The Value-Meal Index, or Why $1 Hamburgers Are Still Hot

Low-Price Items Are Catch-22 for BK, McD's, Drawing Traffic but Pinching Profit

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Value meals thrive in times of economic softness, but they are also hard on fast feeders' bottom lines -- which is why chains seem to be promoting them less and less.

"Dollar menus can be great traffic drivers, but they're not great profit drivers," said William Blair analyst Sharon Zackfia. The theory is that a customer lured to McDonald's or Burger King for a value item will also spring for a higher-priced drink or side dish to complement it, but that 's not always the case, often causing concern among franchisees.

At Burger King, for instance, franchisees have been at odds with corporate over marketing and the price point of $1 for a double cheeseburger -- a price the company eventually bumped up.

That's not to say that fast feeders have abandoned promoting value items altogether. McDonald's pushes items from the dollar breakfast menu in certain markets. Burger King has been advertising its Stackers line -- $1 for a one-patty burger, $2 for two patties, and so on. But by and large, fast feeders have been increasingly marketing more margin-friendly drinks and core menu items.

Burger King has been advertising its Whopper -- an item not found on its value menu, though the Whopper Jr. is . And according to a Miami Herald article from May, the company will do away with the steady stream of $1 value promotions. "Putting marketing against their core product is the smartest thing they've done in a long time," said Darren Tristano, exec VP at Technomic.

McDonald's, likewise, has advertised for core items such as the Big Mac, and recently advertised four new dipping sauces for one of its keystone products: Chicken McNuggets. Website BurgerBusiness recently reported that No. 3 burger chain Wendy's added a Crispy Chicken Caesar Wrap to its 99-Cent Everyday Value Menu, but the full-price Berry Almond Chicken Salad received the marketing support.

Meanwhile, drinks are being pushed in part because of their huge margins. "It's partially because of the time of year, but drinks are also extremely profitable," said Dick Adams, a former McDonald's franchisee turned restaurant consultant. Soft drinks tend to be the most profitable, but their sales are on the decline in terms of units sold -- down 5% as of March over a year ago, according to NPD.

"Part of the reason we're seeing a decline in soft drinks is because consumers are ordering combo meals less," said Bonnie Riggs, restaurant industry analyst at NPD. And combo meals are on the decline in part because consumers are choosing a la carte dollar and value items, forgoing soft drinks. So fast feeders are advertising items like $1 soft drinks and full-price specialty drinks, such as smoothies.

But if gas prices and commodities -- especially beef -- continue to rise, the return of heavy value promotion could make a comeback. "Typically you see value promotion during the rise of gas prices. If we continue to see gas prices rise and sluggish employment, I'd expect the marketing to shift to more value-oriented menu items," said Morningstar analyst R.J. Hottovy.

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