Thursday, April 23, 2009

McDonald's Angus Burger: Upgrading America's Burger

McDonald's Rolls Out $4 Burger: Why?

With the nation in its deepest recession in decades, why would McDonald's pick this moment to launch a $4 burger?

You may have noticed the signs that just went up on some McDonald's drive-through menus: The new Angus burger. It weighs one-third of a pound. It costs four bucks.

In its first-quarter earnings conference call this morning, the company did not say it is rolling out the Angus nationwide, but it did not say it isn't. The company was cagey.

Still, they're starting to pop up -- The Ticker saw the Angus on a menu last Saturday, at a McDonald's on the road from Washington to Morgantown, W.Va.

An upscale product in this climate? What could the company be thinking?

McDonald's has been more than recession-proof. Indeed, the company's current slogan, "I'm lovin' it!" could be amended to read, "The recession -- I'm lovin' it!"

Last year, McDonald's was one of only a handful of publicly traded companies to show a stock gain on the year.

Today's earnings showed a 4 percent gain in net income for the first quarter, a number that would have been higher had the strong dollar not eaten into sales overseas, where McDonald's gets two-thirds of its revenue.

Analysts say McDonald's -- like Wal-Mart, Dollar General and other discounters -- has benefited from a "trade-down" phenomenon during the recession, as cash-strapped Americans stop eating out at Chili's and start eating out at McDonald's.

So why monkey with success? Why roll out a burger that puts your price-point in-line with Fuddrucker's, Red Robin and other high-end burger joints?

McDonald's has been testing the burger at some restaurants since 2007, franchisees report. The company created this site to promote it.

The Ticker called Stifel Nicolaus vice president Steve West, who covers McDonald's and who actually flew to L.A. a couple of years ago to taste-test the Angus, and reports that it's a good burger.

He had a good answer to the "why?" question, but not the "why now?" question.

Nicolaus said that the McDonald's menu has been upgraded over the past few years everywhere across the board -- chicken strips were added to the McNuggets, real salads were added, breakfasts were expanded, sweet tea was added.

Everywhere, that is, except for burgers.

"McDonald's has not had a good burger upgrade in years," West said. Note he said "good," which clearly does not include the ill-fated McDLT, which came packed in enough styrofoam to wreck two ecosystems.

West pointed out that McDonald's has lagged behind rivals such as Burger King, which has its own Angus, in the upscale-burger market. But that's understandable, he said, because McDonald's has identified four areas where it wants to "win:" breakfast, beverages, chicken and drive-through.

Note that "burgers" is not on that list. For many consumers, a fast-food burger is probably a commodity, unless it's got a little upscale to it.

As for why now, "I'm with you. I don't know why now," he said.

West even pointed out some potential stumbling blocks to the Angus roll-out: The company already is in the middle of an expensive launch, the McCafe gourmet coffee project, which is aimed squarely at Starbucks and Caribou Coffee.

Further, he said, adding a new one-third burger adds "much more complexity to the system," he said. "You have more SKUs [stock-keeping units], more stuff in the freezer, more stuff to track."

So we called Hudson Riehle, vice president of research for the National Restaurant Association, who provided one possible answer to the "why now?" question. And it's a counter-intuitive answer, at that.

Riehle said his group's research shows that in recessions, higher-income families that never would have gone to a quick-service restaurant such as McDonalds's are attracted to premium-priced products -- such as a $4 burger.

In other words, McDonald's may actually get new customers with a $4 burger from burger snobs who would never touch a Big Mac but, in this tight-money times, don't feel like dropping $7 for a gourmet burger elsewhere.

"Premium products at quick-service establishments is definitely a trend of the future," Riehle said.

We shall see. Despite its galactic success in just about everything else over the past 50 years, McDonald's does not have a good track record when it tries to fancy-up its burgers. We'll see if this Angus has legs.

-- Frank Ahrens
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By Frank Ahrens | April 22, 2009; 4:55 PM ET

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