In what’s being seen as a smart but a somewhat risky move, McDonald’s (NYSE: MCD) today announced the newest foray into premium pricing with its $5 Smokehouse Deluxe burger at a time when consumers are downgrading from casual dining restaurants to more fast-food fare.
Though currently only available in Canada, McDonald’s “premium” offering is the latest in a larger overall push into pricier menu items. Fast-food chains have already shown that consumers will pay higher prices for premium selections, if they’re saving by bypassing costlier items at casual dining chains. For instance, earlier this year, Burger King (NYSE: BKC) made the decision to charge $8.99 for 8-piece BK Fire-Grilled Ribs combo meals – a move so successful Burger King sold out of the menu item.
In fact, Burger King has been at this for awhile, previously offering Whopper Bars in select areas, with upscale versions of the Whopper, and a test-market Burger King brunches, with cibatta breakfast sandwiches and mimosas. And in spring, BK’s A.1. Steakhouse XT and Smoky Cheddar Steakhouse XT debuted with a price of $4.49 each.
The move comes as casual dining restaurants are mostly holding firm to their premium-priced burgers. Applebee’s, operated by DineEquity (NYSE: DIN) came out with its Steakhouse Burger while Ruby Tuesday (NYSE: RT) is serving up its Smokehouse Burger – with both at a price tag of $9.49. Casual dining chains initially offered deals in pricing last year, but have since shied away from discounting when margins suffered. RT’s stock, for instance, is now up +30.42% from 2009 thanks in part to improvement in margins boosting sales and profits.
You can understand the margins game, too. Burger King’s fourth-quarter net income fell as ingredient and packaging costs increase while sales dipped. If you’re only making a few pennies on a product, even a slight increase in meat prices or shipping costs can eat away significantly at profits. So why not go upscale?
It’s an idea that some may argue isn’t fit for the current economic mold, since with weak consumer spending it’s perhaps not the smartest idea to ask diners to go from $1 menus to $5 or more burgers. But it’s all about how you position value. Consumers still want a so-called “premium” selection, albeit at not-so-premium pricing.
The idea is still risky, though. Sales at Arby’s – half of the Wendy’s/Arby’s Group (NYSE: WEN) — have been pummeled of late, in part because of the restaurant’s perceived “pricier” menu items. Arby’s total revenue in this last quarter fell 9.4% over last year to $269.6 million, due to low sales. And company-operated restaurants sales declined 9.7% year over year to $250 million and franchise revenues slipped 5.4%.
Still, fast-food increased quality foods is also seen by insiders as a way to increase their customer base at a time when customers are shifting their purchasing habits. If a fast-food chain for lure away a casual diner, it’s a simple success. And both McDonald’s and Burger King has pledged to expand stores abroad, in cultures where premium coffee and food selections are sure to be a hit.
McDonald’s has already seen this kind of success – in coffee sales. In 2006 they debuted their premium coffee selections, touted as made with the higher-quality Arabica beans, seen as a direct challenge to Starbucks (NYSE: SBUX) and priced much cheaper. The company said it’s since seen about a 15% increase in revenue per restaurant on average since adding the premium coffee line.
But if this is going to become the fast-food norm – or at least a mainstay in the menus – it could still take some time. Companies are likely going to wait before taking a huge bite out of the “premium” market, at least until it appears more and more consumers are biting into these offerings, too.
As of this writing, burke Speaker did not own a position in any of the stocks named here.
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