Can McDonald’s Find Value In Its Dollar Menu?

Despite delivering earnings successes throughout the recession and Europe’s sovereign debt crisis, McDonald’s (NYSE:MCD) has begun to struggle; last month same-store sales fell for the first time in nine years, and the company’s stock price has dropped 14 percent since January. In order to stimulate sales, Chief Executive Officer Don Thompson, who has come under pressure because of recent results, has announced that the chain will increase advertising for its Dollar Menu options.

But many analysts do not see this as the right course of action.

What is Wrong with the Dollar Menu?

As Bloomberg reported, pushing Dollar Menu items will not result in higher sales figures because people are encouraged to spend less rather than more. In other words, greater Dollar Menu sales mean slimmer profit margins. In the opinion of Greenwood Capital chief investment officer Walter Todd, the company should “tone down the Dollar Menu.”

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Instead, the company needs innovation; advertising value items is an old standard. McDonald’s has “not had anything to talk about of substance,” Goldman Sachs analyst Michael Kelter told the publication, and so “people are going elsewhere.” While McDonald’s has not introduced enough new items to keep customers interested, Burger King (NYSE:BKC) has upped the competition by introducing a fairly constant flow of new menu items, a practice that McDonald’s perfected.

Franchise operators are also concerned about the Dollar Menu marketing plan that the company has proposed. Under this plan, McDonald’s wants stores to offer promotional $0.69 hamburgers and $0.89 cheeseburgers, which local advertising co-ops have deemed to be too cheap to result in reasonable profit margins.

CHEAT SHEET Analysis: Can a New-Product Pipeline Help?

One of the core components of our CHEAT SHEET Investing Framework requires that companies consistently produce successful products or services. McDonald’s built its reputation on serving low-cost, quickly-made burgers, which made the company the most iconic fast-food chain and helped it weather the 2008 financial crisis. However, analysts fear that increasing the number of value items on the menu is not enough innovation to compete with Wendy’s (NASDAQ:WEN) and Burger King, companies that have outmatched McDonald’s in terms of innovation by pushing new menu items heavily in their marketing.

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