Fast Food Value Menu — Too Cheap for Some?

By Lisa Scherzer

You can buy a Hot ‘n Spicy McChicken at McDonald's for $1, a Junior Whopper from Burger King for $1.29, and 4-piece chicken nuggets at Wendy's for 99 cents. Is it possible that fast food is getting too cheap?

As these restaurants contend with increased competition, cost-conscious consumers and a still-uncertain economy, they're trying to outdo each other by slashing prices ever more in the hopes of getting customers through the door. But some franchisees are grousing, suggesting those rock-bottom prices are getting too cheap for their comfort.

A recent report from Janney Montgomery Scott on McDonald's (MCD) surveyed several franchisees. Many seemed to feel it was a problem for restaurants to rely so much on discounted items. As one franchisee responded in the survey: "We need ‘new' news – not just cheap food." That sentiment was echoed by others, who on the whole said their stores' level of discounting was too high. "It's one or the other, the Dollar Menu or other discounting. We can't continue to do both," one said. Another McDonald's store owner griped that all the discounts aren't strategic, while another said, "Every item introduced comes with unlimited coupons for FREE and a ‘suggested price point' that is ridiculous and does not meet franchisees' needs for profitability."

Widespread discounts

To get a sense of how widespread the discounts are among the major fast-food players, just check out the latest promotions. McDonald's late last year brought back its Dollar Menu after trying to push more premium items. In January Taco Bell, which is owned by YUM Brands (YUM), began testing a new $1 Cravings Menu in two markets featuring nine items, three of them new. Also in January, Wendy's (WEN) introduced a revamped menu called "Right Price Right Size," with items, including the Crispy Chicken Sandwich and Double Stack burger, ranging from 99 cents to $1.99. Subway fans who thought $5 footlongs were too pricey started getting 6-inch subs for $3.

And following McDonald's, Burger King got aggressive with its menu and launched a limited time offer for a Junior Whopper for $1.29 in February. At the time, Steve Wiborg, head of Burger King's North America business, said a stronger "value message" will hopefully "drive more customers to Burger King – some of whom will end up ordering higher-priced items once they get there," according to a Wall Street Journal report. This practice is known in the restaurant industry as a barbell strategy.

The value push, though, hasn't been sufficient to bolster weak sales, if McDonald's earnings report Friday is any indication. Global sales at restaurants open at least 13 months fell 1% in the first quarter, and the company warned that sales would be slightly lower in April.

Competition in this space has been especially intense, says John A. Gordon, principal of Pacific Management Consulting Group, a chain restaurant analysis and advisory firm. The reason: Same-store sales – the all-important benchmark of a restaurant's positive growth – in the latest quarter were being compared with performance during winter 2012, which was relatively positive. Sales and traffic were higher then, driven in part by relatively good weather and an election-year bump, says Gordon. McDonald's same-store sales trend was up 7.7% in January 2012 (for the U.S.), 11.1% in February and 8.0% in March.

"Those are big numbers to go up against," Gordon says, adding that, as we went through balance of 2012, the sales trend began to fall a bit. Compare those numbers with this year: up 0.9% in January, down 3.3% in February and up 0.3% in March.

While the fast-food industry might be synonymous with "value," the big players have also been introducing new, more premium offerings. Last month McDonald's added chicken McWrap sandwiches (suggested price is $3.99) to its menu and Wendy's announced limited-time Flatbread Grilled Chicken Sandwiches, in an attempt to appeal to healthier eaters and upgrade some of its product line – with the hope of boosting margins.

"In theory, over time if you drive traffic and you take care of customers, and it's a good product, they will come back and you'll do well," says Gordon. But in the short term, the more discounted the products are, the more eroded the brands are in consumers' eyes. "If you pound away too long on a low price point, it tends to alter a perception over time," Gordon says. "And customers start to ask, what is the real worth or value of this brand or product?"