Global sales at McDonald’s (MCD) store locations open at least a year fell 1% in the April-June period, the first decline since the final quarter of 2020, the company reported in announcing second quarter earnings. In the United States, sales fell nearly 1%. McDonald’s saw fewer customers but it said those who came spent more because of price increases. The company said its costs for paper, food and labour increased as much as 40% in some markets over the last few years. In May, McDonald’s USA CEO Joe Erlinger said that the price of a Big Mac had risen 21% since 2019.
The company said it expects same-store sales to be down for the next few quarters and is working on fixes like meal deals and new menu items.
The quarter included only a few days of the company’s new $5 meal promotion–a McChicken or a McDouble plus four chicken McNuggets and a drink for $5. The promotion has proven so popular that the company has extended it into August.
I’ve started to call this The McDonald’s Economy–where the long-term effects of high inflation on prices damps consumer purchasing, but where the recent drop in inflation has limited companies’ “cover” for price increases. The result is that companies are seeing lower sales volumes at the same time as consumers push back ore strongly against price increases. McDonald’s isn’t the only company caught in this vise. Customer traffic at U.S. fast-food restaurants fell 2% in the first half of the year compared to the same period a year ago, according to Circana, a market research company. Circana expects high inflation and rising consumer debt will also dent traffic in the second half of 2024.
PepsiCo (PEP), which had until recently been successful in off-setting lower volumes with higher prices, has talked about the need for 2 for 1 promotions to address consumer resistance to potato chip prices. Chipotle (CMG) has felt compelled to address consumer beliefs that it had been shrinking portions to offset higher costs at a time when further price increases have become problematic. Of big consumer companies only Coca-Cola (KO) has said that it sees no erosion of its pricing power.
Do I need to say that the McDonald’s economy is a tough environment for producing revenue and earnings growth–or higher stock prices?
To see the effects of the McDonald’s economy at work, take a look at the company’s second quarter earnings report. Net income fell 12% to $2 billion, or $2.80 a share. Excluding one-time items, McDonald’s earned $2.97 a share. Wall Street’s consensus projection had called for $3.07. For the second quarter, revenue of $6.5 billion was just off the $6.6 billion that Wall Street was expecting.
