Praising The Dollar Menu's Eventual Demise



McDonald's apparent decision to get rid of its Dollar Menu will effectively mark the end of the $1 price point that has highlighted the QSR price wars of the past 15 years. But it's also an acknowledgement that the $1 price has long been obsolete.

The Chicago-based burger giant is testing plans to rework the Dollar Menu, with some items remaining $1, others priced at $2, and a few "sharable" items like 20-piece Chicken Nuggets priced at $5. The new value menu could be in place this year, according to reports.

For the chain's operators, the move couldn't come too soon. Franchisees have been hoping for the end of the Dollar Menu for several years, said Richard Adams, a former McDonald's franchisee who now consults with operators through his Franchise Equity Group. As it is, many operators had been taking products off that menu for some time. Even McDonald's has had to shoehorn items to fit into the menu, such as the introduction of the McDouble, which is just a Double Cheeseburger with one fewer slice of cheese.

Value menus in QSR date back to the 1980s, when Taco Bell began lowering prices on some items. In 1989, Wendy's introduced the 99-cent value menu. But McDonald's largely avoided discounting until 1993. And then discounting as a strategy grew among the burger chains, and in 2002, amid sales weakness and franchisee revolts, McDonald's introduced the Dollar Menu.

After some initial hiccups, consumers got on board with the idea of buying fast-food items for $1, notably the Double Cheeseburger, and sales took off.

The beginning of the end of the dollar price point probably came in 2009. That's when franchisees of Burger King, protesting their financial losses from that chain's own $1 double cheeseburger—which is much larger than the McDonald's version—filed a lawsuit against the chain. The lawsuit was eventually settled and Burger King increased the product's price.

And earlier this year, Wendy's finally came off of its 99-cent price point, when it reworked that value menu into a "Right Price, Right Size" menu, with some items priced more than 99 cents.

McDonald's status as the last $1 holdout was probably not going to last long after that move. One dollar simply doesn't work that much in today's cost environment. Food inflation, rising labor costs and looming health care costs and pressure to raise worker wages all make the $1 price point too low for too many items.

Consider this: because of inflation, today's dollar is worth only 77 cents in 2002 dollars. It's tough to make a profit off of the inflationary equivalent of 77 cents. And while loss leaders are a key business strategy, too many of them, at too steep of a loss, makes life awfully tough for the operators charged with running a chain.

There are a multitude of challenges associated with coming off of the Dollar Menu. For one thing, consumers still really love discounts, especially now when many of them have a low paying job, if they have one at all. Consumers have also grown used to low-cost fast food after years of industry-wide discounting. On top of that, the Dollar Menu worked for McDonald's because consumers love simplicity. One dollar worked for McDonald's consumers the same reason that a $5 Footlong worked so well for Subway for so long: it's a simple price that works well on a billboard. "Dollar Menu & More," as the new menu is apparently being called, just doesn't quite have the same ring to it the way the Dollar Menu did.

But Adams said franchisees aren't concerned that the new value menu could hurt sales. After all, franchisees don't always benefit from topline sales increases the way a franchisor does.