Big Mac Offers Subsidies if Franchisees Support $1 Menu

10 September 2002

McDonald’s is set to launch a lossleading $1 menu across its chain of nationwide fastfood outlets – the majority of which are franchisee-owned.

But the eyes of most franchisees tend to be fixed on this week’s bottom-line rather than next year’s strategic corporate goals. They do, however, recognize a dollar bill when they see one – as McDonald’s has acknowledged with a new program of promotional subsidies.

As of October 4, the chain will roll out a number of items costing $1 or less, the first being its Big 'N Tasty lettuce-and-tomato hamburger and a fried McChicken sandwich. So far, so (fairly) good.

But at this point, beads of sweat begin to appear on franchisees’ brows. From November 1, the $1 menu will be expanded to include a seven-ounce serving of French fries, a 21-ounce drink, a fruit and yogurt parfait, a McSalad Shaker and a choice of pies and sundaes.

Lest any fear there has been a switch in Big M’s corporate strategy toward philanthropy, the chain will also begin testing what it calls “a more contemporary menu” that includes premium salads – a tactic that has recently increased traffic at rival Wendy’s International.

And for those franchisees of little faith who fear this strategy will hit their bottom lines, McDonald’s is to introduce “downside support” – or, in plain English, subsidies. If a restaurant sells more cut-price Big 'N Tasty burgers than the McDonald’s market average but sees gross profit fall year-on-year, McDonald's will pay an amount equal to 30% of the gross-profit reduction.

There will also be a range of incentives to persuade franchisees to upgrade or remodel their outlets. In certain circumstances, McDonald’s will pay up to $150,000 in refurbishing costs. And operators will qualify for significant rent reductions by posting same-store sales improvements.

The new plans were okayed by franchise leaders at a meeting in Las Vegas last week. They have now been put to franchisees nationwide and are expected get the green light as early as this week.

Data sourced from: The Wall Street Journal Online; additional content by WARC staff