Beyond The Dollar Menu: How McDonald's Approaches Discounting

McDonald's (NYSE:MCD) has to straddle a difficult divide when it comes to discounting. It needs to offer attractive prices to customers while also helping franchisees maintain their bottom lines.

A good example was its Dollar Menu. That offering was very appealing to consumers. (Who doesn't want a bunch of menu choices for a dollar?) But franchise owners didn't like it because it drove money-losing traffic.

The chain dropped the Dollar Menu in 2013 and has since tried a number of different deals. Now, the chain seems to have settled on a strategy that works, and it laid out its discounting plans during its first-quarter earnings call.

Has McDonald's solved the problem?

Comparable-store sales rose by 4.5% in the chain's U.S. locations in Q1. CFO Kevin Ozan noted during the call that comparable guest counts were actually down, but average check size went up.

"Consumer-relevant national promotions such as the Bacon Event and the 2 for $5 Mix and Match deal, which included our fresh beef quarter-pounders for the first time, performed well in the quarter," Ozan said. "We also introduced Donut Sticks at the breakfast daypart, and this new item resonated with our customers."

The 2 for $5 deal is an example of a discount that drives business but does not hurt the bottom line. That model has been successful for the company, as has its $1 $2 $3 Dollar Menu, which ideally drives consumers to order extra items.

"Throughout 2019 we'll continue to pulse in national deals like the 2 for $5 Mix and Match that was relaunched [earlier this month]," Ozan said. "These deals will complement local value at both breakfast and on the $1 $2 $3 Dollar Menu."

McDonald's has also given individual markets the freedom to decide what items are included in the promotion. That's so franchise owners can avoid offering a deal on an item that leads to smaller check sizes. It's not an exact science, but it's clearly better than a one-size-fits-all approach.

It's all about balance

A chain like McDonald's needs to have customers believe they're getting a good value for their money. That doesn't always have to mean having a small check. A diner might add a $2 specialty coffee drink to a regular meal and feel that's a value. Another customer might pick and choose a nontraditional meal from the $1 $2 $3 Dollar Menu and think that's the best deal.

For the chain, the discount proposition is about enticing customers without giving away the store. If people come in only for the deals -- which are lower-margin sales or even loss leaders -- franchisees get angry. McDonald's has seemingly figured out how to offer value in a way that works for both its franchisees and its customers.

That's an impressive trick to pull off, and the chain has been steadily doing it. This requires constant tweaking as it takes new offers to keep customers engaged, but McDonald's has shown that it has the right value platforms to drive sales and check size.

This article originally appeared in the Motley Fool.

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.