For one, it deprives competitors of sites. Starbucks Corp. has two stores across the street from one another in Vancouver, British Columbia. But the strategy can backfire. The price that McDonald's paid for expanding its core customers was cannibalization of its existing stores. In other words, it's inevitable that if you add another store in an area where two already are prospering, the average sales at the existing stores will suffer.
Individual franchisees suffer because their sales decline while customers go to nearby outlets.
McDonald's, however, still collects royalties from franchisees based on the increasing overall revenue. But as cannibalization continues, the investment in new stores outpaces the profits earned from increases in total sales. If ubiquity didn't work to build traffic, the company is wagering, maybe a turn back to the chain's 1955 bargain-priced origins will. However, because sales increases are acquired by investing in additional land, buildings and equipment, management must carefully and quickly prune units not meeting profitability standards. The new move on pricing follows McDonald's backtracking on its strategy to make its restaurants as common as its ads on television.