This fast food stock will win the value menu war

The fast food scene has seen quite a competitive battle for customer dollars this summer. No doubt inflation has caused many former frequent diners to hibernate, at least until prices drop to more reasonable levels. Undoubtedly, some of the most prominent names in the fast food scene may have stretched themselves too far in terms of price hikes.

The deteriorating value proposition likely heavily influenced the loyalty built up many years before the post-pandemic period of inflation. Either way, the value menu war, as it’s called, aims to address the setbacks endured by many industry players in the years following the pandemic.

So far, I’d argue that fast food companies have done a pretty good job of communicating the value they offer. Undoubtedly, many of the most popular fast food deals may only be available for a few more months. And while prices in 2019 and 2020 seem entirely off the table, at least for now, there are massive opportunities for fast-food firms to gobble up more market share.

Simply put, lower prices will draw customers through its doors, while other efforts (think new food items, innovations in loyalty apps, upgraded dining areas and faster ordering times) will drive them to comes back

Key points about this article

• McDonald’s is doing a fantastic job of righting the ship with a renewed focus on value.
• Beyond value menus and lower prices, new menu items like the Big Arch could be the key to outsized profitability gains.
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McDonald’s (MCD)

There is more than one way to improve your value proposition. One way is to lower prices. The other way is to give more per dollar. In case McDonald’s (NYSE:MCD), has gotten pretty aggressive with its value menu, with $5 meal deals in the U.S. and $5 and change meals in Canada.

Indeed, $5 doesn’t buy much in today’s post-inflationary environment. So, such probable loss leaders will continue to attract the attention of diners, some of whom are repeat patrons and others who rarely eat at the Golden Arches.

Sooner or later, however, McDonald’s will have to pad its margins. The new menu offerings seem like a great way to do this.

The Big Arch: A new product that could increase sales and margins

Enter the new Big Arch burger, which seems to tick all the boxes as an item that can shake up sales and margins simultaneously. Indeed, customers have longed for a bigger, more filling burger for some time. And when a Big Mac no longer does, the Big Arch could deliver the beef for customers looking for something that fits the bill.

The bigger, meatier, cheesier burger will come at a premium price. And given that customers seem more than willing to pay more to get more (take Chipotle Mexican Grill (NYSE:CMG), which has thrived amid inflation with its beefier offerings despite higher prices), perhaps McDonald’s new burger could have the secret sauce to boost profitability growth.

Big Arch was released in Canada and Portugal last week and has received good reviews so far. Having had the chance to try the burger twice, I have to say it lives up to the hype. Heck, I think an argument could be made that it’s McDonald’s best burger, given that it combines the attributes of other burgers (think Big Mac and Quarter Pounder with cheese) in a rather graceful manner.

However, the million dollar question remains whether that’s enough to justify the steep $10 sticker price (around $7 and change).

Additionally, it remains to be seen if the new burger becomes a mainstay on the menu as it moves into new markets. Personally, I think it has all the makings to be the next big menu offering since the introduction of the Big Mac in the late 1960s.

conclusion

Innovation is back at McDonald’s, and investors should love the stock, even at nearly 25 times its price-to-earnings (P/E) ratio. The 2.31% dividend yield may not be as consistent as it was a few weeks ago before the stock rallied more than 16% from its 52-week lows.

Either way, McDonald’s stock is a great way for investors to play defense in an increasingly choppy market while also playing offense in the fast-food scene, which has struggled to innovate and relied on principally on margin-eroding price cuts to win over customers.

If there’s one restaurant company that can win the value menu wars, it’s McDonald’s. From new everyday lower prices to $5 meal deals (and change) and the introduction of ambitious new menu offerings like the Big Arch, McDonald’s has the tools to not only win over customers, but to lure them away from rivals.

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