Burger chains back off $1 promotions to boost profits

  In select Midwest markets, Hardee’s is offering a BLT Double Cheeseburger—topped just as you’d guess from the name—for a value-friendly $2.39 or 2 for $4. To go with it, a 32-oz. Coke or tea is just $1.

  Such pricing looks to be the new QSR norm this summer as commodity costs make deep discounting on food a less profitable proposition. Loss leaders are history. Dollar menus aren’t dead, but they’re now more about beverages than burgers as chains stress “value” above price.

  Chains aren’t abandoning that much-ballyhooed “barbell strategy,” with high- and low-end pricing intended to balance nicely. Value items will continue to be offered but it appears unlikely that many marketing dollars will be used to back them. Burger King briefly touted its BK Stackers starting at $1, but the promotional emphasis is on full-price Whoppers (with the spiced-up Angry Whopper returning in some markets) and $1 frozen drinks. McDonald’s has been promoting core menu items—Big Mac, Quarter Pounder and now Chicken McNuggets (at left)—without discounting any of them. Beverages, however, are $1. Wendy’s added a Crispy Chicken Caesar Wrap to its 99¢ Everyday Value Menu, but the full-price Berry Almond Chicken Salad gets the ad support.

  Brad Ludington, restaurant analyst with KeyBanc Capital Markets has been on top of this shift. In a recent note to clients he noted that he has “observed what seems to be a trend of QSR companies moving up from a $1 price point on value menus and LTOs. Several chains have moved to $1.50 and $1.99/$2 price points in recent promotions, including Tim Hortons, Subway, Dairy Queen, Burger King, Starbucks and Sonic Corp.”

  During its Analysts Day last month, Sonic said it was “revaluing” its Everyday Value, which is being rechristened the Everyday Deals menu. Instead of blanket $1 pricing, value items might be $1.50 or $2. Ludington says he expects such a “focus on upselling to items in the $1 price range will remain a focus for QSR brands in the coming months.” The closest to $1 promotions is Checkers/Rally’s current 2-for-$2 deal on 5-piece chicken nuggets and Checkerburgers.

  Consider that just a year ago, the equation was reversed with price, not value, the key concept. McDonald’s extended its popular Dollar Menu to breakfast, including a Sausage Biscuit, Sausage McMuffin and Sausage Burrito. That was a response to Burger King’s introduction of a $1 BK Breakfast Muffin Sandwich, as was Dunkin’ Donuts test of a 99¢ menu. A year later, McDonald’s and Burger King’s dollar breakfast menus still exist but aren’t promoted. Dunkin’ Donuts’ 99¢ menu test was discontinued. No one is adding items to their dollar breakfast menus now.

  The $1 McChicken sandwich that McDonald’s marketed a year ago is being succeeded by the $1.49 Jalape?o Cheddar and Cheddar Onion McChicken sandwiches that the chain is slowly expanding nationally.

  A prime reason for the dollar devaluation? Deep discounting kills profitability.

  For the first quarter of 2011, Burger King’s same-store sales were down 8%, which it blamed on lower customer traffic than a year ago, when it was promoting the $1 Double Cheeseburger. Maybe but, comp sales during that period in 2010 were down 6.1%. So Burger King’s customer traffic was higher but it didn’t make any money selling the $1 Double Cheeseburger and now it’s suffering a second time from the comparison.

  Burger King’s new ownership is too smart to want to repeat that mistake. During its recent earnings call, Burger King EVP-CFO Daniel Schwartz stressed that the chain’s focus from now on is to “drive profitable sales.” Profitable should be heard in all caps.

  Eighteen months ago, Jack in the Box was touting a $1 Big Cheeseburger. It’s promotion in this year’s first quarter was the All-American Jack combo, “which was a $4.99 price point, a full meal, very compelling price point and a great product,” Jack in the Box Chairman-CEO Linda Lang told analysts last month. “So you’ll continue to see those types of bundled value meals that have worked for us. And because they are bundled with a fry and a drink, their food cost is not significantly higher than the overall food cost. So that’s a positive for us.”

  Burgers for a buck apparently are far less of a positive. Dollars are for drinks.