McDonald's Hedges Bets With Dual Burger Strategy

McDonald's Hedges Bets With Dual Burger Strategy
by Karlene Lukovitz, Monday, December 1, 2008, 3:30 PM
Media Post News


McDonald's decision to pull a dual-burger maneuver in the face of rising cheese costs that have been eating into the profitability of its phenomenally successful 99-cent Double Cheeseburger is an inspired compromise, say restaurant industry analysts.


The strategy, announced just before the Thanksgiving holiday, consists of raising the price of the famed Double Cheeseburger--which features two cheese slices--from 99 cents to $1.19 and simultaneously replacing it on the Dollar Menu with a new "McDouble" that's identical save for its single slice of cheese.

The changes went into effect as of Monday in corporate-owned stores, and McDonald's will begin national advertising around its revised Dollar Menu on Jan. 5, according to Bloomberg News. While pricing at the franchise stores that account for about 80% of McDonald's nearly 13,900 U.S. locations is up to the operators, U.S. franchisees endorsed the changes during November, Bloomberg reported.

Diehard fans of the Double Cheeseburger, McDonald's franchisees and the chain's competitors alike had been left to speculate about the item's fate since The Wall Street Journal outed the possibility of changes being afoot back in early August. Faced with dwindling margins on the Double Cheeseburger as commodities hikes forced up cheese prices, some franchises had taken to cutting their losses via strategies that ranged from upping the price of the traditional double-slice burger, to keeping the $1 price but reducing the cheese from two slices to one, to offering the burger sans cheese.

Wendy's quickly moved to gain some leverage during the period of uncertainty by replacing its 99-cent Stack Attack with a slightly different--although already existing--99-cent burger, the Double Stack Cheeseburger, and launching a marketing push for two existing 99-cent sandwiches on its Value Menu.

McDonald's, however, was not about to make a precipitous move, given that the Double Cheeseburger has been the anchor of its eight-item Dollar Menu since the menu's inception in 2003. The Dollar Menu is not only a powerful traffic driver, but has been estimated to account for about 14% of the chain's sales.

The Dollar Menu has also been key in enabling McDonald's to draw in cash-strapped consumers during this trying economic year and continue showing increases in same-store sales in most recent months. QSR magazine reported an increase of 3.4% in U.S. same-store sales for the second quarter and a 5.3% U.S. same-store increase for the month of October (globally, same-store sales rose by 6.1% and 8.2% for those two respective periods).

"McDonald's had to simultaneously accomplish two very important objectives: Make sure that the value proposition continued to be strong enough to compete effectively with all of the other value menu options out there, and ensure that the margin was sufficient for its franchisees to make a fair profit," sums up Dennis Lombardi, EVP, foodservice strategies for WD Partners, a design and development firm for restaurants and retail chains. "Their solution was a compromise that achieves both requirements."

While Lombardi notes that some franchisees and some consumers are bound to find fault with the strategy, he points out that McDonald's undoubtedly tested the move and was very confident that there would be minimal, if any, impact on sales. "If they had raised the Double Cheeseburger's price by a dollar, maybe there might have been a negative affect on traffic and sales. But as it is, people will just try out the new burger with the single cheese slice and decide for themselves whether it's worth spending the extra 20 cents for the Double Cheeseburger," he says.

Various financial analysts were also quoted in the press as predicting that the menu changes will improve profits while having no discernible affect on sales--although some have also expressed the opinion that even McDonald's is unlikely to be able to sustain comparable-store gains if the economy remains in the dumps well into 2009, as is generally expected.