The Journal of Agricultural and Resource Economics reports that the biggest mark-ups on any restaurant menu are drinks and side dishes, thus maximizing the profits for the business. For the purpose of this article, McDonald’s Restaurants, which has world-wide franchises, will be used to demonstrate why drinks are the most profitable item for fast food restaurants.
McDonald’s, for example, spends between 13 and 18 cents to produce a soft drink. That includes the syrup, the cup, water, ice, electricity, labor, and wastage. Most McDonald’s now have the customer prepare their own drinks, so that cuts the cost of labor and allows them to make a hefty profit for each drink sold.
McDonald’s offers free drink refills for its “dine-in” customers. Psychologically, the idea of getting a great bargain with free drink refills causes people to choose McDonald’s over its competitors. Studies show that people who think they are getting a bargain will spend more money on other products.
Incentives, another psychological tactic, keep customers happy. Knowing they can purchase a small size drink and get refills creates a sense of self control for the customer. However, many do not get refills, so this more than makes up the profits for those few who do get refills.
Paying $1.59 for a medium sized soft drink, McDonald’s cost is $0.15 or less. John Drinkard, marketing director for Villa Enterprises who is a franchisor of more than 300 restaurants, states that the typical profit margin on fountain beverages is approximately 85%. McDonald’s profit margin is 90% or more because of their volume purchasing power.
The concentrate (caramel) for 70% of Coca Cola’s 1.5 billion drinks sold daily, originates in Ireland, which charges little tax. Concentrate for 50,000 Cokes costs $2.60. The costs include labor. A single penny’s worth of syrup makes almost 200 cups of Coke. Even with the cost of the dispensers, cups, ice, water and electricity, this allows fountain drinks to be almost all profit for fast food restaurants.
With the introduction of espresso and latte coffees, McDonald’s had a 15% increase in its coffee sales. Don Thompson, president of McDonald's USA, said "You can't get much better profit than by adding water to beans. It's a great margin business and one that customers are asking for." He expects that McDonald’s will take some share out of the specialty coffee marketplace. McDonald’s has been very successful with its McCafe coffee shops. One analysis states, “McDonald's specifically noted that growth was largely driven by this high-margin [coffee] segment. In their recent third-quarter conference call they outlined global expansion plans for McCafe.” This development allows McDonald’s continued growth in this profitable sector. McDonald’s plans to expand its McCafe line overseas.
In conclusion, the extremely low costs of drinks for fast food restaurants, allows for high profit margins, which makes drinks the most profitable item for fast food restaurants.