Here's how much profit McDonald's makes on its new $5 meal

By Charles Passy

The margins are tight, but there's still a profit to be made on the offer, according to industry experts

Apparently, there's money to be made off even a $5 meal.

That's the opinion of restaurant-industry experts in respect to a new offering that McDonald's (MCD) rolled out nationwide on Tuesday. The $5 combo includes a McDouble cheeseburger or McChicken sandwich, a four-piece order of Chicken McNuggets, a small order of french fries and a small soft drink.

The offer is being introduced at a time when consumers have complained about high prices at fast-food restaurants. In particular, an $18 McDonald's meal became a point of contention.

In such an inflationary environment, it might seem impossible for McDonald's operators, the majority of whom are franchisees, to eke out a profit on a $5 meal. But Mark Kalinowski, a veteran fast-food-industry analyst, estimated there's a 1% to 5% profit margin on the combo, which translates into anywhere from $.05 to $.25 per meal.

Admittedly, that's lower than the regular profit margin on a McDonald's meal, which Kalinowski estimated at between 5% and 10%. But Kalinowski said the deal has the anticipated added benefit of getting price-sensitive customers back in the door and frequenting the chain again, something McDonald's clearly hopes will continue beyond the announced limited timespan for the $5 offering.

See also: Forget McDonald's $5 value meal. If you really want to save money, bring your own wine to a diner.

In addition, Kalinowski said, there's also the possibility some customers will look beyond the $5 meal once they're in the door.

"They're hoping you bring your buddy, who's going to order that Double Quarter Pounder with Cheese meal," said Kalinowski.

McDonald's doesn't deny that there is still a financial gain for operators in the $5 offer. The company said the deal meets consumers' desire for value while maintaining profitability for franchisees.

But the consumer component was obviously a key factor.

"Customers are telling us that they're really stretched. ... They felt the stress of the inflation over the last few years," McDonald's President Joe Erlinger said in an interview with NBC's (CMCSA) "Today" show on Tuesday.

The deal also comes with a caveat: In certain higher-priced markets - specifically Alaska, California, Guam, Hawaii, Nevada, Washington state and parts of New York City - the offer could be priced at $6, the company noted.

'Customers are telling us that they're really stretched.'McDonald's President Joe Erlinger

Either way, how does McDonald's make a deal like this work? It's all about bundling food items together, experts say.

The profit margin on sandwiches tends to not be so great: A burger or chicken sandwich might have a food cost of 40%, according to Kalinowski - meaning the ingredients in a $5 burger cost the operator $2.

The margins are better on fries and soda. In particular, fries can have a food cost as low as 5%, according to Joey Campanaro, a New York City restaurateur who owns Little Owl, a popular Mediterranean-themed establishment.

So by packaging items with different profit margins together, the deal balances out.

Food costs are just one part of the equation, however. Restaurants also have expenses for labor, rent, insurance and countless other things, which is why the overall profit margin for the $5 meal is as low as 1% to 5%.

"It's all of the above," said Campanaro.

In the end, a $5 deal doesn't have to be a complete loss leader, to use the term for a money-losing offer designed solely for the purpose of bringing in more customers.

But Arlene Spiegel, a New York City hospitality consultant, also said it's a mistake to think of a $5 value meal as a sales bonanza for the operator. She said the costs of condiments, napkins and straws weigh especially heavily when margins are this tight.

Ultimately, said Spiegel, "the deal is more promotional than profitable."

McDonald's isn't alone in promoting a value option to woo cost-conscious customers right now. Other fast-food chains have announced similar offers: Burger King (QSR) has a $5 "Your Way Meal" and Jack in the Box (JACK) has a "Munchies under $4" deal.

-Charles Passy

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06-29-24 1018ET

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