Toronto Star

McDonald’s to drop drink prices in U.S.

Coming off all-day-breakfast high, slumping chain is hoping to keep people coming through the door


McDonald’s Corp., reeling from an industry-wide restaurant slump and slowing growth from its all-day breakfast push, is looking to beverages to help perk up the business.

The world’s biggest food-service company, which last year focused its advertisin­g on cheeseburg­ers and chicken sandwiches, plans to offer $1 sodas and $2 McCafé specialty drinks across the U.S. It is turning to higher-margin beverages at a time when cheap grocery prices are prodding more Americans to eat at home. The drink promotion may also help McDonald’s cope with the eventual rebound in food costs.

McDonald’s has been revamping its menu and marketing since Steve Easterbroo­k took the helm almost two years ago. Along with the introducti­on of all-day breakfast, Easterbroo­k has relied more on discounts and promotions across the country. Last year, the chain advertised two-for-$2 and two-for-$5 deals to bring back diners they’d lost after nixing its popular Dollar Menu.

In Canada, McDonald’s runs several limited-time promotions throughout the year that cut the price of various beverages, including coffee and soft drinks.

McDonald’s leads a $228-billion U.S. fast-food industry that faces slackening growth.

After increasing 2.4 per cent last year, fast-food revenue gains will slow to 1.5 per cent this year and 1.6 per cent in 2018, data from researcher IBISWorld shows.

“Demand has been a little weak,” said Jack Russo, analyst at Edward D. Jones & Co. “A lot of these guys think they’ve got to keep promoting to keep people coming in the door.”

The McDonald’s promotion in the U.S., which starts in April, will include soft drinks of any size for $1. For a limited time, customers can also buy McCafé beverages such as smoothies, frappes and espresso drinks for $2. At stores in Chicago on Tuesday, small McCafé frappes sold for between $2.69 and $3.09. The chain plans to support the rollout with national advertisin­g.

The strategy aims to create “noticeable changes” for customers, said Adam Salgado, vice-president of U.S. marketing at Oak Brook, Illinoisba­sed McDonald’s. “It’s adding another layer of great value for customers with more choices.”

The shift from food to drink may reflect a changing environmen­t. Over the past several years, profits have been helped by cheaper commodity prices. But that may not last much longer: The consumer-price index in the U.S. rose a larger-thanforeca­st 0.6 per cent in January, the most in almost four years, U.S. Labour Department figures show.

Snack maker PepsiCo Inc. said on a Feb. 15 conference call that it expects commodity inflation to accelerate this year. Potbelly Corp., a U.S. sandwich chain, also warned about rising costs. Advertisin­g drinks, which typically have higher profit margins than food, is easier on the bottom line.

Beverages are “some of the highestmar­gin products, so they can probably afford to do it,” said Peter Saleh, an analyst at BTIG. Gross margins for drinks can be as high as about 90 per cent, while food is usually about 65 per cent to 70 per cent, Saleh said.

McDonald’s competitor­s are making their own overtures toward budget-minded diners. Wendy’s Co. is continuing its four-for-$4 meal deal, which includes a cheeseburg­er, nuggets, fries and a drink. Starbucks Corp. and Dunkin’ Donuts, meanwhile, both have rewards programs that lock customers in with free and discounted beverages and food.

Fast-food customers always are looking for a deal, Salgado said. “We know that there are budget-conscious consumers out there. Value will always be a part of our strategy.”

 ?? DANIEL ACKER/BLOOMBERG ?? McDonald’s is looking to regain momentum by offering $1 soft drinks and $2 McCafé specialty drinks across the U.S.
DANIEL ACKER/BLOOMBERG McDonald’s is looking to regain momentum by offering $1 soft drinks and $2 McCafé specialty drinks across the U.S.

Newspapers in English

Newspapers from Canada