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Why McDonald’s is supersizing its prices

Talking Numbers
Why McDonald’s is supersizing its prices

McDonald’s might not be happy with your dollar anymore. The fast food giant announced that they are testing a “Dollar Menu and More” that includes items priced up to $5 (for 20-piece chicken nuggets). If McDonald’s finds success with the higher-priced menu in the five markets they currently testing, then a nationwide rollout is likely.

(Read: McDonald's revamping 'Dollar Menu' to include $5 items)

The Dollar Menu was introduced in 2002, and has since been a big driver for McDonald’s. In their second-quarter earnings call, CEO Don Thompson called it “a foundational component of our strategy,” and said that it represents 13 to 14 percent of sales.

But lately, franchisees have started to raise concerns about pricing, and the Dollar Menu has become a target of ire. According to a franchisee survey conducted by Janney Montgomery Scott analyst Mark Kalinowski, many franchisees complain that the Dollar Menu and discounting were cutting into their profits.

So between customers scrounging for a deal, and franchisees looking for profits, McDonald’s appears to be between a rock and a hard place. And increasing prices on their preexisting Dollar Menu appears to be their way of finding wiggle room – even if it threatens to create a customer revolt.

“To me, it reflects the inflation pressure that quick-service restaurants are experiencing now,” said Brian Kelly of Brian Kelly Capital. “But whether it works remains to be seen.”

Yet the burger behemoth could also be dealing with a bigger problem. According to Zachary Karabell of RiverTwice research, McDonald’s is simply getting too big and too old to generate the kind of growth it used to.

(Check out: Big Mac: inside the McDonald's empire)

“McDonald’s appears to be in some secular decline,” said Zachary Karabell of RiverTwice Research. “It’s tough to keep a brand such as that going. It’s a wonder that they’ve thrived this long.”

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