McDonald’s is convincing customers to pay more as the fast-food giant ditches its Dollar Menu roots and raises prices (MCD)

Hollis Johnson/Business Insider

McDonald’s US sales growth was driven by the average customer spending more at the fast-food giant, even as customer traffic slipped, the company announced during its first-quarter earnings call on Tuesday.
Customers’ average check increased due to higher prices and a shift in what menu items they purchased, as more people ordered for delivery and via kiosks.
The chain is also downplaying the deep discounts of the $1 $2 $3 menu in favor of the pricier 2 for $5 deal, which returned in late 2018.
Convincing customers to spend more by cutting Dollar Menu-esque deals is crucial to McDonald’s business — especially if it can’t fix its traffic problem and get more people to visit the chain.
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McDonald’s deals are getting pricier as the Dollar Menu fades into the rearview mirror at the fast-food giant.

On Tuesday, McDonald’s reported that comparable sales grew 4.5% in the first quarter.

However, the company also reported that traffic was negative during the quarter. Same-store sales were driven by higher checks — not by bringing more people into McDonald’s.

In essence, McDonald’s has convinced — or forced — customers to spend more money as the chain steers them away from the uber-cheap deals of the Dollar Menu era and towards pricier options.

While McDonald’s raised prices during the the quarter, CEO Steve Easterbrook said that a shift in people’s ordering habits played a bigger role in increasing how much customers spent on average.

"You don’t want the pricing element to be overly dominant," Easterbrook said.

Read more: The dollar menu is dead

Customers ordering delivery tend to spend one-and-a-half to two times as much per order, Easterbrook said, contributing to a higher average check. The unhurried nature of self-order kiosks also results in customers spending more. And, options such as adding bacon to burgers and new menu items like Donut Sticks contributed to customers spending more at the chain.

McDonald’s also highlighted its 2 for $5 Mix and Match deal as a sales driver — a promotion that demonstrates how important getting customers to pay more has become to McDonald’s strategy.

Death of the Dollar Menu

Hollis Johnson

McDonald’s launched the $1 $2 $3 menu in late 2017. Like the Dollar Menu — which was retired in 2013 — before it, the new value menu served as an attempt to bring more customers to the chain by offering massive discounts.

The $1 $2 $3 menu failed to produce the results the fast-food giant wanted. In October, Neil Saunders, managing director of GlobalData Retail, wrote in a note to clients that McDonald’s had "focused too strongly on the Dollar Menu."

He said that while the $1 $2 $3 menu drives some traffic, the message is "tired" and it drives customers to "trade down rather than to explore higher-priced options."

In the months since, McDonald’s has shifted its focus to the pricier 2 for $5 Mix and Match promotion, bringing back the deal to include the chain’s fresh-beef burgers in late 2018.

Meanwhile, McDonald’s gave control of the $1 $2 $3 menu over to franchisees, who could add and subtract items based on local preferences and profitability. Some of the most significant deals, such as the $3 Happy Meal, were stripped from the value menu.

The 2 for $5 Mix and Match helps drive higher average checks and franchisee profitability, BTIG analyst Peter Saleh wrote in a note on Monday.

"Given the limited success McDonald’s experienced in driving transaction growth with value platforms such as relaunched $1 $2 $3 Dollar Menu, we are not surprised to see the concept shift its promotional focus to full price items," Saleh wrote. "Early this year, McDonald’s was promoting its 2 for $5 Mix & Match Deal, as compared with the prior year when the concept was aggressively advertising the new $1 $2 $3 Dollar Menu."

By forcing customers to spend at least $5, the deal can help boost average check figures and sales, even when fewer customers are visiting stores.

McDonald’s has realized that its Dollar Menu era is over. Now, the fast-food giant’s biggest challenge is convincing its customers to continue to pay more.

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Source: Business Insider – ktaylor@businessinsider.com (Kate Taylor)