Can McDonald's Weather a Burger King Price War?

Burger King (BKC) announced that it will test a $1 double cheeseburger in an effort to take market share back from McDonald's (MCD).

Price wars hurt profits and stock prices. Burger King's announcement may have been in response to reports in The Wall Street Journal that some McDonald's franchisees are complaining that its successful $1 burger is a loss leader that they can't afford. Many McDonald's franchisees in high-cost markets already charge up to $2 for the burger, which is a great traffic builder for the chain. So BKC's thinking may be that the time to go after MCD is when its franchisees are considering raising prices and are actually doing so.

Burger King didn't say which markets will feature the $1 burger test, but the WSJ reports several of its franchisees have been offering 99-cents burgers for several weeks. This suggests the early results are positive in terms of building store traffic, and it must be assumed, profits for franchisees and BKC.

How will McDonald's respond? Will it take the challenge lying down and assume Burger King won't take traffic? Or will it come back with a more attractive offer? Another question is, who will absorb the cost of the price cuts, the chains or their franchisees? And how would a price war affect the chains' bottom lines and stock prices?

When I see a company threatened by a price war like this one, I either avoid the stock, or I sell it, as I sold MCD Wednesday. The Journal notes that a similar price war in 2000-2001 was tough on the chains. The market is looking too weak to support MCD's price in the face of a price war, which has made the stock look a lot less attractive than it did a week ago.

MCD/BKC 1-yr comparison chart

Disclosure: none