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B5658

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Date: 1993, 2003, 2011

DAVID ROBI NSO N

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McDonald’s 55 Cent Promotion
After decades of international success, by 1997, McDonald’s faced slowing sales growth and stiff
competition in the United States. Price promotion seemed like a good way to rekindle sales growth.
However, in June 1997, McDonald’s corporate management abruptly announced that it was canceling
its price promotion, “Campaign 55,” which had been planned to last all year. The attention-getting
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pricing plan was to feature a different hamburger-sandwich each month at the bargain price of just
$0.55 (in honor of the 1955 founding of the fast food chain). The promotion began with the
company’s flagship product, the Big Mac®. Since the regular price of a Big Mac was close to $2, it
was surprising that the company’s loyal customers joined restaurant owners and howled in complaint
about the “C-55” promotion.

McDonald’s—an American Success Story

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McDonald’s was one of America’s most successful companies. An initial investment of 100 shares
when the company went public in 1965 would have cost $2,250 and by the end of 1998, adjusting for
stock splits, would be worth $2.8 million. With a compound growth rate higher than 20 percent per
year, MCD became the darling growth stock of small investors and investment clubs and even joined
the elite 30 stocks in the Dow Jones Industrial Average.
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The company’s history is part of American business folklore: Ray Kroc was a mixer salesman who
heard about the McDonald brothers of San Bernardino, California running eight mixers at a time. He
was so impressed with the operation of their hamburger restaurant that he convinced them to let him
open the first franchised store in Des Plaines, Illinois. McDonald’s Hamburger restaurants offered a
very simple, predictable menu at each restaurant location with speed of service and reasonable prices
as key success factors.

What Kroc brought to the business was the idea to franchise the stores. McDonald’s only owned about
20 percent of its restaurants; the rest were owned by local franchisees. By 1997, there were 2,275
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U.S. owners (many franchisees owned more than one store). During the company’s best years, a
McDonald’s franchise was considered almost a license to print money. For an initial investment of
about $500,000, McDonald’s restaurants routinely returned their local owners more than $100,000 a

Lecturer Dr. David Robinson prepared this case study as the basis for class discussion rather than to illustrate either effective or ineffective
handling of an administrative situation. This case was written from public sources.

Copyright © 1993, 2003, 2011 by The Regents of the University of California. All rights reserved. No part of this publication may be
reproduced, stored, or transmitted in any form or by any means without the express written permission of the Berkeley-Haas Case Series.

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 MCDONALD’S 55 CENT PROMOTION 2

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year in profit after paying operating expenses and various royalties and fees to the company. Industry
experts estimated that a typical McDonald’s outlet had annual revenues of $1.3 million.

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The McDonald’s corporation determined the menu and overall promotional strategy. Local operators
determined pricing. For example, prices at an inner city McDonald’s were routinely higher than those
offered by nearby suburban outlets, to accommodate higher wage and occupancy costs. However,
when a national promotion involved a price cut, franchisees were under some pressure to go along.
National ad’s ended with the tag: “…at participating McDonald’s.” A franchisee that opted out of a

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promotion would have to explain to every customer why the promotion didn’t apply to their store.

By 1997, McDonald’s was a multi-national corporation with more than 24,500 restaurants in 116
countries and more than $12 billion in corporate revenues (Exhibit 1). About 85 percent of the U.S.
restaurants were owned by franchisees; the rest were corporate owned and managed. By the time of
the 1997 announcement, the company had 12,500 restaurants in the U.S. and about a 25 percent share
of all fast food sales. The nearest competitor, Burger King (with 6,900 stores) had about 11 percent of
fast food sales, and McDonald’s captured more than 40 percent of the money spent on hamburgers.

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Entering the Doldrums
But by the mid-1990s the company’s growth seemed on the verge of stalling. Overseas operations
were providing 59 percent of operating earnings, and even before the Asian financial crisis, the
company had continually faced challenges in overseas operations. For example, the Moscow
McDonald’s was famous for lines waiting outside the door (even at very high prices), but it was hard
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for the company to convert profits in rubles into cash at home.

New Product Development was important for the chain’s growth. In its early years, McDonald’s
added a fish sandwich, and in the early 1980s Chicken McNuggets® became an enduring hit. By the
late 1980s, McDonald’s had opened up a whole new line of business at breakfast, with new
sandwiches such as the Egg McMuffin®. A significant observation was that for each of these
innovations, many of the franchisees predicted early failure, as in: “People will never come into
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McDonald’s for breakfast.” So the corporate headquarters often had to lead the way.

In the 1990s, however, McDonald’s became renown for new products which just never seemed to get
off the ground, despite huge development budgets. The Arch Deluxe® was targeted to adult
customers (in an attempt to counter a perception that McDonald’s was for children, while grown-ups
went to Burger King). And, in an attempt to woo more health-conscious eaters, the McLean Deluxe
was a lower-fat version of a Quarter Pounder® which cost more than $200 million to develop. The
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McLean and Arch Deluxe eventually joined McPizza and McPasta, on the scrap heap of failed product
launches, and efforts to repeat the success of breakfasts by generating more dinner business similarly
failed. McDonald’s hadn’t had a winner in a long time.

