McDonald’s is shifting around its menu in an attempt to wean customers on to its Extra Value Menu. At first glance, a shift in menu pricing may not seem like a huge deal for a company the size of McDonald’s. But the move could leave investors hungry for returns as inflation costs and a general disdain for higher prices being passed on to consumers hit the stock price.
McDonald’s (MCD) reported its second quarter earnings this week, noting that earnings had declined 4.5% due to FX risk, namely a stronger US dollar. The company produced a profit of $1.35 billion, or $1.32 per share, compared with a profit of $1.41 billion at $1.35 a share during the same time last year. This was a disappointment for investors to say the least.
So as we look at what lies ahead for MCD in Q3, there’s a very important shift occurring that we believe could negatively impact earnings down the road. That shift is the pricing structure of the menu at McDonald’s. Like many other fast food restaurants, McDonald’s has had a “Dollar Menu” for some time now. Consumers are used to it being there and can get behind something that costs a buck. In this era of inflation and higher commodity prices, however, it remains unprofitable to operate the Dollar Menu.
In an effort to compromise, MCD went and created the “Extra Value Menu,” which includes the following : 20-piece chicken McNuggets, double cheeseburgers, chicken snack wraps, Angus snack wraps, medium iced coffees and snack-sized McFlurries, plus up to four regional options.
This falls in line with the overall change in pricing structure of the McDonald’s menu, which now consists of four different tiers (combos are excluded): Premium: $4.50-$5.50+ / Core: $3.50-$4.50 / Extra Value Menu : $1.20-$3.50+ / Dollar Menu .
In summary, McDonald’s has taken more costly items like burgers and soft drinks off the Dollar Menu and shifted them to the new Extra Value Menu, replacing them with cookies and ice cream. Believe it or not, there’s a lot of risk in taking away cheap burgers and fries from customers, as Hedgeye Managing Director of Restaurants Howard Penney explained in a note from earlier this year:
“We see this as a big risk for MCD. If customer preference is to have the drink and fries as part of the dollar menu then there is a risk that this change negatively impacts customer satisfaction. The company told us that a “mini-combo meal” offering may bundle the fries, burger, and drink but a decision has not been made on that yet. Still, ordering the $1 items individually is being taken off the table.”
Americans are still reeling from the effects of inflation and are opting for items on the cheaper menus instead of the $6-8 combo meals on the core menu. That puts a squeeze on McDonald’s profits and is a factor that cannot be ignored come this fall. With the company taking price in the U.S. of 3% versus last year, in line with the BLS’s Food Away from Home CPI measure and below Food at Home CPI, customers may be less impressed by McDonald’s value proposition that in years past.