McDonald's Dollar Menu Replacement Fuels Industry Price War

(Bloomberg) -- The fast-food price war is about to get even more intense.

McDonald's Corp., the world's largest restaurant chain, unveiled its new value-priced menu on Monday, aiming to keep its lead in an industry that's increasingly racing for the bottom. The lineup, set to go live on Jan. 4, includes items such as chicken tenders, Happy Meals, sodas, triple cheeseburgers and the Egg McMuffin.

With visits to U.S. fast-food restaurants seen remaining flat next year, the major chains are jockeying for position and announcing discounts to keep diners' attention. Taco Bell, the Mexican-themed chain owned by Yum Brands Inc., is responding with what it calls its “biggest value push in company history.”

The new offering at McDonald's, which will run alongside the regular menu at restaurants, is a balancing act for the Golden Arches. If items are priced too high, customers feel like they're getting ripped off and head to competitors. But if the prices are too low, McDonald's own franchisees will do the grousing.

That was the case with the company's Dollar Menu, which was phased out in 2013. McDonald's operators thought it weighed too heavily on profit margins, but the menu was popular with customers. And its absence was felt. The demise of the Dollar Menu was seen as a contributor to a sales slump that lasted two years.

This time around, McDonald's thinks it has a formula that can keep franchisees happy. More than 90 percent of restaurant owners have signed up to participate in the program, according to Chris Kempczinski, who runs the company's U.S operations.

“You have to make sure it's something we can sustain,” he said in an interview.

Andy Barish, an analyst at Jefferies, upgraded the stock to “buy” on Tuesday and raised his price target to $200, in part because the new value menu will help the chain continue to gain customers.

McDonald's shares climbed as much as 2 percent to $174 in New York Tuesday, in the biggest intraday gain in more than two months. The stock had already climbed 40 percent this year through Monday.

Bolstering Comeback

McDonald's announced in October that it was planning the menu, though it didn't give details until Monday. The idea is to shore up a comeback built on the success of all-day breakfast and more targeted discounts like McPick 2 for $5.

When the new menu hits next month, customers will be able to get a handful of options for $1, $2 or $3. The cheapest items include sodas, McChicken sandwiches, a sausage burrito and cheeseburgers. The sausage McMuffin with egg is on the menu for $3, alongside a new chicken sandwich. And the company's buttermilk chicken tenders, which sold out last month after a brief run, are returning to the menu -- with an order of two costing $2.

One popular item that's absent is french fries. Kempczinski said the company spent months trying to figure out the best way to construct the new menu and ultimately decided it was compelling without fries.

“We didn't need fries to make it attractive,” he said.

Taco Bell, meanwhile, is seeking to remain in the mix as McDonald's and its burger rivals at Wendy's and Burger King increasingly look for ways to appeal to the core fast-food customers looking for discounted fare.

Shares of owner Yum were little changed Monday at $83.32.

Taco Bell is reminding customers that it has a $1 menu with 20 items, and this lineup will be boosted by 20 more limited-time offerings in 2018. The menu will include nacho French fries and a new “stacker” quesadilla -- beef and cheese in a folded flour tortilla.

“I think a lot of places begrudgingly try to figure out what food to serve at these price points,” Brian Niccol, the chain's chief executive officer, said in an interview. “We choose to lean into it.”

To contact the reporter on this story: Craig Giammona in New York at cgiammona@bloomberg.net.

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Lisa Wolfson

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