Fast food chain Taco Bell, owned by Yum! Brands (NYSE:YUM) is looking to a make a big splash with an ultra cheap food offering. The fast food chain recently announced that it will be offering full meals for $2. According to the company, for $2 customers will be able to get a taco or burrito, a soft drink, and a bag of chips. As fast food chains continue to focus on offering the best value, Taco Bell's move will certainly have the industry sitting up and taking notice.
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With the US consumer more frugal than ever, Taco Bell is clearly looking to hit other fast food chains squarely between the eyes. There's no doubt that giants like McDonald's (NYSE:MCD) will be paying very close attention. McDonald's is enjoying solid growth over the past year as cash strapped consumers gravitate towards the company known for its $3 Extra Value Meals. Taco Bell's new $2 price point may create a major transformation in the pricing of fast food alternatives. At the moment, McDonald's isn't flinching. According to a USA Today news article, McDonald's was quoted as saying "Our research shows that we consistently rank among the best in the industry in consumers' perceptions of value." Time will tell. (For more, see Sinking Your Teeth Into Restaurant Stocks.)
An Industry Game Changer
Even so, McDonald's incredible popularity may make it the rare exception. Earlier this week, the Wendy's/Arby's Group (NYSE:WEN), the nations second largest fast food burger chain, reported a quarterly loss. Indeed while the company's loss narrowed from the 2009 comparable quarter, its Arby's brand is advertising $5 meal deals. Whether or not Taco Bell's move is going to affect this will be seen in the quarters to come. To be sure, both Arby's and Wendy's have a dollar menu and, while consumers are being frugal, spending an extra dollar for the unique offerings of Arby's or a fresh burger from Wendy's may not be a problem at all.
Still, over the years, the fast food industry has become very price conscious with competitors striving to offer the lowest prices. Currently $3 seems to be the price floor for a meal and every major fast food burger chain, including Burger King (NYSE:BKC) all have dollar menus to attract frugal consumers. If just one other fast food chain decides to follow Taco Bell's move it will likely have a ripple effect across the industry. This would certainly be goods for consumers, but its effect on the bottom line may not be so good for shareholders.
For now, I don't see any major changes in the pricing of food from the competition. Burgers and burritos are two different food items and if someone wants a Big Mac, $1 may not be enough to make a difference. Still, Taco Bell's new menu is a game changer. Should the company's numbers show strong signs of growth, I would expect competitors to take a very close look.
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