In the U.S. market, McDonald’s began a strategy of rapid expansion of the number of stores. After
adding about 200 new outlets a year in the early 1990s, there was a dramatic increase:

Year Number of New Stores

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1993 (estimate) 200

1994 841
1995 1,130
1996 726
1997 (estimate) 400

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 MCDONALD’S 55 CENT PROMOTION 3

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The large increase in the number of stores led to cannibalization of existing stores’ profits. Profit per
location was flat in the early 1990s at about $120,000 per store, but by 1996 it had dropped to $95,000

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per store. The stock market reacted by no longer treating McDonald’s as a growth stock, and the
stock price was flat in 1996.

McDonald’s Stock Price Showed Little Growth over Two Years

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25

20

15

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10

0
April-93

April-94

April-95

April-96

April-97
July-92

July-93

July-94

July-95

July-96
October-92
January-93

October-93
January-94

October-94
January-95

October-95
January-96

October-96
January-97
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Source: Public data.

The rapid expansion put existing franchisees in a difficult position. When the corporate office
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identified a new location close to an existing McDonald’s, the opportunity to buy and operate the new
store was frequently offered to an existing operator. The franchisee had the unpleasant choice of
operating two, less-profitable stores, or passing up the second store and watching a new entrant earn
profits cannibalized in part from the existing store.

It was against this background that the C-55 promotion was developed as a way to drive traffic into
the stores. Perhaps McDonald’s managers remembered Taco Bell (at the time a unit of Pepsi) which
lowered prices across the board in 1989, in a dramatic move to build business.
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Value Pricing
The concept of “value pricing” has many definitions. To some companies, it just means taking a
“good enough” position: Come up with a mid-priced offering that is not a “stripped down” model, but
does not have luxurious features. To other companies, it means offering a feature set equivalent to
competitors’ offerings but at a slightly lower price point.

However, a value pricing strategy can have a particular meaning for companies deciding the pricing
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for goods in mature markets. The leader in this field was the Honda Motor Company. When the firm
launched the CIVIC in the U.S. market, Honda observed that the pricing strategy of the U.S. car
manufacturers was to heavily advertise a base model at a seemingly unbelievably low price (Chevrolet
had models in the late 1960s advertised at $1,799, for example) but few cars were actually available at
that price. Most cars on dealers’ lots came with features that almost all buyers demanded, priced at a
hefty premium (for example, $200 for a radio in this case).

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 MCDONALD’S 55 CENT PROMOTION 4

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Since Honda had to ship its cars from Japan with all likely features already installed, they carefully

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researched the bundle of features (automatic transmission, power door locks, etc.) that most American
consumers ordered from Detroit manufacturers. They then priced the CIVIC at the “nicely equipped”
price, which at first glance, appeared more expensive than the price of comparable American small
cars. However, consumers knew that the effective price of a U.S. car was inevitably much higher and
soon saw the Honda as a good value. In time, the CIVIC became the number one selling model in the
U.S.

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From Honda’s experience, then, a good working definition of value pricing is: A pricing strategy, in
which a bundle of items or features which consumers usually purchase together, is offered at a price
which is a discount from the price of the items purchased individually. Consumers see the bundle as a
simple way to buy. They perceive the price as a reduction from the price usually paid and a “fair
value” for the bundle offered. The “value price” is rarely the lowest price in the market and there are
usually competing lower-priced products from other vendors following an “economy model” strategy.

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Value pricing soon caught on in the fast food market, where consumers almost always bought multiple
items on each visit, typically: hamburger, fries, and a soda. “Meal Deals” and “Value Pricing”
became the norm in U.S. fast food restaurants by the late 1980s. The following offer from Burger
King was typical:

Burger King Individual Meal Deal

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Whopper $ 1.49
Medium fries $ 1.29
Medium drink $ 1.19
Total $ 3.97 $ 3.39

The “Meal Deal” at $3.39 represented a 15 percent discount from the price of the individual items. It
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would be possible to find the same items cheaper at some other chains. Customers considered Burger
King’s flame-broiled Whopper a “unique value’ and considered the bundle price a fair value.
McDonalds also joined the trend to value pricing, indeed was considered a leader in the strategy by
offering bundles of “Extra Value Meals” at consistent prices, not just as special promotions.

Although Taco Bell’s low-price strategy was sometimes called a “value pricing” it was a classic
“economy model” position: Taco Bell staked out the low-end of fast food, with offerings designed for
everyday pricing as low as $0.29.
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Campaign 55
In February 1997, details of C-55 were leaked in the business press. Franchisee reaction was swiftly
negative. They correctly determined that “rolling back prices to 1955” was a promotional strategy
which confused consumers who had come to expect the good deals of value pricing. Discounting the
bundle of three items—hamburger, fries, and drink—made sense since it was widely reported that the
variable costs of a medium drink which sold for more than $1 were less than $0.10. But C-55 seemed
to be discounting the Big Mac, an item with a much smaller margin.
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Consumer confusion—and revolt—came when they turned up at McDonald’s restaurants to purchase

