The “barbell” menu strategy McDonald’s Corp. has touted in the weeks since announcing disappointing October same-store sales looks out of balance to the Oak Brook, Ill.-based chain’s critics, with the Dollar Menu seen as dead weight preventing other initiatives from gaining traction.
As chief executive Don Thompson noted in discussions with investors in November, the chain of more than 34,000 worldwide locations would pursue traffic and market-share gains by promoting value heavily while rolling out premium limited-time offers to entice customers to trade up. But marketing experts wonder whether the two-pronged approach completely neglects an important third leg of the stool — core, signature items like Big Macs and Quarter Pounders — or whether the Dollar Menu’s pull prevents any menu item priced well above $1 from selling.
Several quick-service chains, including McDonald’s, have turned to the barbell strategy during and since the recession, with varying degrees of success. Executives of those companies have repeatedly said that value-menu customers often cannot afford to deviate from those low price points, necessitating ongoing menu adjustments.
Wendy’s, for example, is reformulating its My 99-cent Everyday Value Menu and discontinued the mid-price “W” cheeseburger when it caused too much trade-down from full-price sandwiches. McDonald’s has stopped promoting its Extra Value Menu of mid-price items.
Burger King found more success by pivoting from a high-low menu strategy and overhauling its menu with new products in every tier, while Taco Bell had a huge incremental-sales win this year with Doritos Locos Tacos and the Cantina Bell line.
In the case of McDonald’s, Richard Adams of San Diego-based Franchise Equity Group, a former McDonald’s owner-operator and current consultant to dozens of franchisees, argued that the Dollar Menu is a “dinosaur.”
“The food inflation that Wall Street so loves pushes the premium items so far away from the $1 price point that the Dollar Menu doesn’t make sense anymore,” Adams said. “Customers always gravitate toward it.”
Franchisees of the brand’s 14,000-plus domestic restaurants recently approved new additions to the Dollar Menu that are scheduled for late December: a Grilled Onion Cheddar Burger and a snack-size portion of Fish McBites. But they voted to go no lower than $1 by rejecting a plan proposed by the Operators National Advertising Fund to sell hamburgers and cheeseburgers for 69 cents and 89 cents, respectively.
Adams said new Dollar Menu items will only serve to make it harder to sell premium limited-time offers like the recent Cheddar Bacon Onion sandwich.
“Who would pay $4.79 for a sandwich when the two sandwiches on the Dollar Menu are perfectly good?” Adams said. “It’s just the math. The more you raise prices, the more you encourage people to buy off the Dollar Menu.”
Core curriculum
One marketer suggested McDonald’s move away from its high-low strategy and start building more business from signature sandwiches.
Tim Nelson, president of Chicago ad agency Tris3ct and former head of the U.S. retail marketing account for McDonald’s at Arc Worldwide, praised the chain’s testing in Northern California of Quarter Pounder spinoffs in three flavors: Habanero Ranch, Deluxe and Bacon & Cheese.
Nelson called the sandwiches “the right concept at the right time with the right burger.”
“It’s fortunate that they have something that could be so substantially incremental to their offering and value perception,” he said.
Similarly, he added, a new version of the Egg McMuffin that is made with egg whites — which was being test marketed last month in Atlanta and Austin, Texas, in preparation for an early-2013 national rollout — leverages a core item but appeals to trends in healthful food.
Tweaking core products also could bring focus back to combo meals, he added.
“If you innovate around your signature equities and do things that, while they bring new news to those products, can sell Extra Value Meals, you can work back to … getting customers in the habit of buying core products as part of a meal bundle,” he said. “You’re not going to sell many of them when you have to sell them for $3 or $4, and you’re still competing with the Dollar Menu,” he added.
The right core product augmented in the right way can sell for a small premium and drive same-store-sales growth, as recent examples of the Doritos Locos Tacos at Taco Bell and Domino’s Pizza’s reformulated pizza have shown. Nelson said McDonald’s sandwiches already have a strong, differentiated platform from which to launch the strategy.
“Other QSRs just can’t do it; they have a hamburger, not the Quarter Pounder with Cheese,” he said.
He conceded that Burger King historically has marketed variations on its signature Whopper, and the brand earlier this month promoted the Angry Whopper and Wisconsin White Cheddar Whopper sandwiches. In a special four-day deal to celebrate the 55th anniversary of the Whopper, the chain also offered an original Whopper for 55 cents with the purchase of either specialty version.
But that kind of aggressive discounting can be detrimental if a brand overdoes line extensions or special promotions with signature items, Nelson cautioned.
A confluence of discounts and limited-time offers may be in play in several McDonald’s locations with the popular McRib this December, as at least one major market, San Diego, plans to offer a second McRib sandwich for just $1 with the purchase of a McRib Extra Value Meal.
Winter of discontent
Ultimately, no amount of value-driven traffic or average-check growth from premium sandwiches could increase sales over last winter’s numbers, when unseasonably warm weather fueled robust same-store-sales figures, Adams of Franchise Equity Group said. That figure rose in the United States by 9.8 percent in December 2011, 7.8 percent in January, 11.1 percent in February and 8 percent in March.
“There’s no way they can do enough discounting to overcome those numbers,” Adams said.
He added that McDonald’s should have emphasized to investors how much last winter’s mild weather contributed to the unusually high same-store-sales results. Importantly, unrealistic expectations from last winter will turn up at a time when Adams expects there to be rampant food inflation because of this year’s drought.
“It’s a perfect storm, where McDonald’s Corp. will push for more discounting, and pork and beef prices will be going through the roof,” he said. “I don’t think there is a plan that could work.”
The brand could have avoided the inevitable hit to its reputation when last winter’s sales comparisons exert their considerable pressure on upcoming same-store-sales figures, but “they downplayed the weather and took all the credit themselves for their innovation,” he said.
“This winter is going to be considered a disaster,” Adams said. “McDonald’s will be lucky to get a 5-percent decrease in same-store sales. Unless we have a spectacularly warm winter, it’ll be miserable.”
Contact Mark Brandau at [email protected].
Follow him on Twitter: @Mark_from_NRN.