McDonald's looks for the right value offer

McDonald’s third-quarter earnings report didn’t offer much in the way of surprises. Same-store sales declined 0.2%. Average check was up, thanks to the sale of specialty beverages like Red Bull Dragonberry Energizer. But traffic was down, as a subset of customers still opted not to visit the chain’s restaurants as often.

But the company saw some green shoots. The company reconfigured its value message, focusing its marketing on entry-level meal deals and Extra Value Meals. It also used digital offers, including a $2 breakfast sandwich and a free fries with a $1 purchase, to lure more loyal customers. That helped pull traffic up in September.

The company’s goal now is to figure out exactly what kind of national, entry-level value offer will work to lift it out of its traffic troubles.

Value strategy shift

“Our goal is straightforward,” CEO Chris Kempczinski told analysts on the company’s fiscal third quarter earnings call Wednesday. “Customers should see a clear and compelling value proposition every time they consider McDonald’s, whether looking for an affordable luxury item, a complete meal, or a digital offer in the mobile app.”

McDonald’s value efforts have taken a hit this year, after the company introduced a 10 Items Under $3 menu. That replaced a buy-one, get-one-for-$1 offer. Customers did not like the switch, viewing it as an effective price increase, because buying two items for $3 apiece is more expensive than buying one at the normal price and adding one for $1.

Leadership and marketing challenges

That, plus the relative ineffectiveness of marketing promotions such as its sponsorship of the FIFA World Cup and a KPop Demon Hunters collaboration, led the company to change its U.S. leadership. Joe Erlinger left. Skye Anderson was promoted to take his place as the market’s president.

The struggling value offer came at a tough time for the chain, which is asking operators to invest behind the company’s “Next” initiative on top of existing remodel plans.

The company is now moving aggressively to find some kind of national value offer that will resonate with consumers this time.

Testing and rollout plans

Last week, McDonald’s began an eight-week test of two different offers in 1,900 locations. Some stores are testing mix-and-match bundles to give customers better choice. Other stores are testing fixed bundles of a set combination of items to “make ordering straightforward.”

And then there are about 4,000 restaurants that have opted to move forward with entry-level bundles before those tests are complete. Those two groups of restaurants represent about 40% of the U.S. system.

McDonald’s goal is to have a single, nationwide value offer early next year.

“There’s very strong alignment around focusing on this entry-level value as being the last piece of the value equation that we need to figure out,” Kempczinski said. “I think that’s why we already see we’ve got about 40% of the U.S. system doing some version of an entry-level value program. Part of that is in testing. Part of that is franchisees not wanting to wait for the test and put entry-level value in place already.”

Company executives were cautious to suggest that the company’s same-store sales will improve in the current quarter, when comparisons get notably more difficult. But executives did say they were pleased with the progress made so far. The goal is to put the company in a better position by the end of the year, then introduce a new value component next year.

McDonald’s executives said it’s too early to provide any results from the test thus far. “There’s a variety of elements that you need to get right,” Kempczinski said. He said the company needs the right prices, the right place on the menu board, and the right bundles.

“You need to have good entry-level value for that low-income consumer,” he said. “They’re looking for great entry-level value, and we have not had that in place at the level we’re satisfied with.”

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