How McDonald’s became OK with higher prices

The chain’s shift away from the Dollar Menu enabled operators to raise prices on premium products. It didn’t hurt says, says RB’s The Bottom Line.
Photo courtesy of McDonald's

The Bottom Line

Last week, we wrote about the wide difference in price for a Big Mac or a McDonald's Cheeseburger by state, and found some surprising differentials. It cost 70% more for a Big Mac in Seattle than it costs in Austin, Tex., for instance. Prices for Cheeseburgers can be more than double in some cities than in others.

While the story focused on the minimum wage, there was another underlying element to these differences: McDonald’s has shifted away from its reliance on value consumers. Franchisees have raised prices more aggressively in recent years—taking Big Macs perilously close to levels that were once reserved for fast-casual burger chains.

Yet it doesn’t appear to be hurting the company’s sales.

“There was a false transaction-driving mentality that we believed we had to be the low-cost provider,” former franchisee Jim Lewis said. “We still need to be one of the low-cost providers. But there’s always room to go higher than what we were.

“The reality is people like McDonald’s. If you like a Big Mac, you like a Big Mac. You’re not going to pay $10 for it. But you may pay $4 rather than $3.”

This is actually a big shift. For years in the early 2000s, and then through the Great Recession, McDonald’s franchisees used a Dollar Menu to get customers in the door—a strategy that helped the company destroy much of its competition.

But the company struggled to adjust to the post-Dollar Menu environment and its same-store sales struggled between 2012 and 2015.

McDonald’s has had only two quarters with a same-store sales decline since then, however, and one of those was the pandemic-influenced spring quarter of last year. Remove that particular quarter and McDonald’s has averaged a 3.6% same-store sales increase over the past three years.

Just about all of that has come through higher prices charged by franchisees, rather than traffic.

Franchisees, it turned out, were free to raise prices on premium items more aggressively because it no longer had that Dollar Menu. Lewis noted that operators feared to price things like a Big Mac or a Quarter Pounder too high, lest it push customers to that Dollar Menu.

 “We were tied to the Dollar Menu for so long, it tied our hands to raise the rest of the menu,” Lewis said. “That really caused us a headache.

“It gave everyone a little more room to move the whole menu.”

And, while they lost customers who no longer had their $1 McDouble, franchisees were OK with this—value-only customers are unprofitable.

To be sure, McDonald’s has made a lot of effort to improve traffic during that time—it has tested various value options, shifting to local offers and then back to national offers again and doing things like dollar drinks and two-fer deals. But much of its effort has been aimed at speed of service and other areas.

McDonald’s realized they have some real benefits that customers are willing to pay for. The company’s service is quick. And its locations are convenient—more convenient than just about anyone else. McDonald’s customers control their time, Lewis said, and that is valuable.

Operators’ ability to raise prices, and consumers’ apparent willingness to pay it, helps explain McDonald’s seeming indifference to higher minimum wage, with CEO Chris Kempczinski declaring “McDonald’s will do just fine with that” back in January.

There is a real risk, however, to pricing indifference and a willingness to sacrifice customer counts. Younger consumers that liked the Dollar Menu are now opting for rival chains instead, which could give those chains a leg up once said consumers have more money in their pocket.

And higher prices are a potentially big problem if the economy sputters once stimulus dollars wear off. On top of that, food prices are expected to creep up—which could cause some real problems for low-priced operators at a time of already-rising wages. Years of price increases could leave chains like McDonald’s with less pricing ability in future years. And, as Lewis noted, there is a limit.

For now, though, McDonald’s is OK with that $5 Big Mac.

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