For all the talk of the U.S. job market having recovered to pre-recession levels, and improvements in consumer spending, one fact continues to bedevil restaurants like McDonald’s and discount retail chains: low-income Americans can’t, or don’t want to, spend on the pricier offerings those companies are trotting out.
McDonald’s (MCD) reported a worse-than-expected 1% drop in sales at U.S. restaurants open at least 13 months — its seventh month without growth — and blamed “ongoing broad-based challenges.” (Wall Street analysts had been expecting a 0.1% increase, according to Consensus Matrix.)
One of those challenges is that customers have been coming in less often after McDonald’s pared the selection of items on its Dollar Menu last year.
McDonald’s woes echo those of Family Dollar Stores (FDO) and Dollar General (DG), which are both hustling to bring back more items for $1 after efforts to offer fancier, pricier items fell flat with shoppers.
The world’s biggest fast-food chain said it is putting great focus on value, i.e. inexpensive items, to try to “stabilize” results in the U.S. , where it gets nearly one-third of its revenue. While not reversing its decision to pare its Dollar Menu, McDonald’s is trying to boost business by stepping up promotions in its “Dollar Menu & More” offerings and breakfast, including a bigger push for its popular McCafé coffee, a step in the right direction, according to one analyst.
“They had a customer who was price-sensitive and depended on the dollar menu to go to McDonald’s,” Steve West, an analyst with ITG, told Fortune. His research found that traffic to McDonald’s restaurants fell 3% after the cutback on $1 items. McDonald’s has lost market share to resurgent competitors Wendy’s (WEN) and Burger King (BKC) in the last year.
McDonald’s is also still contending with the lingering effects of introducing too many new menu items last year, such as wraps, that slowed service and increased the incidence of incorrect orders, annoying customers.
The restaurant company can take solace in the fact the sales overseas fared much better, particular in Asia, Africa and the Middle East, where they rose 2.5%.