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McDonald's Considers 'Tweaking' Dollar Menu

McD-DOLLAR-MENU

Like major food makers, McDonald's will likely raise its prices at least moderately in coming months as a result of the rising costs of key commodities such as grain, meat and sugar. And the Dollar Menu probably will not be exempt, based on comments by the chain's top executives during the company's third-quarter earnings conference call.

The executives stressed that McDonald's has been able to manage the impact of volatile commodity prices better than the general market, and that no decisions have been made about pricing changes. However, they acknowledged that the U.S. division and its franchisees are "debating" price increases, including the possibility of adjusting pricing, or content, within the Dollar Menu.

"The Dollar Menu will stay," said COO Ralph Alvarez, pointing out that the company continues to heavily advertise this menu. "There are just probably going to be some tweaks to it."

Franchisees, Alvarez said, "understand the importance of everyday value," and that "some level of migration on that value menu is important in order to keep the good value scores balanced across the menu. At some point, you can't raise the price on everything else and leave the Dollar Menu the same, as we have for six years."

"We have been pretty upfront that at this point that we are going to stick with the name Dollar Menu, so that tells you a lot right there," about the company's commitment to ensuring that these items retain their value to consumers, he added.

While acknowledging that any change to the Dollar Menu is "not without risk," he stressed that McDonald's has closely analyzed Dollar Menu buyers' motivational drivers, including how many value menu purchases are the prime transaction drivers versus add-ons to other purchases, as well as the perceived importance of the dollar pricing level.

CEO Jim Skinner also stressed the importance of maintaining "the value relationship" across the menu, while also maintaining the Dollar Menu and its relevance to consumers. Skinner noted that one possibility under discussion is "maybe adjustment of the lead sandwich." He confirmed that a decision will be made and communicated soon.

McDonald's continued its strong performance during the third quarter, reporting a 10% increase in earnings and a global same-store sales increase of 6%, including a 5% gain for U.S. locations. October performance is expected to be at similar levels, the company reported.

CFO Peter Bensen emphasized that a major reason that McDonald's' third-quarter operating margin of 18.2% was down by just 20 basis points from the prior year, despite commodity cost pressures, is its ability to leverage its scale, supply-chain infrastructure and risk-management practices to minimize input cost increases' overall impact. "We manage our grocery bill like a portfolio, where increases in some commodities can be offset by lower prices on others," he said.

Alvarez noted that McDonald's continues to follow an overall strategy of keeping pricing just below overall marketplace "food-away-from-home" levels, to remain competitive. But the QSR also watches its value scores in comparison to consumers' "food-at-home" costs, and rising grocery prices have this year resulted in McDonald's' scores on this front rising "significantly," he said.

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