Is the dollar menu good for McDonald's bottom line?
People stand in line at a McDonald's restaurant in Times Square in New York City.
McDonald's, the nation’s largest fast food chain, released its earnings for the last part of 2012 on Wednesday. Analysts say its $1.4 billion profit is good, but not great, considering how McDonald's got there.
Seems the Golden Arches put a renewed focus on its dollar menu in an effort to get more people through the doors.
As it turns out, fast-food chains have a “love/hate” relationship with their dollar menus, as evidenced by my recent order at an Atlanta McDonald's. I chose a McDouble, which has two small beef patties, cheese, pickles, ketchup and mustard. Based on that order, I asked John Gordon of Pacific Management Consulting Group if McDonald’s is “lovin’” me.
“You paid $1 approximately for the Double Stack?” Gordon asks.
“Yep,” I answered.
“OK. Very good,” he affirms as he crunches the numbers.
Gordon says he helped fast-food chains develop their dollar menus, so he has a pretty good idea of the profit McDonald’s likely made from my McDouble.
“The McDonalds unit there received about 30 cents,” he says. Had I added a large fry off the regular menu for $2, Gordon says the store would have made an extra $1.50.
That’s where the love/hate comes in. Chains love that dollar menus get folks in the door. They hate that the items costing a buck are hard to make money on.
“So that’s the art and science of putting together a menu with products that have been financially engineered, if you will, with margins that remain attractive to the company that can be sold for prices that are attractive to guests,” says Russ Klein, chief marketing officer for rival chain Arby’s.
In a normal economy, Klein says, a dollar menu attracts about 20 percent -- maybe 30 percent -- of Arby’s customers. But with this economy, it’s in the 35 percent range.
That can make a chain nervous.
“So Arby’s has been very careful to manage the promotion of our value menu,” Klein says.
Notice the semantic shift? Chains are replacing the phrase “dollar menu” with a “value menu.” At Arby’s there are $1 items, but its new “Snack and Save” value menu includes products up to $3. The hope is to emphasize what you get for the money without having to lock down a price on it.