford Bernstein analyst Sara Senatore told WSJ. "Competitors are getting their act together."