McDonald's Corp. just turned up the heat in the fast-food business

By Patricia Commins

Reuters; 26th February 1997

Press Index

If franchisees go along with the plan, the world's largest restaurant chain will launch its biggest nationwide promotion ever, featuring 55-cent sandwiches, down from about $1.95 for a Big Mac, according to franchisee sources.

The plan is a bold stept to lure customers into McDonald's restaurants in the face of intense competition in the nation's giant fast-food industry.

McDonald's, which has more than 20,000 units worldwide and more than 12,000 in the United States, declined to give specifics on its plan. Spokesman Jack Daly said the Oak Brook, Ill.-based company hopes to launch a "national value-price promotion."

Pointing to a current promotion on Chicken McNugget sandwiches, which analysts said has helped McDonald's build sales this month, Daly said, "It's in that same spirit."

Charles Gonzales, a McDonald's franchisee with two units in the San Francisco area, said the nationwide promotion would feature a different sandwich for 55 cents each month when a customer buys french fries and a drink at the regular price.

The promotion, he added, is expected to start with the Big Mac hamburger, which is usually priced between $1.90 and $1.99, and will include breakfast sandwiches as well, he said.

But the promotion, to be presented to franchisees on Thursday, could spark a price war, analysts said. That prospect worried investors who drove fast-food stocks sharply lower.

"Everyone will have something for 55 cents. Now it's a zero-sum game again," said Piper Jaffray analyst Allan Hickok.

But Dean Witter analyst David Adelman said Wendy's International Inc. and Burger King, a unit of Grand Metropolitan Plc, may not match McDonald's price promotions right away.

"There are a lot of things (companies can do) to enhance value without directly cutting prices," Adelman said, including increasing the frequency of regular promotions.

Earlier, Burger King said it had no plans to change its prices. Wendy's officials were not immediately available.

McDonald's stock tumbled $2.625 to $44.625 and Wendy's slid $1.50 to $20.75 on the New York Stock Exchange, where the shares were among the most active issues. American shares of Britain's Grand Metropolitan Plc, which owns Burger King, fell $1 to $30.625, also on the NYSE.

Dean Witter's Adelman said it remained to be seen if the McDonald's plan will bring in more customers. "We have much more jaded consumers today," he said, noting price cuts were not "new news."

Gonzales noted some franchisees oppose price promotions since they often do not boost customer traffic enough to offset lower sandwich prices. Moreover, regular customers may be tempted to order whatever sandwich is being offered that month instead of higher-priced menu items, he said.

Daly, however, said increased sales volume is expected to offset lower menu prices. "Margins (are) a function of volume," he added.

Dick Adams, chairman of the Consortium, an independent association of McDonald's franchisees, said he expected the promotion plan to be approved.

"They (franchisees) are going to vote for it," Adams said. "They are being told that it's the only plan that is available."

He said McDonald's was expected to present the plan in a satellite broadcast to operators across the country on Thursday.

McDonald's has been looking to boost domestic sales, which have been pressured because of competition. In a December 1996 memo to owners and operators, Jack Greenberg, chairman of McDonald's U.S.A. said, "We must re-energise and focus our U.S. marketing efforts and develop a national value proposition."

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