McDonald’s Hopes To Reinvigorate Sales With Menu Changes

by Trefis Team
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McDonald’s Corporation (NYSE:MCD) has had a tough few months. It has reported tepid same-store sales growth and weaker margins. One of the reasons why the margins have declined lately is because of excessive reliance on value meals such as the Dollar meals. Value meals generally have lower margins and are offered by the company to attract more customers with the hope that they will spend more on other expensive (and more profitable) items. For the first six months of the year, the margins of the company-reported stores were down 50 basis points.

See full analysis for McDonald’s Corporation

Similarly, McDonald’s comparable sales have only managed to rise 0.4% through August with its American sales just about offsetting the negative sales in Europe and Asia Pacific. [1] Comparable sales, or same-store sales, is an important measure to gauge a restaurant’s performance since it only includes the restaurants open for more than a year and excludes the effect of currency fluctuation.

McDonald’s has made a plethora of additions to the menu to address its margins and sales concerns. The newer menu items will also have a greater focus on chicken. Chicken is healthier than beef (more protein, less fat) and is considered less indulgent. Moreover, beef prices have been fairly high since the drought last year and using chicken is more profitable for the company as well as its franchisees.

Through the menu makeover, McDonald’s hopes to

i) Boost customer traffic as new menu products help create some buzz

ii) Attract more health conscious customers with greater chicken and fish offerings

iii) Improve margins through a greater offering of premium products

Following are some of the recent additions:

a) Expanded Dollar Menu

McDonald’s is testing an expanded version of the famous Dollar menu called the ‘Dollar Menu & More’ which will have products priced at $2 or $5 in addition to the regular $1 items. Currently, the items in Extra Value meal are sold in a similar price range but that hasn’t been too successful. Instead, the company hopes to leverage the Dollar menu name to upsell products. The existing Dollar menu remains unchanged. [2]

b) Chicken McWrap

Over the years, McDonald’s popularity has dipped among the fresher food seeking young adults. The restaurant chains that are doing well – Chipotle, Subway, Five Guys – all target millennials. To regain its popularity among this demographic, McDonald’s introduced the McWrap a few months back. The image features veggies oozing out of the tortilla wrap – emphasizing freshness and health. It is also an item that young adults are likely to consider as ‘comfort food’ and eat often without feeling guilty. [3]

c) Mighty Wings

McDonald’s has also introduced the Mighty Wings which will go on sale until November. The chicken wings, which will be sold at $2.99, $4.79 and $8.99 for three, five and ten pieces respectively, are part of the company’s strategy to encourage customers to buy premium (and more profitable) products. In addition, McDonald’s also added Fish McBites to its menu earlier this year as the fast food giant shifts its menu away from red meat.

d) Egg White Delight McMuffin

McDonald’s has the edge when it comes to breakfast, but it needs to continually evolve its menu in order to maintain its dominance. And so the Golden Arches has introduced a new, light 250 calorie Egg White Delight McMuffin. For those who are not obsessed with calories, the fast food giant has also added Steak, Egg, and Cheese Biscuit that will be available only till 10:30 a.m.

Other restaurant chains such as Taco Bell and Burger King that earlier had a tiny presence in this segment are now expanding their breakfast menus as they struggle to generate optimal sales growth in other parts of the day. Even Chipotle has started selling coffee at select restaurants, a sign that the restaurant chain might eventually move into the breakfast segment.

The upcoming months will provide a glimpse of whether McDonald’s can accelerate its sales and prove it critics wrong. We’ll be keeping a close eye on the data released by Mickey Dee’s.

We have a $99 price estimate for McDonald’s, which is slightly above the current market price.

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Notes:
  1. MCD 8-k []
  2. McDonald’s to test new ‘dollar menu and more’ meals, September 5, 2013, foxnews.com []
  3. 6 McDonald’s Menu Makeovers Making Consumers Buy Their Happy Meal, September 18, 2013, wallstcheatsheet.com []
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