McDonald's Corp.'s plan to offer deep
discounts on its fast food, including 55-cent sandwiches, is a risky promotion that could hurt
profits and sour relations with franchisees, analysts said Thursday.
"I think that (price promotion) strategy is flawed, to put it bluntly," said analyst Roger Lipton of Lipton Financial Services.
Instead of cutting prices, Lipton added, McDonald's needs to focus on "higher-quality products and better service."
McDonald's, which beefed up its menu offerings last year with a new "Deluxe" line of sandwiches, defends its products with its sales figures.
"We're a global leader. We serve 35 million customers around the world each day," said McDonald's spokeswoman Anna Rozenich. "Certainly we're doing something right."
Under the proposed promotion plan, the fast-food giant would feature one sandwich - such as its Big Mac - for 55 cents when a customer also buys french fries and a drink.
Short term, that will bring more customers into McDonald's, said Josh Rosen, an analyst at ABN AMRO Chicago Corp.
But longer term, the 55-cent promotion, which is expected to apply to a different sandwich each month, could backfire. "By selling a Big Mac at 55 cents, you are telegraphing to consumers that's what it's worth," said Rosen.
However, Merrill Lynch analyst Peter Oakes applauded the 55-cent promotion, which he said will help McDonald's build incremental customer traffic. He said the promotion is akin to McDonald's "extra value meals," which were launched six years ago and became McDonald's most successful item in the last 10 years.
Some franchisees are concerned, however, that the promotion, which could run about 12 months, may hurt profit margins.
"McDonald's is intent on raising top line sales and showing (positive) U.S. (same store) sales," said Dick Adams, head of the Consortium, a group of independent McDonald's franchisees. "Franchisees are interested in top line sales, but only as it relates to bottom line profits."
McDonald's, which has not commented on the details of its planned promotion, said its interests are aligned with those of its more than 2,700 franchisees in the United States.
"When our franchisees are doing well, we're doing well," McDonald's Rozenich said. About 80 percent of McDonald's U.S. restaurants are franchises.
Many of McDonald's U.S. franchisees have been upset by lower U.S. same-store sales trends, which some have blamed on the fast-food giant's rapid expansion, franchise sources said.
"Cannibalization (when a new unit draws sales away from an existing one) is a big issue with a lot of people," said one franchisee, who asked not to be named.
While competitors such as Wendy's International Inc. and Burger King, a unit of Grand Metropolitan Plc, said they will not follow with price cuts, McDonald's promotion likely will draw some customers away.
"They're going to take some business from people. There is a segment of the population that will gravitate to McDonald's to buy Big Macs at 55 cents," said Sid Feltenstein, chairman of A&W Restaurants Inc., a chain of 800 units.
However, based on current menu prices at a downtown Chicago McDonald's, a customer would pay $3.01 for a 55-cent Big Mac along with a medium-sized french fries and medium-sized drink. That would be a savings of 48 cents compared with the $3.49 Big Mac extra value meal at the same McDonald's.
Asked Feltenstein: "Are people to go out of their way to save (48 cents)?"