McDonald's Ready to Break the Buck
Sep 6th 2013 5:45PM
Updated Sep 6th 2013 5:46PM
Walk into most dollar stores these days and one of the first things you notice is that aside from the cheap tsotchkes lining the wall, almost everything else costs more than a dollar.
While some stores like Dollar Tree remain fairly true to form, even it opened up a second chain called Deals to explore higher price points. Family Dollar is a "dollar store" in name only; almost everything it sells is more than a buck. And the price inflation has even given rise to a chain that revels in the five-dollar space, Five Below, which hews to its merchandise costing no more than a fin.
So news that fast-food king McDonald's is also willing to "break the buck" and reprice its Dollar Menu shouldn't come as much of a surprise. In five test markets across the country, the burger joint is sampling customer taste for a "Dollar Menu & More" option that provides choices for $1, $2, and $5 (another menu ran items at $1, $1.79, and $4.99). Without giving specifics, the restaurateur suggests they've been well received.
Like the dollar stores, fast-food restaurants are also routinely bumping up their prices, hoping to gain additional profits from the incremental increases.
Yum! Brands' Taco Bell chain had a "Why Pay More? Menu" for years that started with price points at $0.79, $0.89, and $0.99, but over time those prices crept well beyond the dollar threshold. Only recently has it begun going in the other direction, revisiting the dollar menu again with a new "$1 Cravings" value, though its "Cantina" menu offers food choices in the $5 range.
Similarly, Wendy's has a new "Right Price, Right Size" menu that runs items from $0.99 to $1.99, and Burger King Worldwide offers a value menu that starts at a dollar and goes up from there.
But tweaking its offerings is not exactly new for McDonald's either, as it had previously launched what it called an "Extra Value Menu" that had prices as high as $2, but it failed to catch on due to a lack of "simplicity and clarity," according to management, and the fast-food chain quickly backpedaled.
What all this juggling suggests, however, is that the days of the dollar menu are doomed. As a marketing ploy it's been successful, as McDonald's has shown, but in terms of the bottom line it's dicier at best. A few years ago, when Burger King tried to sell double cheeseburgers for $1, its franchisees revolted and sued the company because they were losing money on each burger they sold.
Breaking the buck and offering higher-priced items will soon become the norm, just as when I walk into my local "$0.99 Dreams" store and find that, yes, I must have been dreaming to think I'd find anything of value for a dollar.
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The article McDonald's Ready to Break the Buck originally appeared on Fool.com.Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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