On a recent lunch break, John Kurzatkowski was enjoying two McDouble cheeseburgers, fries and a large Coke at a McDonald’s in Oak Brook, Ill.
“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 Oak Brook-based burger giant is re-emphasizing its Dollar Menu, a 10-year-old idea 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 has 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. We want to make sure it’s attractive to choose our restaurant.”
Although Dollar Menu sales generally comprise just 13 to 15 percent of McDonald’s sales in the U.S., 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 of Palatine, Ill., 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.
New products in pipeline
Leading up to the initial 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.
“You have to have some compelling products in the pipeline to get people to the restaurants,” Morningstar analyst R.J. Hottovy said, adding that there need to be some higher-margin impulse items that can easily be added on to meals otherwise based on the Dollar Menu. “You have to have a compelling lineup of those types of products as well.”
Golden said there’s been “an acceleration of testing” of new products in recent months for the entire menu, and also for dollar-priced items. McDonald’s started with the Dollar Menu because it appeals particularly to its most loyal customers, whom he said “love the McDouble and the McChicken” but were simultaneously wondering, “Is there something that would make me want to come more often?”
In December, McDonald’s moved its limited-time grilled onion cheddar burger to the Dollar Menu and credited the burger’s popularity with better-than expected sales. The product will remain in stores until early June.
This month, as part of a Dollar Menu 10th anniversary celebration, the chain will promote a Hot ’n Spicy McChicken sandwich as a limited-time offer for $1. Also tested: a burger called the McCruncher for the Dollar Menu; it features white cheddar, crunchy onions and a chipotle ranch sauce.
McDonald’s chose the spicy sandwich because the chain found “a desire for experimentation” among its customers that was “not limited to specific age, gender, socioeconomic status or ethnicity.”
“There’s a growing interest in food with bolder flavor,” Golden said. “We wanted to make sure we made it easily available to all of our customers. You’ll see bolder flavors in a lot of other things we’re doing as well.”
Industry experts have backed McDonald’s strategy.
“By focusing on the Dollar Menu, it is helping them drive traffic back into the restaurants,” Hottovy said of McDonald’s fourth-quarter same-store sales, which just beat his expectation of flat performance.
McDonald’s created its Dollar Menu as part of a turnaround plan, beginning in early 2003, after the chain had reported its first quarterly loss. Same-store sales were declining, and stock was trading in the low teens. More than nine years of nearly unfettered growth followed, as the company improved operations and cleaned up existing U.S. stores. It also rolled out premium items like grilled chicken salads, smoothies, frappes and oatmeal with apples. Shares topped out at $102.22 early last year and have stayed around $100.
Wendy’s is promoting a “Right Size, Right Price” menu, with a number of items at 99 cents at most locations, including a fried chicken sandwich, four-piece chicken nuggets, “value-sized” fries and “value-sized” drink. Most Burger King stores offer the same items for $1, a spokeswoman said.