Doubling Down on the Dollar Amid a Rare Sales Decline

May 21, 2013

On a recent lunch break, John Kurzatkowski was enjoying two McDouble cheeseburgers, fries and a large Coke at a McDonald’s.

“I like that they’re $1,” Kurzatkowski, 31, said of the cheeseburgers, which he buys about twice a week. While the physician recruiter doesn’t think price is everything, he concedes it’s a factor.

“I noticed that Wendy’s (burgers) went to $1.19,” he said. “And I noticed I went there less often.”

Kurzatkowski is the quintessential customer McDonald’s can’t afford to lose.

In the midst of its first soft sales patch in nearly a decade, the burger giant is re-emphasizing its Dollar Menu, a 10-year-old feature that became the linchpin of the last turnaround in its U.S. business. The chain is shifting ad dollars to products for $1 and introducing new items to what’s been a relatively staid assortment, including the two-patty McDouble, a fried chicken sandwich, yogurt parfait and side salad.

Analysts credit the renewed focus on the Dollar Menu with slowing what could have been a more rapid sales decline, but they underscore that the environment is more competitive than ever.

Burger King and Wendy’s are hitting hard on value and advertising premium items. The key for McDonald’s, experts say, will be introducing compelling new products at attractive prices that keep customers like Kurzatkowski coming through the doors.

“We’re aware that consumers are a little unsettled right now,” said Neil Golden, chief marketing officer of McDonald’s USA. “Whether that’s higher gas prices or just overall not having as much week to week, we know the consumer is looking for great values in everything they’re doing in the food arena.”

Although Dollar Menu sales generally comprise just 13 to 15 percent of McDonald’s sales, the offerings do drive traffic to stores, where customers sometimes buy a more expensive product.

“There are those consumers who will make purchases on the Dollar Menu and those customers that are motivated by Dollar Menu (to come in) and see other options that are more appealing to them that day,” Golden said.

Take Jerry Pitt, who stops into McDonald’s for lunch a few times a week. He says it’s the parfait on the Dollar Menu that keeps him coming.

“It’s the only fast-food place you can get yogurt and blueberries,” he said. On a recent visit, Pitt ordered his usual parfait with a McChicken sandwich, both from the Dollar Menu, but he also succumbed to an upsell for $2.99. “I added a Filet-O-Fish,” he said.

Leading up to the sales decline in October, critics say, McDonald’s did not have enough new products in 2012. With a number of new items in the wings for 2013, such as a McWrap sandwich, and other items in test, such as chicken wings, the current Dollar Menu focus likely gives the chain some breathing room.

Industry experts have backed McDonald’s strategy.

“By focusing on the dollar menu, it is helping them drive traffic back into the restaurants,” Morningstar analyst R.J. Hottovy said of McDonald’s fourth-quarter same-store sales, which just beat his expectation of flat performance.

McDonald’s, based in the Chicago suburb of Oak Brook, created its Dollar Menu as part of a turnaround plan, beginning in early 2003, after the chain had reported its first quarterly loss.

Darren Tristano, executive vice president of Technomic, described value menus as “a necessary evil” in today’s competitive environment. The three big burger chains would have to collude to end burgers for $1, he said, because “if one stopped, the others would gain that business.”

“There really is magic in the dollar price point,” said one McDonald’s franchisee who declined to be identified. “When you go away from it, it’s harder to communicate, because it’s no longer as simple as saying we’ve got Dollar Menu every day.”

Rodrick Johnson, 22, visits a McDonald’s about once a week with girlfriend Ashanta McKenzie. Once daily customers, the couple cut back, in an effort to eat healthier. Johnson said he wouldn’t stop going to McDonald’s even if it didn’t have a Dollar Menu.

“Just less often,” he said. “Maybe every other week.”