It looks like you can make money off of even a $5 meal.
That’s what people who work in the restaurant business think about a new product that McDonald’s MCD, -1.29% started selling across the country on Tuesday. For $5, you get a McChicken or Double Cheeseburger sandwich, four Chicken McNuggets, a small order of french fries, and a small soft drink.
People are complaining that fast food restaurants have too high prices right now, which is why this offer is being made. One thing that caused a lot of trouble was a $18 McDonald’s meal.
It might seem impossible for McDonald’s owners, who are mostly franchisees, to make a profit on a $5 meal when prices are going up so fast. But Mark Kalinowski, a seasoned fast-food industry analyst, said the combo has a 1% to 5% profit margin, which means it makes between $.05 and $.25 per meal.
That is less than the normal profit margin on a McDonald’s meal, which Kalinowski thought was around 5% to 10%. But Kalinowski said that the deal will also likely bring back price-conscious customers who used to shop at the chain and make them want to come back. McDonald’s clearly hopes that this will happen beyond the limited time period for the $5 deal.
Kalinowski also said that there’s a chance that some customers will look at more than just the $5 meal once they get inside.
Kalinowski said, “They want you to bring your friend, who will order that Double Quarter Pounder with Cheese.”
Even McDonald’s doesn’t deny that the $5 offer still makes money for operators. The company said that the deal gives customers what they want while still making money for franchisees.
But it was clear that the consumer part was very important.
People are telling us that they’re really stretched… President of McDonald’s Joe Erlinger told NBC’s CMCSA, +2.30% “Today” show on Tuesday that the last few years of high prices had been hard on them.
The deal does have a catch, though. The company said that the price could be $6 in some higher-priced areas, like Alaska, California, Guam, Hawaii, Nevada, Washington state, and parts of New York City.
‘Customers are telling us that they’re really stretched.’
McDonald’s President Joe Erlinger
How does McDonald’s make this deal work, anyway? Experts say it’s all about putting food together in bundles.
Most of the time, sandwiches don’t make a lot of money: Kalinowski says that the food cost for a burger or chicken sandwich could be 40%. This means that the ingredients for a $5 burger cost the owner $2.
When you sell fries and soda, you make more money. A popular Mediterranean-themed restaurant in New York City called Little Owl is owned by Joey Campanaro. He says that fries can have a food cost as low as 5%.
The deal is even because items with different profit margins are packed together.
But the price of food is only one part of the picture. There are also costs like rent, insurance, workers’ compensation, and many more that restaurants have to pay for. That’s why the overall profit margin for a $5 meal is as low as 1% to 5%.
He said, “It’s all of the above.”
Last but not least, a $5 deal doesn’t have to be a complete loss leader, which is an offer that loses money but is meant to get more people to buy.
But New York City hospitality consultant Arlene Spiegel said it’s also wrong to think of a $5 meal as a gift that will bring in a lot of money for the business. She said that when margins are this small, the costs of condiments, napkins, and straws are especially high.
Spiegel said, “The deal is more about publicity than making money.”
Right now, McDonald’s isn’t the only place advertising a value option to attract customers who want to save money. Other fast food chains have also come out with deals like these. For example, Burger King QSR, +1.28% has a $5 “Your Way Meal,” and Jack in the Box JACK, -1.01% has a deal for “Munchies under $4.”
