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Will McDonald's Dollar Menu Cost More?

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According to media reports, McDonald’s Corp. (MCD) is trying to alter its famous “Dollar Menu" by including items that cost more than a dollar. The new version of the menu named "Dollar Menu & More" is expected to hit U.S. stores this year.

The decision came in the wake of shrinking profits. McDonald's and other fast-food chains have been relying heavily on promotions, value menu and low-priced options to strengthen their position in a market where consumer confidence is faltering. “Dollar Menu” is such an option. While these sales building measures drive comps, they prove detrimental to margins if exercised on a long-term basis.

The “Dollar Menu” program -- launched almost a decade ago and accounting for around 13%--14% of total sales -- has been a driving force in generating sales even in the time of recession. Over the years, management has been trying to shore up this line. In fact, in the recently-concluded second quarter, McDonald's added the Grilled Onion Cheddar Sandwich, Hot 'n Spicy McChicken and some limited time offer selections to help the product line stay competitive.

However, the products were not margin friendly, which is why the world’s biggest hamburger chain had to alter its menu options over the years to adjust with rising food prices.

Presently, the revamped offering is in a test phase in five markets across the country. As per CNBC reports, there are three pricing points for the revamped menu, $1, $2 and $5, and it comprises “shareable” items like 20-piece McNuggets. So far, the response from the test markets has been encouraging.  

The company tested another version of the menu with price points of $1, $1.79 and $4.99. These comprise several chicken items and burgers with an additional beef patty or bacon toppings. However, the changes are yet to be finalized.

McDonald’s has a Zacks Rank #4 (Sell). Other players in the restaurant industry, which look attractive at current levels, include The Wendy’s Co. (WEN), AFC Enterprises Inc. (AFCE) and Burger King Worldwide Inc. (BKW), all with a Zacks Rank #2 (Buy).

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