McDonald's Talking Up Double Cheeseburger w/o the Cheese

McDonald's Chief Operating Officer Ralph Avarez told analysts on the second-quarter conference call in July that backing for the Dollar Menu remained strong throughout the U.S. system, in spite of continued increases in beef, wheat, and other commodity costs. This runs contrary to what I am hearing directly from franchisees and affiliates, who operate 78 percent of all restaurants and contribute about 66 percent to operating profits (through rent and/or royalty payments), according to the recent 10-Q.

However, with wheat prices trebling in two years, and chicken and beef costs expected to rise about six percent and about 9 percent in 2008, local operators can no longer sit idle. Working on thin margins -- pennies for the four-piece chicken nugget item on the Dollar Menu -- franchisees are also feeling the hurt from rising fuel, rent, and utility costs. One franchisee privately told me that his margins actually rose in June, when the company stopped serving serving tomatoes on burger and chicken sandwiches during the recent salmonella outbreak.

Acknowledging the concerns of franchisees, McDonald's is testing the Double Cheeseburger at different price points in a limited number of restaurants, according to McDonald's USA spokesman Bill Whitman.

However, restauranteers in expensive locales like Manhattan are not waiting for corporate's lead, they have already removed the popular Double Cheeseburger from the Dollar Menu. Other chain operators have taken to selling the double-burger less one slice of cheese (and/or without pickles).

So far, the company has announced no specific changes to the Dollar Menu, but more information on the fate of its Double Cheeseburger should come on or about October 22, when McDonald's tentatively plans to release third-quarter operating results.

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Editor David J. Phillips does not hold a financial interest in any companies mentioned in this posting. The 10Q Detective has a Full Disclosure Policy.