Consumer Attachment to Dollar Menu Leads McDonald's to Just Add $5 Items to It

Oct. 23, 2013 — -- McDonald's is finding a happy compromise in pushing higher-priced items to customers with its new "Dollar Menu and More," refusing to let go of the powerful draw of one dollar marketing.

McDonald's, based in Oak Brook, Ill., announced that the Dollar Menu and More menu is an expansion of its 10-year old Dollar Menu, which accounts for 13 to 15 percent of sales. Some items may cost as much as $5, such as 20-piece McNuggets.

So what's the point of adding items to the dollar item that clearly cost more to anyone who can read numbers?

R.J. Hottovy, analyst with Morningstar, said there is "strong consumer attachment to a dollar menu."

The company's latest push stems back to its failed attempt to expand its Extra Value Menu last year. McDonald's tried to focus on core menu items with less emphasis on the dollar menu, with soft traffic as a result.

"The dollar menu is a key traffic driver, " Hottovy said.

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Now McDonald's can have its cake and eat it too, so to speak.

"You keep the Dollar Menu at the forefront of marketing, but still have some other products," he said. "It keeps the marketing message on the dollar."

Hottovy said it's an "appropriate strategy" to have in this economic environment.

McDonald's third-quarter earnings results, released on Monday, were a continuation of the past few quarters in which a challenging consumer spending picture and fewer customers eating out in informal settings are weighing on profits, Hottovy said.

"In this environment, it's paramount to keep traffic coming into restaurants," Hottovy said. "As things hopefully normalize in the economy, you'll hopefully see trading up from consumers."

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Still, McDonald's restaurant sales "easily trumps the quick-service restaurant industry average of just over $1 million per location," Hottovy says.

Hottovy says menu innovation played a role in the company's productivity, such as introducing McWraps, a larger version of their snack wrap, premium burgers, McCafe specialty coffee menu and real fruit smoothies.

Hottovy wrote in an investor research note that despite some value-menu management missteps last year and "fierce" industry competition, he doesn't "expect McDonald's strong competitive positioning to abate anytime soon, and we believe the company possesses the widest economic moat in the restaurant category."