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McDonald’s finds again that traffic is hard to come by

The chain’s dollar menu generated sales, but not the traffic growth it wanted, says RB’s The Bottom Line.

The Bottom Line

McDonald’s $1 $2 $3 Dollar Menu helped the company generate sales in the first three months of the year—just not quite the way it wanted.

On the company’s first quarter earnings call Monday, company executives noted that the menu helped to generate sales through an improved average check.

Consumers, it seems, would buy a combo meal and then add an item from the value menu to that order. Or they would create a meal using items from the dollar menu. Both efforts led to an improved average check that, along with prices, helped generate 2.9% same-store sales growth in the first three months of the year.

What it did not generate was traffic growth, which is precisely what value menus are supposed to do.

The results illustrate the challenges McDonald’s has had for nearly seven years to find a true successor to its value menu in an enormously competitive environment.  

“Overall, we’re not satisfied with guest counts being down,” CEO Steve Easterbrook said. “But the role the Dollar Menu plays and the way it influences our overall product mix is where we want the platform to be.”

This is just one quarter, and it’s dangerous to draw too many conclusions from just one three-month period, especially one in which everything else was generally positive.

Many other factors contributed to the weak traffic. Weather, frequently a major factor in restaurant sales, likely cut its sales by half a point in the quarter.

Breakfast was surprisingly weak, prompting a separate, two-for-$4 breakfast sandwich deal. Breakfast has been an anchor that has kept McDonald’s sales positive for some time. But it’s also increasingly competitive. And that apparently hurt traffic.

In addition, the restaurant business is in a state of perpetual, same-store traffic decline as supply has clearly exceeded demand.

“One of our challenges in the U.S.,” Easterbrook said, “is consistently growing comparable guest counts, especially when current overall industry traffic is negative.”

Executives have been preaching patience with the value menu for some time now. In January, they said it would take “three to six months” for consumers to fully understand the new value offers.

Value is important to McDonald’s. It takes a lot of customers to support a 14,000-unit chain, and lower prices brings in more customers.

But the company has also struggled with traffic. For years, the chain had little problem with it, thanks largely to its popular Dollar Menu—which supported traffic in 2009 and 2010 when financially strapped consumers kept their spending at bay.

Commodity costs ultimately rendered that menu obsolete and McDonald’s shifted away from value in 2012. McDonald’s sales weakened after that, and traffic has been a challenge ever since. The company last year estimated that it lost 500 million customer visits in the years since the end of that value menu.

In 2015, McDonald’s tried the McPick 2 menu, offering a series of two items for a certain price point. That didn’t work well: Customer counts declined by 2.1% in 2016 but increased 1% in the U.S. in 2017.

Executives felt the McPick menu wasn’t consistent enough, and this year shifted to a newly designed dollar menu with tiered pricing to provide the value necessary to grow customer counts more consistently. That hasn’t happened yet.

Maybe it’s the menu itself. It says something that McDonald’s primary rivals, Burger King and Wendy’s, didn’t jump aboard a new dollar menu bandwagon this year, preferring to stick with higher-price-point offers, notably Burger King’s 2 for $6 platform, which Wendy’s has mimicked in recent weeks.

The competitive landscape has changed. Consumers have a lot of choices. And while value is still important, it’s not enough to simply offer lower prices.

The good news for McDonald’s is the chain has a lot of efforts in the works that should help meet some of those higher expectations, such as remodeled locations with self-order kiosks and fresh-beef burgers.

And executives said on Monday they will keep “finessing” the dollar menu so it generates traffic.

But it won’t be easy, as McDonald’s has found for nearly seven years now.

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