How McDonald's Is Winning More Than the Value Wars

By Building on Its Dollar Menu, Fast-Feeder Boosted Ad Spending on Full-Priced Items

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CHICAGO ( -- It wasn't enough that McDonald's is beating competitors in same-store sales and winning the value-perception wars. Thanks to stepped-up burger marketing, it's now getting higher-margin customers, too.

While McDonald's pretty much owns the value menu and pricing proposition, since last summer it's quietly boosted advertising of full-priced items, which is paying off by bringing in higher-ticket customers. The product-specific pushes, for Big Mac in July, chicken nuggets in December and the Quarter Pounder with cheese in February, have resulted in double-digit sales increases for the products in question.

Big Mac
Big Mac
"In the last eight months, we have placed greater emphasis on flagship-quality products," McDonald's USA CMO Neil Golden said in an interview. "And it's making a difference. These are the products consumers love and feel good about enjoying on a regular basis, and it's been a very successful part of our business."

Has not forsaken Dollar Menu
At the same time, the chain has not forsaken the iconic Dollar Menu, with which the brand is irrevocably intertwined for so many consumers. Rather, said Greg Watson, McDonald's VP-marketing strategy, "we've increased support on core burgers and we're seeing a lift in core burger sales like Big Macs and Quarter Pounders. And we're selling more McNuggets."

Market-share figures show McDonald's is less dependent on its lower-margin Dollar Menu. In the last quarter, the low-price menu has dropped from 13% of the chain's sales to 10%. A big reason is the double cheeseburger, now priced at $1.19, depending on the market, but McDonald's is also making a concerted pitch of higher-ticket items. "It's not surprising that Dollar Menu sales have dropped," Mr. Watson said. "We did take the double cheeseburger off and we've been supporting Quarter Pounder with cheese. I think consumers are finding other choices."

UBS analyst David Palmer said the strategy seems particularly timely. "They're advertising old favorites and the consumer wants the old favorites now," he said, adding that the lack of "new product news" also gave the chain time to align for its McCafe marketing blitz.

Neil Golden
Neil Golden Credit: Tim Klein
And so now the chain that sparked the dollar wars is backing off and leaving its competition holding the bag. Burger King now counts 12% of sales from its value menu at U.S. company restaurants; Wendy's value menu sales are now about 15% of sales, though that's down from 20% last year. But for McDonald's with the menu accounting for 10% of overall sales, that equates to more dollars for the biggest, most profitable player in the sector.

Dennis Lombardi, exec VP-food services at WD Partners, said that McDonald's is "truly going to be a great Harvard case story for their performance over their last five years." He said the chain is "resonating with the consumer on a lot of different levels," with a relentless focus on marketing, seemingly happy franchises and impressive store-level execution.

Concession with franchisees
The once-battered chain began a comeback in 2002, wading out of quarterly losses and negative same-store sales, some say, on the shoulders of its Dollar Menu, and particularly the Double Cheeseburger. But the chain removed the item from the Dollar Menu last fall following franchisee complaints about the sandwich's profitability in the face of skyrocketing commodity costs. That concession helped align the chain's franchisee network, which was hunkering down for a long winter's McCafe buildout. The new drink platforms required up to $100,000 in renovations per store, to which McDonald's paid up to 40%.

Now the trick is going to be staying the course, said Technomic President Ron Paul. After all, he said, "McDonald's has been firing on all cylinders for so long."

UBS's Mr. Palmer noted that recent consumer research revealed that "Americans didn't really want to try a big new thing," in terms of new menu items. But McDonald's is now focused on espresso-based beverages, and looking to an Angus burger launch this fall, followed by smoothies and frappes. "Perhaps McDonald's will be preparing itself for Americans trading back up," he said. But while that could happen in 2010, "it does seem to be going against the grain, introducing new premium items."

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