The fast-food scene has seen quite the competitive clash for customer dollars this summer. Undoubtedly, inflation has caused many former frequent restaurant goers to hibernate, at least until prices come down to more reasonable levels. Undoubtedly, some of the more prominent names in the quick-restaurant scene may have overextended themselves regarding price increases.
The deteriorating value proposition has likely weighed heavily on loyalty built up for many years before the post-pandemic period of inflation. In any case, the value menu war, as it’s called, aims to solve the setbacks endured by numerous industry players in the years that followed the pandemic.
Thus far, I’d argue that the fast-food firms have done a pretty good job of communicating the value they provide. Undoubtedly, many of the hottest fast-food value offerings may only be around for a few months longer. And while 2019 and 2020 prices seem entirely off the table, at least for now, there are massive opportunities for fast-food firms to gobble up more market share.
Simply put, lower prices will get customers in its doors, while other efforts (think new food items, loyalty app innovations, modernized dining areas, and faster order times) stand to keep them coming back.
Key Points About This Article
- McDonald’s is doing a fantastic job of righting the ship with its renewed focus on value.
- Beyond value menus and lower prices, new menu items, like the Big Arch, could be key to supersized profitability gains.
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McDonald’s (MCD)
There’s more than one way to improve the value proposition. One way is to lower prices. The other way is to offer more per dollar. In the case of McDonald’s (NYSE:MCD), it’s been going pretty aggressive with its value menu with $5 meal deals in the U.S. and $5 and change value meals in Canada.
Indeed, $5 does not buy a heck of a lot in today’s post-inflationary environment. So, such likely loss leaders will continue getting the attention of diners, some of whom it’s welcoming back, and others who seldom ever eat at the Golden Arches.
Sooner or later, though, McDonald’s will need to pad its margins. New menu offerings seem to be a great way to do this.
The Big Arch: A New Product That Could Beef Up Sales and Margins
Enter the new Big Arch burger, which seems to check all the boxes as an item that can jolt sales and margins simultaneously. Indeed, customers have longed for a bigger, more satiating burger for quite some time. And when a Big Mac no longer does it, the Big Arch could deliver the beef for customers seeking something that better hits the spot.
The bigger, meatier, cheesier burger will come at a premium price. And given customers seem more than willing to pay more to get more (take Chipotle Mexican Grill (NYSE:CMG), which has thrived amid inflation with its heartier offerings despite commanding higher prices), perhaps McDonald’s new burger could have the secret sauce to supersizing profitability growth.
The Big Arch launched in Canada and Portugal last week and has been met with good reviews so far. After having a chance to try the burger on two occasions, I must say it lives up to the hype. Heck, I think a strong case could be made that it’s McDonald’s best burger, given it combines attributes from other burgers (think the Big Mac and Quarter Pounder with Cheese) in a rather graceful manner.
However, the million-dollar question remains whether that’s enough to justify the steep CA$10 (around US$7 and change) sticker price.
Further, whether the new burger becomes a menu mainstay as it rolls into new markets remains to be seen. Personally, I think it has all the makings to be the next big menu offering since the introduction of the Big Mac back in the late 1960s.
The Bottom Line
Innovation is back at McDonald’s, and investors should be lovin’ the stock, even at close to 25 times trailing price-to-earnings (P/E). The 2.31% dividend yield may not be as beefy as it was just a few weeks ago before the stock rose more than 16% from its 52-week lows.
Either way, McDonald’s shares are a great way for investors to play defense in an increasingly choppy market while also playing offense in the fast-food scene that’s struggled to innovate and has relied chiefly on margin-eroding price cuts to win back diners.
If there’s one restaurant firm that can win the value menu wars, it’s McDonald’s. From new everyday lower prices to $5 (and change) meal promos and the introduction of new, ambitious menu offerings like the Big Arch, McDonald’s has the tools to not only win back customers but grab them from rivals.
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