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McDonald's Aims to 'Evolve' Dollar Menu

Overall Income Rises, but Franchisees Grumble Over Narrowed Margins

By Published on . 2

CHICAGO (AdAge.com) -- Admitting to problems with franchisees over a platform that's behind much of its turnaround, McDonald's is determined to tweak its dollar menu until it's profitable. In a second-quarter earnings call with analysts this afternoon, Ralph Alvarez, the chain's president-chief operating officer, cited increased commodity costs, declining margins and franchisee profitability for the change.
McDonald's dollar-menu items currently account for about 14% of total U.S. sales.
McDonald's dollar-menu items currently account for about 14% of total U.S. sales.

"From a promotional point of view, we've got to be much more careful on balancing driving traffic while maintaining margins," Mr. Alvarez said. The chain intends to continue offering inexpensive options, he said, "but what sits on that menu will look different than now because it has to be profitable."

Listening to complaints
McDonald's has previously confirmed that it's testing double cheeseburgers for more than $1, but today's call was the company's first commitment to "evolve" the menu. The fast-feeder has faced increasing pressure from its usually docile franchisees, some of them accusing the company of driving traffic at the expense of their margins. There has also been some pushback about new-product giveaways.

"They're concerned and rightly so," Mr. Alvarez said. "We're seeing commodity cost increases that we haven't seen in a lot of years."

The chain relied heavily on dollar-menu advertising earlier this year. Those items currently account for about 14% of total U.S. sales. But in recent months, McDonald's has focused on higher-priced items, such as the Big Mac and Southern Style chicken sandwich and Southern Style chicken breakfast biscuit.

Despite higher food costs and a cost-conscious consumer, McDonald's second-quarter same-store sales rose 3.5% in the U.S. over the prior-year period. Net income was $1.2 billion, up from a $711 million loss a year ago. The company credited coffee and the Southern Style chicken biscuit as contributing heavily to breakfast sales, McDonald's fastest-growing daypart. Mr. Alvarez also singled out iced coffee and sweet tea as key drivers, but added that specialty coffee is beating internal expectations in the 1,600 locations where it's been rolled out.

Drinks all around
This is, of course, just the beginning of Mickey D's big beverage rollout, expected to be completed by the end of 2009. McDonald's is aiming to transform itself into a drink destination rather than a place where beverages are sold to wash down burgers. The chain has said it expects the entire platform to add about $1 billion in annual sales.

"Throughout 2009, we will add smoothies, frappes, bottled beverages and energy drinks," Mr. Alvarez said. "Overall, we're very pleased with the results in the U.S. and are optimistic about the opportunities ahead."
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