McDonald’s cuts prices on drinks

McDonald’s Corp., reeling from an industrywide restaurant slump and slowing growth from its all-day breakfast push, is looking to beverages to help perk up the business.

The world’s biggest food-service company, which last year focused its advertising on cheeseburgers and chicken sandwiches, plans to offer $1 sodas and $2 McCafe specialty drinks across the U.S. It’s turning to higher-margin beverages at a time when cheap grocery prices are prodding more Americans to eat at home. The drink promotion may also help McDonald’s cope with the eventual rebound in food costs.

McDonald’s has been revamping its menu and marketing since Steve Easterbrook took the helm almost two years ago. Along with the introduction of all-day breakfast, Easterbrook has relied more on discounts and promotions across the country. Last year, the chain advertised two-for-$2 and two-for-$5 deals to bring back diners they’d lost after nixing the popular Dollar Menu.

McDonald’s leads a $228 billion U.S. fast-food industry that faces slackening growth. After increasing 2.4 percent last year, revenue gains will slow to 1.5 percent this year and 1.6 percent in 2018, data from researcher IBISWorld show.

“Demand has been a little weak,” said Jack Russo, analyst at Edward D. Jones & Co.

The McDonald’s promotion, which starts in April, will include soft drinks of any size for $1. For a limited time, customers can buy McCafe beverages such as smoothies and espresso drinks for $2. The chain plans to support the rollout with national advertising.

The strategy aims to create “noticeable changes” for customers, said Adam Salgado, vice president of U.S. marketing at Oak Brook, Ill.-based McDonald’s.

The shift from food to drink may reflect a changing environment. Over the past several years, profits have been helped by cheaper commodity prices. But that may not last much longer: The consumer-price index rose a larger-than-forecast 0.6 percent in January, the most in almost four years, Labor Department figures show.

Beverages are “some of the highest-margin products, so they can probably afford to do it,” said Peter Saleh, an analyst at BTIG. Gross margins for drinks can be as high as about 90 percent, while food is usually about 65 percent to 70 percent, Saleh said.