Deceptive Delight: Secrets of the Fast Food Industry's Dollar Menus

How do they do it?

How can they possibly sell food for less than it would cost you to make it at home - and maybe even buy the raw materials at the grocery store?

It is not, as surprised as you may be to hear it, out of the goodness of their hearts.

The dollar menus are not loss leaders in the classic sense, although they work in a similar fashion to increase volume by enticing more customers to buy. According to the industry, they do not lose money, though they barely make a profit. And as many consumers have noticed, the size of the offerings has diminished as the price of meat, vegetables and the energy cost of transportation has risen.

The real secret to the dollar menu's power is that very few people ever buy just the dollar menu items. And that is where the profit lies. The drinks (super-size me!), sides and desserts that people purchase to accompany the basic dollar menu are the highest margin items. Drinks are especially big money makers since the volume of ice and water in the biggest sizes disguises the fact that in terms of ingredients they are almost indistinguishable from the smaller ones.

So, the combination of increased traffic and additional purchases makes the dollar menu a profitable strategy option for an industry whose customers have seen their incomes shrink in real terms over the past generation.

This is a relatively benign form of advantage-taking, especially when compared with the truly predatory mortgage lending practices of the past decade. People can buy just the dollar menu if they want to, whereas in the financial services case, they were required to agree to conditions that were patently misleading.

Americans have become more cost-conscious as real estate prices, jobs and wages have declined. Household debt is being paid down and depressed retail sales suggest that an economy built on credit is readjusting to reality. What the dollar menu example does illustrate is that people have to be discerning stewards of their own resources, however small the costs involved, particularly in times of constraint. JL

Candice Choi reports in the Huffington Post:

That cheeseburger on the value menu may end up costing more than you think.
Whether it's the "Dollar Menu" at McDonald's or the "Why Pay More Menu" at Taco Bell, fast-food chains often spotlight their cheapest offerings to attract customers.

The items usually cost a buck or so and are no doubt a deal if you're looking for a quick treat. But there's a reason why companies dangle the offers; customers often end up spending more on other items once they're in the restaurants. Think $3 coffee frappes and fruit smoothies.

"Every restaurant has an opportunity to get customers to trade up to more expensive, higher-priced options including main entrees, sides, beverages and desserts," said Darren Tristano, an analyst at research firm Technomic.

Additionally, value menus aren't as filling as they were a few years ago because restaurants swap out items that become too expensive to offer at such low prices. Earlier this year, for instance, small fries and small soft drinks disappeared off McDonald's Dollar Menu.

That doesn't mean that you should stay away from value menus. After all, you get deals on certain items because restaurants make money on others.

But as a consumer, it's worth knowing how fast-food chains rely on value offerings – and the role they play in how much you ultimately spend.

FILLING UP THE TRAY

For restaurants, the profit margins for value menu items are often razor-thin. But they make money off them by selling the items in huge volumes.

Taco Bell, for example, is known for its affordable prices even in the fast-food industry; its "Why Pay More" menu offers 89-cent nachos and 99-cent tacos.

But chances are that you'll get more than one taco. Not including a drink, customers order an average of three items, says Brian Niccol, the chain's chief marketing officer.

Better yet, customers may opt for (relatively) pricier items, such as a grilled stuffed burrito, which is around $3. Or they might "trade up" to the new taco that comes in a Doritos flavored shell, which costs 30 cents more than a regular taco. The idea is that people will fill up their trays, hopefully with more profitable foods.

The same philosophy applies to other fast-food chains, including Subway. The ubiquitous sandwich shop doesn't have a value menu per se, but its $5 foot-long deal has become a staple of its marketing. Without giving details, Subway Chief Marketing Officer Tony Pace said the offer has been a "game changer" in terms of bringing in customers since it was introduced in 2008.

And as customers wait for their sandwiches, they may be tempted by the variety of chips (about $1 a bag) that line the counter or the cookies (three for $1.39) by the register.

WOULD YOU LIKE A DRINK WITH THAT?

Whether you choose to order a drink with your meal makes a big difference to fast-food chains. That's because fountain drinks have high profit margins.

"The more often you can sell a drink, the better you feel about providing discounts on other items," said Niccol of Taco Bell.

In the past year, however, customers have kept spending in check by ordering only food or requesting only tap water, according to a study by The NPD Group. As sales of sodas and diet sodas have slipped, restaurants have responded by aggressively marketing other drinks, such as specialty coffees and smoothies.

It's been a big part of McDonald's success in recent years; the chain introduced premium coffee drinks in 2009 and fruit smoothies the following year. It's no surprise that Burger King followed suit with its own coffee frappes and smoothies as part of its revamp earlier this year. Wendy's is also testing specialty coffees in select markets.

At Taco Bell, customers can get a Fruitista Freeze, a frozen drink topped with fruit pieces, or Limeade Sparklers, which is lemon-lime soda and lime juice.

"There's definitely a consumer trend of splurging on drinks," says Niccol of Taco Bell.

In fact, "beverage only" trips to fast-food restaurants are increasing, according to The NPD Group. These trips are often for shakes, smoothies, slushy drinks and coffee.

SKIMPIER MENUS

Value menus aren't as meaty as they once were, either.

When McDonald's first introduced its Dollar Menu a decade ago, for example, the flagship offering was the Big `N Tasty, made with a quarter-pound beef patty. But as McDonald's and other fast-food chains pay more for beef, cheese and other ingredients, what customers can buy for just a buck isn't quite as filling.

The Big `N Tasty lasted on the Dollar Menu for about a year. McDonald's then added the Double Cheeseburger, which has smaller patties, to the lineup instead.

About three years ago, McDonald's took the Double Cheeseburger off the Dollar Menu and replaced it with the McDouble, which has one slice of cheese, instead of two.

As ingredient prices have risen, McDonald's in March introduced its "Extra Value Menu," where items cost closer to $2. That's where the two-cheese-slice Double Cheeseburger is now found.

"What it boiled down to was our ability to offer our customers options that make sense for them, but also make sense for us," says Danya Proud, a spokeswoman for McDonald's.

The changes may be why the Dollar Menu now makes up about 10 percent of McDonald's business, down from about 13 percent in earlier years.