McDonald's New Value Menu Sets Up Fast-Food Fight for 2018

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Heads' up, burger barons: McDonald's has a low-priced approach that's going to put more pressure on the U.S. fast-food industry next year.

The Golden Arches on Tuesday confirmed a U.S. value menu that will include items priced at $1, $2, and $3 in 2018. The move comes years after McDonald's backed away from its Dollar Menu and suggests the heat is on for other chains, particularly direct competitors in the burger category including Burger King and Wendy's.

At the same time, McDonald's operators around the country are preparing to make some of their burgers with fresh beef under a plan announced months ago.

The value proposition, though, got a bit more attention from executives and analysts on Tuesday's quarterly conference call. Earlier this month, Wells Fargo analyst Jeff Farmer suggested McDonald's would have products at $1, $2, and $3 in a national value play in 2018. McDonald's confirmed those plans Tuesday, without directly referring to Farmer.

"One of the things that we have said to our franchisees in the U.S. is 'We don't have to win on value but we can't lose on value,' and that means we have to be competitive with our investments against a value program," said Chris Kempczinski, who has been president of McDonald's U.S. since January.

The program will focus on everyday $1, $2, and $3 values, with deals "that will pulse in and out throughout the year," he said, without naming specific products.

Playing up value shouldn't come as a complete surprise. Its $1 any-size soft drinks and the return of a 2 for $5 McPick deal helped McDonald's woo U.S. customers during the recent third quarter. But pricing items at $1, $2, and $3 could underprice rivals and lead other players to rethink their strategies. Many chains have been relying on $4 and $5 bundles, including Wendy's two-year-old 4 for $4 play and the various $5 meals at chains such as KFC, Taco Bell, Carl's Jr. and Hardee's.

After McDonald's backed away from its Dollar Menu a few years ago, "we weren't as competitive as we needed to be on value and so what you're going to see from us next year is us being really fully competitive with our near-in competitors with a value program," Kempczinski said.

And while marketing strategies weren't discussed on Tuesday's call, it's clear that McDonald's is planning for national advertising to promote its value play. The chain, which named a new U.S. chief marketing officer, Morgan Flatley, in the spring, has the full attention of its dedicated national agency, We Are Unlimited. And McDonald's drastically reduced the roster of creative agencies its regions will work with on their own campaigns. The local efforts are expected to get less weight moving forward.

"The need for some of the local value initiatives is somewhat reduced because we're putting the national muscle to play here to support the program," said CEO Steve Easterbrook.

Almost all of U.S. operators have signed letters committing to a multi-year strategy that includes updating all McDonald's restaurants to a new "experience of the future" design (up from about 13 percent currently), upgrading equipment and ensuring the chain remains competitive on value, Kempczinski said.

As for fresh beef, an initiative McDonald's calls "hot off the grill," some regions are starting to get those burgers. First, everyone at each restaurant must complete a six-week training curriculum. For now, that means increased labor costs, which weigh on restaurant profitability in the short-term.

In September the chain it began promoting its updated McCafe coffee line after some big equipment upgrades. And its tech rollout continues, with mobile order and pay systems to be available across the U.S. by the end of the year. McDonald's is also starting to get "real traction" with targeted mobile offers via its app, Kempczinski said.

Delivery is now available from roughly 8,500 restaurants worldwide and should hit about 10,000 restaurants in all by the end of 2017, including about 5,000 in the U.S., where UberEats handles McDonald's delivery. Delivery is particularly strong in dense urban metropolitan areas where young people are ordering, including New York, Boston, Miami and Los Angeles, executives said.

McDonald's U.S. same-store sales jumped 4.1 percent in the third quarter, surpassing analysts' average forecast of 3.4 percent, according to Consensus Metrix. It was McDonald's U.S.'s third straight quarter of same-store sales growth and its second consecutive quarter of positive comparable guest count growth. Global same-store sales growth of 6 percent also exceeded expectations. McDonald's has now had nine straight quarters of global same-store sales growth and three straight quarters of comparable guest count growth.

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