Does McDonald’s Need a $1 Meal?

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24/7 Wall St. Insights

• McDonald’s Corp. ( NYSE: MCD ) second-quarter report shows the $5 meal deal failed to improve same-store sales.
• Will McDonald’s need to cut the price of the low-priced meal again?
• Also: 2 Dividend Legends to Hold Forever

Based on McDonald’s Corp. ( NYSE: MCD ) earnings, the $5 meal did not bring enough customers into its stores to make a difference at the top line or for same-store sales. Perhaps among people who still can’t afford a $5 meal, McDonald’s may need to cut the price of the low-priced meal again. How low can it go? That depends on whether it wants a loss leader to bring in more people. It would be like Costco's $1.50 hot dog. Its purpose is to get people through the door and hope they buy something more expensive.

In the second quarter, McDonald’s same-store sales dropped 1%, revenue was flat at $6.9 billion, and net income declined 12% to $2 billion. McDonald's President Joe Erlinger said that $5 brought in low-income customers, spending an average of $10. Nevertheless, bringing in enough people to improve revenue was not enough. (The $5 bundle is a McDouble or McChicken sandwich, small fries, a small soft drink, and a four-piece Chicken McNuggets.) It failed to turn same-store sales positive.

McDonald’s may continue to struggle because, although a $5 meal is a bargain, the daily costs of low-income families continue to rise. Last year, the Federal Reserve of Dallas reported that “Drawing upon recent household survey data, we show that high inflation is disproportionately hurting low-income households, including Black and Hispanic households and renters.”

McDonald's shares are down 11% over the past year. Same-store sales show that it still needs more foot traffic. It needs a better hook to draw customers, and the $5 meal may be too expensive.

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