We asked an inventor of the Dollar Menu what McDonald’s new pricing reveals about the economy
The Dollar Menu was born when consumers had fewer dollars to spare. We’re there again.
In 2001, Jim Lewis -- who at the time owned several McDonald’s franchises in New York -- huddled with representatives from America's largest fast-food chain in a room on lower 5th Avenue, at the offices of the advertising agency Arnold WorldWide.
It was the dot-com recession and sales had been weak for over a year. Consumers, more cost-conscious, were pulling back.
“We kept searching for the magic coin to really change that trend,” said Lewis, who at the time was president of the New York-metro McDonald’s franchisee co-op. He owned more than a dozen franchises, including the location in Times Square.
From that conversation that happened in that room, the Dollar Menu was born.
The idea for the menu was inspired in part by Wendy's having success with an Everyday Value Menu. Desperate to break out of the sales funk, McDonald's decided it would use its $50 million ad budget for the New York region to promote it, including paying comedy star Wayne Brady to appear in TV ads, Lewis said.
It was first only available in New York City. It was immediately a hit, and by 2002 it was expanded nationwide. What set it apart from previous promotions was that it allowed customers to build a meal out of $1 components as opposed to a combo with set items. It would live on in some form for more than two decades.
“We learned a very valuable lesson that choice was a huge selling concept to our customers,” said Lewis, who retired and sold off his McDonald’s locations by 2020.
McDonald’s now finds itself in a similar situation: Its same-store sales just declined for the first time since 2020, and it seems the only way to lure consumers is by presenting them a deal they can’t refuse. McDonald’s responded by rolling out a $5 meal deal.
The topic of “value” has since taken over earnings calls, and Chris Kempczinski, McDonald’s CEO, has been clear he wants to beat competitors at the “value war.” Investors loved the news that the meal deal was expanding.
“Déjà vu,” Lewis said. Similar words were said by Michael Quinlan, McDonald’s CEO from 1987 through 1998, who introduced the value menu during the early 1990s recession. Jim Skinner, who was CEO during the financial crisis, added items like a double cheeseburger to the Dollar Menu when cash-strapped consumers were pulling back.
Those deals can sometimes be less lucrative for franchisees. Only about 5% of McDonald’s stores are corporate-owned, meaning the rest are run by owner-operators. Their margins are lower on promotions, but they still have to pay a royalty fee of about 3% of sales. One franchisee advocacy group lamented a “lack of any financial contribution” from McDonald’s to execute its latest those deals.
“The owner-operator is left holding the bag,” Lewis said.
Economic vibe shift
When it comes to consumer sentiment, McDonald’s is a bellwether, not an outlier.
Fast food peers like Wendys and Yum! Brands, the owner of Taco Bell, have released their own value meals this year. Food manufacturers like Coca-Cola and Pepsi have laid off the price hikes and reported customers turning to value and even private labels.
Amazon said it has noticed customers making cheaper purchases and putting off big-ticket items like electronics. Wayfair’s CEO Niraj Shah compared the recent slowdown in the home goods category to the 2008 financial crisis.
McDonald’s, like most companies that sell food, raised its prices since the start of the pandemic as its costs rose and its base of low-income consumers got streams of government benefits. But those funds have now dried up, and consumers are left looking at a Big Mac meal for as high as $18.
Consumers are pulling back, and for good reason: They spent 11.2% of their disposable incomes on food in 2023, the highest share since 1991, according to the US Department of Agriculture. While eating out has always implied spending more, the price of food at restaurants has increased faster than groceries, according to data from the Bureau of Labor Statistics.
Tale of two economies
Consumer sentiment hit an eight-month low in July, with a particularly wide gap among those in the bottom-third percentile of earners compared to the top third, according to the University of Michigan Consumer Sentiment Index.
That gap in sentiment can be seen in company performance.
McDonald’s noted that its $5 meal deal is particularly popular among lower-income consumers, or those making less than $75,000, who they are trying to retain. Value perception is particularly tricky for fast food, which consumers expect ultra-cheap prices.
Fast-casual restaurants like Chipotle and Wingstop, which typically offer higher-quality food at higher price points, have seen their sales increase even as consumers pull back elsewhere. DoorDash, the food delivery service company, recently reported record orders and revenue.
Ebay reported growth in its luxury category, but “more pressure on the less affluent customers in the consumer market.” Kellanova reported weakness among consumers “under $100,000 in household income with kids.”
Still, some data suggests that more people are “trading down,” or choosing to go to a place like McDonald’s when normally they’d have the budget to pick up from Chipotle or dine in at Applebee’s. McDonald’s reported benefiting from that, but not enough to offset the pullback from low-income consumers who are choosing to eat out less.
“Beginning last year we warned of a more discriminating consumer particularly among lower-income households and as this year progressed, those pressures have deepened and broadened,” Chris Kempczinski, McDonald’s CEO, told analysts.
