McDonald's Dollar Menu Is Virtually Disappearing

NEW YORK (The Street) -- The McDonald's (MCD) "Dollar Menu" is dying.

Blame unrelenting inflation over the years eating away at the profitability of selling a hamburger for a buck. Or simply, McDonald's execs realizing that to boost sagging U.S. sales, the fast-food chain has to sell higher-priced sandwiches to a wealthier clientele. Either way, there is almost no denying McDonald's is moving to vacate the dollar menu.

According to reports this week based on a company webcast with franchisees, McDonald's is introducing a host of mid-priced items to its menu that will cost between $1.50 and $3.00. A chicken sandwich and a double burger, both with lettuce and tomato, will go for around $1.50. The current versions of both items today usually cost about $1.19 to $1.39.

In addition to adding the new mid-priced sandwiches, McDonald's is also de-cluttering its drive-thru menu and expanding all-day breakfast nationwide after testing it in San Diego earlier this year, moves that have been widely expected.

The decision by McDonald's to de-emphasize the dollar menu should come as no surprise based on commonsense economics. Prices for items such as beef, poultry and produce, the key components to most of the dollar menu's sandwiches, have surged since the value-centric program launched in 2002. The upward trend in inflation has made selling items at a dollar less profitable for McDonald's franchisees.

"Are dollar menu items profitable? Yes, but are they as profitable as we'd like them to be? Not necessarily," said McDonald's franchisee Terry Shugart. 


Shugart, who started working at McDonald's in 1971 and is now a franchisee operating four restaurants in Northeast Georgia, disagreed with the notion the dollar menu stands to disappear, however. "If you go back to the 1980s, the McDonald's menu was more clearly defined between value and mid-tier," said Shugart, suggesting that McDonald's is returning to its roots to boost sales today.

Each franchisee, noted Shugart, is able to set his own prices based on prevalent market conditions.  

Nevertheless, with consumers not also buying or trading up to McDonald's premium offerings, the existence of a dollar menu has become a bane to the bottom line of many franchisees.

McDonald's execs finally seem to understand these economics its franchisees face. "We are moving to a strategy of more flexibility for the local markets to price the dollar menu," McDonald's U.S. President Mike Andres said on a January 23 earnings call. This sentiment was also echoed recently by McDonald's new CEO Steve Easterbrook. "There will be a balance to play on value -- we haven't quite found that equation yet, but we have been working hard to unlock it," said Easterbrook on a April 22 earnings call.

Meanwhile, the dollar menu has already morphed into a shell of its former self. In 2013, McDonald's rebranded the dollar menu as the "Dollar Menu & More", featuring $1 and $2 sandwiches and even a $5 item (a 20-piece order of Chicken McNuggets). Currently, there are roughly 14 items on the "Dollar Menu and More" menu, up from about 8 or so when the dollar menu was first started.

McDonald's declined to respond to an email seeking comment on its plans for the dollar menu.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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