While McDonald's (NYSE: MCD) has made progress in becoming a more profitable company, it has steadily bled customers since dropping the Dollar Menu in 2012. That menu was always a mixed blessing for the fast-food chain. It drove traffic, but it encouraged customers to spend less by offering them an extensive array of choices that only cost $1.
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The problem is that while McDonald's has been able to increase check size and make more money on each customer, its traffic continues to decline. In the roughly five years since the Dollar Menu went away, the company has seen restaurant traffic drop 10% in the United States.
CEO Steve Easterbook addressed the decline during the company's Q4 2016 earnings call this week, which was transcribed by Seeking Alpha (registration required). He noted that the decline is "not a one-year trend" and said that "it is something that dominates our conversations."
McDonald's has struggled to balance discounts and customer traffic. Image source: McDonald's.
Why is this important?
Making more money per customer covers the drop in traffic, but as the number of people visiting stores continues to fall, at some point there is a point where less is no longer more. Easterbrook acknowledged the problem during the call and promised to address it, but also pointed out that franchisees can now approach the question of discounting to drive traffic versus profit margin on each customer from a position of strength.
"This is all about getting the balance right," he said. "I mean, the cash flow growth through 2016 was phenomenal for our U.S. owner operators. And frankly, there never has been a better time to be an owner operator in the McDonald's system than there is right now."
How will McDonald's win back customers?
The CEO said that the company has two plans to increase its customer count. The first involves improving the user experience through better technology -- something it has had success with in other parts of the world.
"We are really investing front of house to put more choice and control in the hands of customers where it's around how they order, what they order, how they serve, how they pay," he said.
The second effort involves adding more value to its menu. That does not mean a return to the Dollar Menu, but tweaking its McPick menu, which offers combo deals from a limited selection of items. In addition, the company will look to its McCafe line, where it has offered $1 any-sized coffee and $2 specialty drinks to some success.
"You can expect to see us be more competitive at a value end through the year," said Easterbrook.
The CEO also said that the company has analyzed the regions around the U.S. and found that the ones that combine the chain's national deals with customized local "aggressive" deals are the most successful.
It's a tough line to walk
McDonald's has offered a deal consisting of two Big Macs, two orders of fries, and two sodas for $10, but it has not copied the low-cost deals offered by many of its fast-food rivals. Chains including Wendy's and Restaurant Brands International'sBurger King have offered variants of giving consumers a sandwich, chicken nuggets, fries, and a drink for $4. That's essentially a Dollar Menu deal, but it's a limited one with fixed choices.
Offering more deals should increase foot traffic, but it could also lower margins. The trick for McDonald's is finding a balance where the deals lead to extra visits, rather than cannibalizing customers who might have spent more.
That's not an easy path to follow, but at least the company learned what too far is, thanks to its Dollar Menu days. Clearly McDonald's won't be going that far, but it likely will push discounts further than it did in 2016.
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