McDonald's Tests Higher-Priced Offerings to Appease Franchisees

Chain Considers National Rollout of

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Is McDonald's ditching its Dollar Menu?

The Golden Arches has been testing a new concept called Dollar Menu & More that has items priced up to $5, and is weighing a national rollout depending on the success of tests.

"While no official changes have been made to our current Dollar Menu, we continue to evaluate and test the best value options, including the current Dollar Menu & More test, for both our customers and McDonald's owner/operators," McDonald's said in a statement. "Our commitment is to continue to provide our customers with everyday value and choices that can't be beat whenever and wherever they visit us."

One version of the new menu being tested included three price points —$1, $2 and $5 items like the 20-piece Chicken McNuggets. A different version that was tested had prices of $1, $1.79 and $4.99.

Franchisee friction
The Dollar Menu, which accounts for about 13% to 14% of the chain's sales, was introduced 10 years ago but its low margins have caused friction with franchisees. In 2008, corporate found itself at odds with franchisees, who at the time wanted the double cheeseburger off the dollar menu in light of rising commodity costs and what they said was a decrease in profitability. An iteration of the double cheeseburger -- now with one slice of cheese and two patties -- known as the McDouble exists on the dollar menu.

McDonald's attempt at a mid-tier value menu with items up to $2, known as the Extra Value Menu, was introduced in 2012, but sales did not meet expectations. If the Dollar Menu and More goes national, the Extra Value Menu would be bumped, the company said.

McDonald's late in 2012 retooled the marketing calendar for the end of the year and 2013 to aggressively promote the Dollar Menu in the hopes of spiking sales. Franchisees began complaining about the aggressive marketing of the dollar menu earlier this year, and as long as McDonald's keeps heavy Dollar-Menu marketing on the calendar, there likely won't be an end to the friction.

Balancing the barbell
The chain's U.S. same-store sales in the second quarter were up 1%. While that's positive, sales have been decelerating for more than a year. Andy Barish, an analyst at Jefferies, said that June and July "trends indicate that the hyper focus on value and resistance to taking price on the core menu have remained detrimental to margins."

He added that McDonald's "but it doesn't appear that premium items (such as Quarter Pounders and McWraps) have been enough to fully balance the 'barbell'" of the lower priced Dollar Menu items.

The Dollar Menu & More is being tested in Columbia, S.C.; Albuquerque, New Mexico; Hartford, Conn.; Memphis, Tenn. and Fresno, Calif. Its unclear whether it is being supported by marketing in those areas.

Rival Wendy's in January adjusted its value menu, formerly known as the 99 Cent Menu, calling the new one the Right Price Right Size menu. The items on the menu range from 99 cents to $1.99. The move allowed Wendy's to increase prices of some items. For instance, The Junior Cheeseburger Deluxe was increased to $1.19, instead of 99 cents.

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