How Value Menus Are Shaping the Fast-Food Landscape

By Jonah Loeb  FEB 01, 2013 1:42 PM

If 2012 was the year of gourmet sandwiches, will 2013 be the year of the 99-cent cheeseburger?

 


Fast food companies operate on a so-called “barbell menu,” a system in which there are a large amount of high-priced items and low-priced items, with only a few in the middle. We see plenty of premium menu options, better ingredients, and more inventive recipes advertised these days; the McDonald’s (NYSE:MCD) Angus burgers and Premium chicken sandwiches are good examples of the push towards more sophisticated flavors in fast food restaurants.
 
To balance this out, there are value menus. Beginning as far back as 1989, most fast-food chains have at some point advertised entire sections of their menu set at a low fixed price. As sales overseas have hit snags and consumer tastes back in the US have been fickle, value menus have been a stable source of revenue, and they’ve even contributed to some major power shifts in recent months. Here are some ways that companies are using small menu items to make a big difference.
 
McDonald’s
America’s favorite fast food chain used to offer a double cheeseburger and a small order of fries for a dollar each, but McDonald’s decided that too many customers were cobbling together entire meals from the Dollar Menu. The company revamped the menu to include mostly breakfast items or meal add-ons like desserts, and the changes sparked a huge revival back in Novembe 2012 after October sales had taken a major tumble.
 
Another bright idea has been the transition from the double cheeseburger to the McDouble; the only difference between the two is that the former has two slices of cheese while the latter has just one. That saves the average location $0.06 per burger, or (since the McDouble is the restaurant’s top-selling sandwich) a whopping $15,000 per year.

That said, rising beef prices are now making even the McDouble costly for McDonald's restaurant operators. One consultant recently told Reuters, "Depending on what happens to beef prices, McDonald's management should be open to taking the McDouble off the Dollar Menu."
 
KFC
Yum Brands (NYSE:YUM) has long marketed KFC as a restaurant based on value; there was a period of a few years in the late 2000s when every KFC ad would tell you exactly how few dollars per person you were spending. The key, though, is “per person,” since KFC bases its “value” image on huge family meals rather than individual portions. Strange, since when the restaurant has gone for individual value in the past, it’s had massive hits; the KFC Snacker sandwich, which debuted in 2005, broke the company’s single-item sales records. Given Yum’s recent sales decline in China, where KFC is the most popular fast food chain, perhaps it’s time for KFC to re-jigger its value menu and see if it can replicate that earlier success.
 
Taco Bell
Yum’s other flagship restaurant, Taco Bell, is certainly trying that strategy. Even though the taco chain has long built its marketing around offering incredibly cheap individual meals (including, at times, an 89-cent burrito), its menu is organized by category rather than price. As of last week, though, a pilot program for the “$1 Cravings Menu” is underway in Fresno, CA and Knoxville, TN, putting Taco Bell directly in competition with McDonald’s.

In fact, the Cravings Menu contains far more main-course items than the Dollar Menu, which (as mentioned earlier) has shifted towards meal add-ons. If customers are looking for $1 entrees, they may enjoy Taco Bell’s shift towards a dedicated dollar menu. Analysts like John A. Gordon of the Pacific Management Consulting Group, however, are cautious about Taco Bell’s commitment to lower-priced items. “Restaurants simply cannot survive on nothing but a dollar menu,” says Gordon. “Taco Bell has tried to stick to the barbell model, but it’s been increasingly drawn downward.”
 
Wendy’s
Wendy’s (NASDAQ:WEN) is now the No. 2 burger restaurant in the country, in case you missed its hammering of Burger King (NYSE:BKW) early last year, largely due to a marketing campaign that focused on depicting Wendy’s as providing a higher-quality burger. Now the company is again aping McDonald’s by creating a two-tiered system: an ever-present 99-cent group and a second list of items that franchisees can choose to sell for between $1.29 and $1.99.
 
Analysts have tipped this idea as a winner in terms of popularity, since young fast food consumers have increasingly abandoned combo meals in favor of items from a value menu for two reasons: price and flexibility. We all like the idea of a Wendy’s Asiago Ranch Chicken Club, but when we’re on a budget, we’ll settle for a Double Stack and a small order of fries. Unfortunately for restaurants, this means fewer beverage sales; according to Gordon, the percentage of customers who buy a beverage has dropped from 85% or so in the mid-1990s to around 60% today. Wendy’s may be more popular these days, but it should treat the value menu items as loss leaders, not as substitutes for higher-priced items.
No positions in stocks mentioned.