Tuesday, August 05, 2008

Cheeseburgers and candy bars 

I meant to blog this yesterday, forgot, but Mark Perry reminded me. The question is: Can you break the buck and still call it a Dollar Menu? (Second link for WSJ subscribers; see Mark's link if you're not.)
McDonald's Corp. is testing modifications to its popular $1 double cheeseburger, and higher prices for the sandwich, as it prepares to change its Dollar Menu by next year.

In an interview, Don Thompson, president of McDonald's U.S. business, said the company has tested ways to make the burger less expensive to make. Some restaurants are selling it with one slice of cheese instead of two, and billing it as a "double hamburger with cheese." Others are offering a double hamburger without cheese. Some are selling the traditional double cheeseburger at prices ranging from $1.09 to $1.19.

...Launched in 2003, the Dollar Menu has been a key driver of sales at McDonald's 14,000 U.S. restaurants and has helped it ride out dips in consumer spending. But recently, franchisees have complained that the menu has brought too much unprofitable traffic into their restaurants.

The biggest question for the eight-item menu is what to do with the double cheeseburger, considered its anchor. High dairy prices have pushed up the cost of cheese, and McDonald's predicts more pressure because its beef costs will be higher this year. Mr. Thompson said if McDonald's moves the double cheeseburger off that menu, there would still be some type of $1 burger.

Shrinking the cheese, burger and/or bun -- which is the item that has risen most in price percentage-wise, though the second slice of cheese is the best chance to have McDonalds adopt the candy bar inflation strategy of hiding its price increase. 14% of McDonalds sales receipts come from Dollar Menu purchases (and a lot more of its traffic, assuming those purchasing from the Dollar Menu have a smaller ticket than those that do not.) Following Don Lloyd's argument, the value of the second slice of cheese is probably pretty small, and the transaction cost of creating smaller burgers and buns relatively large, so dumping the second slice seems the most rational strategy. But at some point in the past the value of the second slice to the consumer was greater than its cost to McDonalds (otherwise Mickey D's been wasting money and you've been consuming wasteful calories!) so how does a 6.6% increase in cheese prices move us over the line? Do we believe that?

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