On the Margin

Burger King jumps into the newest burger war

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This post is part of the On the Margin blog.

Burger King this morning announced a new meal promotion: 5 for $4, in which customers can get a Bacon Cheeseburger, small fries, four-piece chicken nuggets, a small drink and a warm chocolate chip cookie for $4.

It appears that the Burger Wars are back.

Burger King has engaged with its two primary rivals, McDonald’s Corp. and The Wendy’s Co., for decades. This competition periodically flares into a battle over pricing, and then someone like me calls it the Burger Wars.

Whatever it’s called, however, the current iteration is definitely a renewed pricing battle.

The battle started more than a year ago, when Burger King generated a ton of sales selling 10-piece chicken nuggets for $1.49. Over the summer, McDonald’s offered a 2-for-$2.50 deal, and Burger King offered two items from a selection of sandwiches for $5. Then Wendy’s offered a 4-for-$4 meal, with four items for $4. And McDonald’s introduced its “McPick” menu, with two items for $2.

That menu was just put in place when Burger King offered a bit of one-upmanship in its 5-for-$4 meal, lowering the $1 average price for those other deals by 20 cents per item.

It’s clear that discounts remain vital to a large cross-section of the restaurant dining public, and that for better or worse, restaurants are intent on competing for that group.

This current strategy of bundled deals in fact has its roots in the Great Recession, when a struggling public led many chains to start discounting their products to get customers back in the door.

One such chain was Steak 'n Shake, the Indianapolis-based burger chain that was taken over by Sardar Biglari and then started offering a selection of meals for under $4 to generate sales. It kept that offer and that price point, and has had 27 straight quarters of same-store sales growth.

Other chains, meanwhile, shifted away from discounting amid rising food costs — and often lost sales as a result. McDonald’s CEO Steve Easterbrook has said many times that the chain’s inability to replace the Dollar Menu with something more compelling led to the company’s sales problems over the past three years.

To be sure, it’s much easier to lower menu prices now that food costs — particularly beef — are easing. Chains shifted away from discounting largely because of profit pressure.

Burger King’s decision to jump on the bundled deal bandwagon is evidence that discounts are the way to go in 2016. And it could suggest that it believes Wendy’s deal in particular has generated some momentum — and that the McDonald’s deal will, too.

Indeed, Nomura analyst Mark Kalinowski upgraded both Wendy’s and McDonald’s on Monday, citing burger sector improvement in November and early December, and suggesting that both chains are “full participants” in that improvement.

“When we continually deliver upon our business strategy of bring people into our restaurants with great tasting food at an accessible price point, we win with our guests and our franchisee partners,” Alex Macedo, Burger King president, North America, said in a statement. “Our new 5 for $4 deal continues to build upon that winning strategy.”

The challenge for chains that start discounting while using a single price point to lure consumers is that eventually inflation renders that price point obsolete, which was the problem with Dollar and 99-cent value menus — eventually, food costs made those untenable.

Still, despite lower gas prices and rising employment, some consumers are still interested in discounts. And, given competition from convenience stores and grocery stores, it seems that chains have little choice but to engage in this new discounting battle.

Contact Jonathan Maze at jonathan.maze@penton.com
Follow him on Twitter: @jonathanmaze

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Jonathan Maze follows the money

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Jonathan Maze

Jonathan Maze covers finance for Nations Restaurant News, as well as restaurant chains based in the Midwest. Jonathan came to NRN in 2014 after seven years covering restaurants for Franchise Times...
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