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MCD Dollar Menu Price Hike Could Hurt McDonald’s

McDonald’s (MCD) is considering shaking up the Dollar Menu by … well, retooling its menu to include items for more than a dollar.

MCD is testing new items for a new “Dollar Menu & More” that cost up to five bucks. And regardless about how you feel about the possibility of McNuggets or a cheap chicken sandwich as a consumer, you should know that, as an investor, this kind of tinkering could have big implications for MCD stock.

Furthermore, the move could mean a lot for competitors like Yum Brands (YUM), Wendy’s (WEN) and Burger King (BKW). All three combined are still just worth half the market capitalization of MCD, so what McDonald’s decides is sure to hold weight with competitors.

Regarding the now ubiquitous “value menu” model, it’s clear that lately it has become a race to the bottom. In many cases, some items wind up being a negative for franchisees because of razor-thin margins. So it’s not entirely a surprise to see MCD move to bolster margins.

But remember that McDonald’s isn’t exactly going like gangbusters right now. And after MCD posted a recent miss on both earnings and revenues, it’s clear that consumers aren’t overly willing to spend at the restaurant. A price hike could turn them off further.

Not exactly what you want to think about when the Golden Arches are already suffering from some severe tarnish.

We have some history with value menu price increases, of course. Earlier this year, Wendy’s rebranded its 99-cent menu to include some items up to $2.

And bigger-picture, premium items — whether they be the new line of Quarter Pounder burgers at MCD, or even something adventurous and pricey like ribs at Burger King a few years back — are crucial to generating profits considering a lot of value menu offerings yield little to no payback at low price points.

But don’t think that sliding prices higher is necessarily a no-brainer. Yes, margins could be better, but remember that this push finds its roots in franchisees and not the corporate offices. Some consumers undoubtedly will see this simply as McDonald’s raising prices, and it will hurt the positioning of the company with its cheap eats — even if a portion of restaurants and their owners are ultimately better off for the decision.

This is not unlike the situation at BKW over $1 double cheeseburgers a couple years ago that ultimately resulted in franchisees suing Burger King over the promotion. They claimed the high cost of ingredients made the double cheeseburger unprofitable and thus had a right to change pricing, but ultimately the judge sided with corporate managers.

If McDonald’s wanted to fight over the Dollar Menu, it could — and with the Burger King lawsuit as precedent, it might have good standing. But apparently the corporate leaders are willing to give ground because they feel it’s ultimately better for everyone, including shareholders, to move prices higher.

We’ll see how this move winds up in the long-run. Because right now MCD is underperforming the market in 2013, and is down about 6% from spring highs thanks to softening sales.

Maybe the price hike turns things around for MCD. But a misstep on the Dollar Menu might accelerate the current declines, especially considering consumer spending doesn’t appear to be all that strong and a value menu is perhaps the most attractive part of the MCD brand right now.

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Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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