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McDonald's parts ways with its Angus third-pounder

May 10, 2013: 2:53 PM ET

McDonald's is taking the third-pounder burger off of its menu. But premium fast food is not going anywhere. Here's why.

By Beth Kowitt

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FORTUNE -- The Angus is no more.

McDonald's is taking the premium third-pounder burger, officially launched in 2009, off of its U.S. menu. The move comes on the heels of the elimination of the Fruit & Walnut Salad and Chicken Selects from its offerings as well.

On the surface, this might seem like a shift away from the fast food giant's premium line -- higher-priced and better quality food -- but McDonald's (MCD) needs premium items on the menu. It just has to find the right ones.

"I do think that McDonald's story over the last 10 years has been about improving the quality of offerings," says Bernstein analyst Sara Senatore. "It may just be these products pushed that a little too far."

Premium items serve two main purposes. First, they help get around the veto-vote, which goes like this: The kids want to go to McDonald's, but Mom and Dad don't like fast food. Having choices like salads for the naysayers means the family is more likely to come into the restaurant.

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Secondly, premium items boost profits. The value proposition of McDonald's might get diners in the door. But the hope is that customers will be enticed by a higher-priced burger, sandwich, or salad that have better margins by the time they are ready to place their orders.

Rising beef prices cut into the profitability of the Angus burger, but the sandwich also fell short with customers, who were unwilling to put aside their allegiance to the Big Mac and Quarter Pounder. "McDonald's customers are looking for convenience, value through price, and consistency," says Darren Tristano of industry consulting and research firm Technomic. When you put a burger like the Angus on the menu, it has to be differentiated enough to move the customer up to that higher price point, he adds.

Howard Penney, managing director at Hedgeye Risk Management, points out that you could buy four burgers off the dollar menu for less than the price of an Angus burger. "They need to have a premium menu," he says, but "you can't price it outside [the] range of people coming into McDonald's."

Penney says that McDonald's is testing the Quarter Pounder on the West Coast with three different sauces, theorizing that this will replace the gap left by the Angus burger.

It's a zero-sum game in dining, Penney argues, so it's all about market share: holding onto it and stealing it from others. Premium plays a role here too for McDonald's in fending off competitors from all directions: higher-quality food at other quick-serve outlets, the growth of better-burger chains like Five Guys, even casual dining restaurants (think Olive Garden) that dropped prices to weather the downturn, and the fast casual segment, which includes brands like Panera (PNRA).

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Fast casual may pose the biggest risk to McDonald's. Tristano of Technomic says that sales at fast casual chains in the top 500 restaurants grew by 13.2% last year. "It's really growing quickly, and it's going to steal share," he says.

McDonald's latest moves may also be part of a renewed focus on value. It recently put the Grilled Onion Cheddar Burger on the dollar menu and introduced the Mac Snack Wrap at a low price point, says Bernstein's Senatore. But don't expect premium fast food to fall off the map entirely. Those menu items have a hold on the industry's future.

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