McDonald’s Reinvigorates Its Dollar Menu To Spur Sales

McDonald’s Corporation (NYSE:MCD) is testing an expanded version of the famous Dollar menu in order to address its margin concerns. The new menu is called ‘Dollar Menu & More’ which will have products priced at $2 or $5 in addition to the regular $1 items. ^[1] Currently, the items in Extra Value meal are sold in a similar price bracket but that hasn’t been too successful. Instead, the company hopes to leverage the Dollar menu name to upsell products. The existing Dollar menu remains unchanged.

The Dollar menu is critical to McDonald’s U.S. business and accounts for about 14% of its U.S. sales. Moreover, the company uses this menu to attract more footfalls in the hope that customers will spend on other items as they enter the restaurant. But the excessive reliance on the dollar menu has started eroding the company’s margins. For the first six months of the year, the margins of the company-reported stores are down 50 basis points. ^[2]

Despite the emphasis on value meals such as the Dollar menu, McDonald’s comparable sales have only manged to rise 0.7% through July with the American sales just about offsetting the negative sales in Europe and Asia Pacific. ^[3] Comparable sales, or same-store sales, is an important measure to gauge a restaurant’s performance since it only includes the restaurants open for more than a year and excludes the effect of currency fluctuation.

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There could also have been pressure from the franchisees to expand the Dollar menu since there was a growing air of discontent among franchisees due to the company’s extra focus on value meals. The costs of ingredients such as beef and corn have risen considerably and are eating up the franchisees’ margins. McDonald’s revenues, on the other hand, are a percentage of franchisee sales and are not dependent on the profits that the franchisees earn.

Better Things To Come?

In addition to the expanded Dollar menu, McDonald’s is also introducing the Mighty Wings which will go on sale until November. The chicken wings, which will be sold at $2.99, $4.79 and $8.99 for three, five and ten pieces respectively, are part of the company’s strategy to encourage customers to buy premium (and more profitable) products.

The upcoming quarters should bring some relief to McDonald’s in terms of comparable sales as the restaurant chain faces a favorable comparison over the previous year. McDonald’s sales began faltering from the third quarter of 2012 due to weak consumer spending combined with an unfavorable comparison over the previous year. The unfavorable comparison continued until the beginning of the second quarter this year. As things normalize, McDonald’s upcoming numbers should improve.

We have a $99 price estimate for McDonald’s, which is slightly above the current market price.

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1. McDonald’s to test new ‘dollar menu and more’ meals, September 5, 2013, foxnews.com [↩]
2. MCD 10-Q [↩]
3. MCD 8-k [↩]