Cheap burgers take a bite out of McDonald's
Franchisees don't like the chain's margin-sapping low pricing. Plus, US sales dropped for the first time in 10 years.
McDonald's (MCD) franchisees aren't exactly lovin' it.
Owners of McDonald's outlets are increasingly pessimistic about their ability to turn a profit, given the fast-food chain's heavy discounting and Dollar Menu items, reports the Nation's Restaurant News, citing a survey from Janney Capital Markets.
McDonald's has turned to its value menu to boost traffic to stores amid soft global demand, but so far that doesn't appear to be having the desired effect.
The company on Friday reported a first-quarter profit that was little changed, although same-store sales in the U.S. dropped for the first time in a decade, according to Bloomberg. McDonald's also warned that sales would drop in April, The Associated Press reports.
Franchisees said discounting is hurting their ability to sell items at full-margin prices. Asked to rate the level of 2013 discounting on a scale of 1 to 10, with 10 being the highest possible price cuts, franchisees gave an average response of 8.32, NRN notes. The historical average level is 5.
As previously reported here, McDonald's Dollar Menu is causing something of a bind for the restaurant chain, which wants to lure customers struggling with higher payroll taxes and a still-recovering economy. But getting people into the stores with cheaper items produces a quandary for McDonald's. After all, if you can buy a Sausage McMuffin from the Dollar Menu, why pay the full price of $4.20 for a Big Mac?
Restaurant owners have pushed back against some discounts requested by McDonald's. The Operators National Advertising Fund, a cooperative of franchise owners, recently voted against McDonald's request to sell hamburgers and cheeseburgers for only 69 cents and 89 cents, respectively, NRN notes. About 80% of McDonald's 34,000 restaurants are franchised.
The group also pushed back against selling McDonald's new McWrap product for $1. The franchise owners, however, agreed to add more $1 items such as the Grilled Onion Cheddar Burger and the Fish McBites, which haven't caught on with customers.
In the meantime, competitors are introducing new products, heating up the battle with McDonald's. Burger King Worldwide (BKW) is serving turkey burgers, while Wendy's (WEN) debuted flat bread grilled-chicken sandwiches.
"The economy is still coming back," one respondent in the Janney survey said. "The corporation wants so much discounting. When is the cash flow coming up?"
Shareholders are likely asking the same question.
Follow Aimee Picchi on Twitter at @aimeepicchi.
I'm not paying $4.20 for a Big Mac that has lost the beef!
everything is overpriced and the burgers are just plain blah. I would like to see them get onion rings on the menu or how about some MC "TOTS" ?? I am suprised they didn't jump on that band wagon. Value meals are not value meals anymore. Even if I have to pay a buck or two more to get a real hamburger I will do that to get a good quality burger. Fries are still okay if you can ever manage to get them while they are hot...
I grew up loving Mickey-D's. Over the years, I have seen the sandwich prices double from what they were 5 years ago. Then there's the problem of good workers... I guess they aren't at Mickey-D's. EVERY time I go and order takeout something is either missing or wrong. Yesterday, I got a Quarter-Pounder, and when I pulled it out of the box when I got it home, the workers had PUT NO MEAT between the buns!!! Seriously, I had a bun and cheese with ketchup. We had to take the thing back and show them... seriously, the workers never questioned giving a customer a $4 BUN???
Mickey-D's needs to make sure they have adequate service for their customers charging the prices they are these days. Anymore, I'm getting Subway and Arby's way more often than McDonald's.
"Franchisees said discounting is hurting their ability to sell items at full-margin prices."
I wonder just what are "full-margin prices". Is there a book somewhere that tells what the full margin price for a hamburger is?
The owner of the McDonalds in my town lives in a gated community. Hard to feel sorry for them because they have to discount some items.
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Reports say the generous benefactor behind the huge gratuities is a former PayPal executive.
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