It’s lunchtime. Payday’s not until Friday. And all the change you gather from your desk drawer and coat pockets comes to just more than $2.
The world’s biggest fast-food chain, which has been bedeviled by declining U.S. sales and aggressive competitors, soon will provide an answer to your rumbling stomach.
In a dramatic and risky gambit designed to get the turnstiles spinning, McDonald’s Corp. is planning to hack prices to 55 cents on some of its most popular sandwiches–including the Big Mac–when the order includes a drink and fries.
For fast-food diehards who want to fill up on-the-spot and do it cheaply, it’s sure to be an attraction. But a big question for McDonald’s is whether the 55-cent Big Mac will lure customers whose food choices are driven as much by quality and taste as by price. The answer to that question may say a lot about America’s dining habits.
Financial and marketing experts are just as divided over whether this new strategy, which the company’s vice chairman and chairman-U.S.A., Jack Greenberg, reportedly will pitch to franchisees on Thursday, will be a big hit or a disastrous miss.
It certainly seems to represent a major shift in strategy by the Oak Brook-based fast-food chain, which only last year hyped its bigger, more expensive Arch Deluxe sandwiches. That effort has been largely acknowledged to have been a failure.
Whatever the results for McDonald’s, this move almost assuredly will set off a vigorous price war that could hurt smaller chains, even to the point of driving some of them out of business.
“This type of program will expedite the industry consolidation process,” said Mitchell Speiser, an analyst at Lehman Brothers in New York. “Smaller players or ones that compete on price will not be able to sustain their businesses in this environment.”
At a downtown McDonald’s, customer Virgil Turner voiced the sentiments the company’s brass is hoping for:
“I go to anyone who can prepare a good meal at a good price. That’s (the price drop) something to look forward to. I imagine every kid at school will jump on that,” Turner said between bites of his Quarter Pounder with cheese.
But Mary Austin, a nurse lunching at a nearby Taco Bell, said she would remain loyal to her tacos.
“I’m not fond of McDonald’s and the sauce they use,” Austin said. Even at 55 cents, a Big Mac wouldn’t pass her lips.
The news of the plan, gathered from McDonald’s franchisees and company documents, was reported in the Wall Street Journal on Wednesday. It calls for a 55-cent special on a designated regular-menu sandwich when purchased with a soft drink and fries.
The specials reportedly will rotate throughout the year to include even the pricey Arch Deluxe items introduced last year. Rather than just a temporary promotion, the plan would always offer a regular-menu sandwich at the discounted price.
McDonald’s issued a cryptic statement Wednesday, confirming that it would soon be launching “an unprecedented value offering.” Company officials would not comment further.
Wall Street did not respond positively to the news of price cuts. McDonald’s shares were off $2.50 to close at $44.87 on the New York Stock Exchange. Wendy’s International shares also were down, off $1.50 to $20.75. Burger King Corp., which ranks second to McDonald’s, is a subsidiary of Britain’s Grand Metropolitan PLC.
McDonald’s has reported slight increases in U.S. sales the last few years–a 3 percent increase for 1996–but all the growth has come from the addition of new outlets.
The most important factor in determining a chain’s health–the comparison of the average store’s sales from one year to another–has been negative over the last six quarters.
And to make matters worse, the competition is gaining, even though the giant chain is more than twice as big as its closest rival.
Last year, McDonald’s saw its market share among chains specializing in burgers–a $38.9 billion U.S. business–decline slightly, to 42.1 percent from 42.3 percent in 1995.
Burger King and Wendy’s increased their share of the market. Burger King climbed to 19.2 percent from 18.2 percent, while Wendy’s attained 11 percent of the market, up from 10.7 percent.
Burger King, Wendy’s and PepsiCo Inc.’s Taco Bell have discounted certain items on their menus to 99 cents and maintained those discounts over time. McDonald’s price cuts, in contrast, have mostly been on specialty items for quick promotional periods.
In its statement Wednesday, McDonald’s said “U.S. sales this year have been good . . . the trends are the best we have seen in some time . . . and we’re going to build on this momentum.”
Some analysts who have been critical of McDonald’s strategies describe the 55-cent deal as a desperation move.
“This is a 180-degree turnabout from last year when the company introduced the higher-ticket Arch Deluxe in an attempt to woo more adult customers,” said Damon Brundage, an analyst with NatWest Securities in New York. This strategy shows “the only way they can get more consumers into their stores is to slash prices significantly.
“The fundamental problem at McDonald’s,” Brundage said, “is that their food isn’t very good. They have a product problem. They need to take a long hard look at what they can do to improve the quality of their product, instead of trying to drive traffic with a mediocre product at a lower price.”
Last year, McDonald’s made a much-hyped move in that direction by rolling out a line of bigger, more expensive and reformulated sandwiches under the Arch Deluxe banner. But analysts say the line’s quality and taste were not enough to make a difference, and its marketing approach was distracting and confusing.
But consumer products and retailing specialist George Rosenbaum believes that McDonald’s wouldn’t undertake so drastic a pricing strategy without having done its homework.
“McDonald’s is the most sophisticated user of research of any restaurant chain,” said Rosenbaum, chief executive officer of the consulting firm Leo J. Shapiro and Associates in Chicago. “They realize if you downsize your prices in a way that is meaningful to consumers you will get a tremendous response.
“Their brand equity is so powerful and their locations so convenient, this has a chance of positioning them for a whole new spurt of growth. They may also see the collapse of some competition.”
