McDonald’s menu drops $1 drinks

McDonald's recently faced a backlash because in some markets its $1 $2 $3 Menu does not actually contain any $1 items. That menu exists because the chain, which famously had a $1 value menu, dropped that popular offering because franchisees hated it.

The business goal of the Dollar Menu was to get customers to add to their orders. Instead, too many people simply ordered off the cheap menu. That led to lower-margin sales as well as smaller checks.

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Since it dropped the Dollar Menu, McDonald's  (MCD) - Get Free Report has tried a variety of other ways to offer value to its customers without angering franchisees. The company essentially has to serve two masters who want different things.

Customers want low prices and the $1 price point has been a very popular one that consumers like to see offered even if the choice is very limited. Yum Brands (YUM) - Get Free Report Taco Bell, for example, has a few select $1 items, along with a larger offering at the $2 price point.

McDonald's, however, also has to serve it franchisees who don't want the low margins associated with $1 items. It's simply not worth the labor costs to sell those items, and that is forcing the chain to make another change that consumers are really not going to like. 

McDonald's dropping $1 drinks 

Drinks are a high-margin product, but rising costs have forced the fast-food giant to reevaluate its prices and policies when it comes to beverages. The chain has begun phasing out self-serve beverage machines — something that it's giving franchisees years to do — and now, McDonald's plans to drop its popular $1 sodas.

The chain has promoted $1 drinks since 2017, but a number of its franchisees have stopped offering them, according to Restaurant Dive.

“Customers can always count on McDonald’s for great value, which remains an important part of our marketing strategy. Franchisees set prices and have the flexibility to create promotions that will drive demand locally,” McDonald’s said in a statement emailed to Restaurant Dive.

McDonald's is worried about rising prices

Franchise owners have a lot of leverage over McDonald's corporate decisions.

"Our franchisees and developmental licensees manage their businesses independently and therefore are responsible for the day-to-day operation of their restaurants. The revenues we realize from franchised restaurants are largely dependent on the ability of our franchisees to grow their sales," the company shared in its second-quarter earnings report.  

Inflationary pressures have impacted franchise owners being willing to offer items like $1 drinks. CFO Ian Borden did share some good news on that front during the chain's second-quarter earnings call. on July 27.

"We certainly are seeing inflation start to gradually come down. I think that's been the case in the U.S. business probably starting the end of last year. It's obviously still elevated, but I think we are seeing that gradual kind of decline," he said.

Borden also sees that higher prices across the board, not just for food, have impacted the chain's customers.

"We know there continues to be a lot of pressure on consumers. We know consumer sentiment continues to be impacted," he added.

CEO Chris Kempczinski does believe that franchise owners understand the need for the chain to offer affordable prices.

"I've been very impressed and pleased with how they're thinking about working through the current scenario right now, which is they're playing the long game," he said. "And they recognize the importance of us continuing to make sure we have leadership in value and affordability as they also think about how do they rebuild margins back to kind of where we were during this pre-inflationary spike."

McDonald's shares finished Friday at $278.23, down 2.3%. The shares are up 5.6% this year, 13th among the 30 stocks in the Dow Jones Industrial Average  (^DJI) - Get Free Report.