"Value Meal" Explosion Squeezes McDonald's, Other Fast-Food Eateries

(MoneyWatch)  More people are staying home instead of eating out -- but traffic at fast-food joints is actually up. The catch is, customers are opting for the best deals, like $1 mini-burgers or 89-cent tacos. Restaurants are rolling out cheap specials to compete for these customers, but increased ingredient costs are squeezing the profit margins on these low-priced items.

"These 99-cent and dollar meals are priced at 2002 cost levels," a consultant to McDonald's owner-operators told the Chicago Tribune. "It's insane."

Some fast-food chains are reevaluating their bargain-product strategy. McDonald's is testing out small price increases on its dollar menu; for example, the $1 double cheeseburger may go up to to $1.09 or $1.19. Burger King, meanwhile, is testing a smaller beef patty for its $1 Whopper Jr.

These chains are "walking a tight-rope," the Tribune says.

"It's kind of like a game of chicken" for fast-food chains, said Morningstar restaurant analyst John Owens. The restaurant industry doesn't want to repeat the notorious "burger wars" of 2002, when fast-food outlets got carried away with discounting premium items such as Whoppers and Big Macs and their profits took a hit, Owens said.

But more upscale restaurants may be in an even tighter spot ?€" and slashing prices won't help them, according to a Booz & Co. report examining how current economic pressures affect consumer choices:

The customers they've lost have switched to another category entirely. For example, a premium restaurant might lower the price of an entree from $12 to $9, but that won't draw in customers who have switched to eating at home, and are paying $5 to do so.

And Starbucks is likely to sell fewer lattes but more packaged coffee, as consumers struggle to cut costs.

According to a separate Booz & Co. consumer spending survey, consumers are doing more things at home in order to save money. More than a third of respondents said they've started packing their own lunches for work, 43 percent are eating out less, and 39 percent are choosing less expensive restaurants. People also reported changes to their grocery shopping habits, such as using more coupons, switching to cheaper brands and avoiding impulse buys.