Big Macs for $0.55 to find the small print: the special price was only available if the customer also
bought an order of fries and a drink, the same bundle as Extra Value Meal. And some customers
alleged that the price of the drinks and fries were being raised in compensation. Here’s how the
offerings compared in a typical store:

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 MCDONALD’S 55 CENT PROMOTION 5

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McDonald’s Extra Value McDonald’s
Individual Meal "C-55" COGS†
Big Mac $ 1.99 $ 0.55 $0.59
Medium fries $ 1.39 $ 1.39 $0.15
Medium drink $ 1.09 $ 1.09 $0.10
Total $ 4.47 3.49 $ 3.03 $0.84

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Although the C-55 pricing would have been a substantial discount from the three items purchased
separately, and even a 13 percent discount from the Meal Deal bundle, consumers widely perceived
the tactic as “bait and switch.”

Arch-rival Burger King had already configured its menu with a number of menu items priced at
$0.99—with or without fries and drinks—and pointedly did not match McDonald’s price promotion.

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Similarly, Carl’s Jr., a regional chain, announced that they would “stay on the successful course that
[we have] been on for the past two years—emphasizing the quality and quantity of our product.” 1

The promotion failed to ignite sales as planned, and some franchisees reported reduced revenues.
Michael Quinlan, McDonald’s CEO at the time, claimed the promotion was misunderstood and said
that the company’s critics, “Don’t know what they are talking about.” But after a few more weeks of
consumer and franchisee dissatisfaction, the company threw in the towel and halted the promotion
with no alternative developed.
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No
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†
Muller, C. see Sources
1
Martin, R. See Sources.

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 MCDONALD’S 55 CENT PROMOTION 6

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Case Discussion Questions

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1. Does C-55 appeal to Loyals or to Price-Switchers?

2. If this campaign worked, would it attract new customers, make existing customers buy more
often, or make existing customers buy more when they buy?

3. Why did the C-55 promotion flop?

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4. Assess Burger King’s response.

5. What should McDonald’s corporate management do now?

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No
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 MCDONALD’S 55 CENT PROMOTION 7

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Exhibit 1

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McDonald’s Financial Statements 1996 to 1998

Consolidated Statement of Income

(In millions, except per common share data) 6 months Years ended 12/31

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6/1997 1996 1995
Revenues
Sales by Company-operated restaurants $ 3,867.3 $ 7,570.7 $ 6,863.5
Revenues from franchised and
affiliated restaurants 1,582.9 3,115.8 2,931.0
Total revenues 5,450.2 10,686.5 9,794.5
Operating costs and expenses

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Company-operated restaurants
Food and packaging 2,546.6 2,319.4
Payroll and other employee benefits 1,909.8 1,730.9
Occupancy and other operating expenses 1,706.8 1,497.4
3,167.2 6,163.2 5,547.7
Franchised restaurants–occupancy expenses 299.4 570.1 514.7
Selling, general and administrative expenses 681.2 1,366.4 1,236.7
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Made For You costs
Special charges 72.0
Other operating (income) expense (55.3) (117.8) (105.7)
Total operating costs and expenses 4,092.5 8,053.9 7,193.2
Operating income 1,357.7 2,632.6 2,601.3
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Interest expense 176.2 342.5 340.2

Nonoperating (income) expense 22.7 39.1 92.0
Income before provision for income taxes 1,158.8 2,251.0 2,169.1
Provision for income taxes 376.1 678.4 741.8
Net income 782.7 $ 1,572.6 1,1427.3
Net income per common share $ 1.11 $ 2.21 $ 1.97
Net income per common share–diluted 1.09 2.16 1.93
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Dividends per common share $ .1575 $ .29 $ .26

Source: 10-Ks and Annual Reports.

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 MCDONALD’S 55 CENT PROMOTION 8

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Sources

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Branch, S., “What’s Eating McDonald’s?”, Fortune, October 13, 1997, pp. 122-125.

Feder, B., “McDonald’s Ends 55-cent Sandwiches: Move Signals Disarray in Plans for
Marketing,” New York Times, June 4, 1997, p. E1.

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Gibson, R., “Burger Flip-Flop: Worried McDonald’s Plans Dramatic Shifts and Price
Cuts: Burger King Says Thanks,” Wall Street Journal, February 26, 1997, p. A1.

Gibson, R., “McDonald’s Aims to End Confusion about Promotion,” Wall Street Journal,
May 23, 1997, p. B11.

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Gibson, R., “McDonald’s Campaign Pullback Causes Some Analysts to Cut their Profit
Estimates,” Wall Street Journal, June 5, 1997, p. B12.

Jenkins, H. W., “How to Save McDonald’s,” Wall Street Journal, March 18, 1998, p.
A23.

Leonhart, D., “McDonald’s: Can it Regain its Golden Touch?,” Business Week, March 9,
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1998, pp. 70-77.

Martin, R., “Greenberg’s 55-cent Message Signals McWorry,” Nations Restaurant News,
March 17, 1997, p. 76.

Muller, C., “Redefining Value,” Cornell Hotel and Restaurant Administration Quarterly,
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June 1997, p. 62-73.

No
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