MCD – Balancing Traffic and Margins

MCD’s decision to take the double cheeseburger off the dollar menu as of next week and raise the suggested retail price on the item to $1.19 is a welcomed move. Despite consistently strong same-store sales growth, MCD has faced declining U.S. restaurant margins for the last seven consecutive quarters.

The dollar menu currently accounts for about 14% of sales and the double cheeseburger has been the menu’s most popular item so a step toward increased profitability on this one menu item will help to improve U.S. margins. Although the higher price could impact traffic, I think it is more important that the company focus on margins. Additionally, maintaining the dollar price point in this environment of higher commodity costs has been the source of much friction among franchisees as they have watched their bottom lines suffer rather significantly despite continued traffic gains. At some point a decision needed to be made around traffic and margins, and MCD’s recent focus on the dollar menu had tilted the scales in favor of traffic at the expense of margins. Some franchisees, however, had clearly already chosen margins as they had already raised the price of the double cheeseburger and some are even charging more than $1.19, but MCD’s decision to follow with a system-wide price increase signals a level of support on the part of corporate.

MCD will be replacing the double cheeseburger with the McDouble on the dollar menu, which will still offer two beef patties but with only one slice of cheese (relative to the two slices of cheese on the double cheeseburger). The recent price of cheese was the primary focus of many franchisees’ argument for wanting to raise the prices of dollar menu items.

MCD’s traffic trends may experience some increased pressure from Wendy’s now that the double cheeseburger is no longer on the dollar menu as Wendy’s has been aggressively pushing its value trio promotion, which includes the Jr. Bacon Cheeseburger, the Crispy Chicken Sandwich and the Double Stack Cheeseburger, all for $0.99. As I posted back on November 5, a survey showed that the new value items are driving same-store sales but not profitability. Sound familiar? As I have said before, the restaurant industry is a zero sum game so if Wendy’s is experiencing a pick-up in traffic, it has to be coming from somewhere. Wendy’s market share gains could be accelerated by MCD’s changes to its dollar menu. That being said, I still think it was the right move by MCD from both a profitability standpoint and a franchise health perspective.


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