Some incremental changes are coming to a McDonald's menu near you – what are the implications?
Later this month, McDonald's will change some of its Dollar Menu items and it will begin offering an expanded value menu, including 20-piece chicken McNuggets, double cheeseburgers, chicken snack wraps, and Angus snack wraps, according to Reuters.
As we learned in a conversation with the company, McDonald's is focusing its menu on four tiers (not including combo meals):
1. Premium: $4.50-$5.50+
2. Core: $3.50-$4.50
3. Extra Value Menu (new): $1.20 to $3.50+
4. Dollar menu
In trying to understand the implications of what McDonald's is doing, a restaurant industry consultant and associate of ours had this to say: "I get a kick out of these corporate guys at Wendy's (WEN) and McDonald's pretending they have some magical formula for value pricing. It's 100% driven by food costs and customer behavior."
Given that McDonald's (MCD) is seeing increasing inflation in 2012, we believe the company is trying to manage its margins by forcing consumers to trade up to the "extra value menu" from the "dollar menu." This makes more sense when we consider that one of the biggest changes is to remove small drinks and small fries from the dollar menu and replace those items with fresh baked cookies and ice cream cones.
We see this as a big risk for McDonald's. 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.
The new "Extra Value Menu" will be advertised on March 26th. According to Reuters, "the new menu will include 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, that were previously listed elsewhere on its menu." The idea for McDonald's is to streamline and change what is highlighted on the menu. The company likes to phrase this differently, saying that it is "making it easier for customers to find ['Extra Value Menu' items]."
From our perspective, the big problem is that the "Dollar Menu" has been around for a very long time. Inflation has made it an unprofitable but necessary evil. Customers, also pressed by inflation, have been migrating from the combo meals on the core menu, which can cost $6-$7, over to the Dollar Menu where customers get almost double the value from a price perspective. We view this latest change as an attempt by the company to stem this flow of business from the core menu to the dollar menu. This adds an extra emphasis on the importance of April sales; investors will be watching closely for an indication of whether or not the new menu strategy is working.
