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McDonald’s, just reported a rare miss on quarterly profit estimates, marking the first time in two years that the company has fallen short of expectations. This comes amidst a confluence of factors, including consumers taking their money elsewhere, and international market headwinds.
The most notable reason (and most important) for the sales slump appears to be customers becoming more selective with their fast-food choices. The report cites consumers being “more discriminating with every dollar they spend”, as budget-conscious diners could be opting for more value-driven alternatives. It didn’t help that McDonald’s raised their prices to such a zenith that they are now comparable to sit-down restaurant pricing, you know, options that offer categorically better quality, and more food to back up those price-points. Bad move, Clownie. Bad move.
CEO Chris Kempczinski noted the pressure on consumers to investors: “So the pricing that’s been taken over the last several years was all taken as a means to offset what we were seeing around quite high labor inflation and quite high commodity food and paper inflation. So restaurant margins are now back to where we are, where we were again in 2019 in the U.S., which then says to me that we do have the ability to be thinking about what we do from a value proposition going forward.”
Shrinking Product Higher Cost
On a prior earnings call, Kempczinksi spoke on McDonald’s testing a bigger, cheaper burger in select markets so as to cater to the common cries of shrinking burgers and higher prices. They have talked about it during an earnings call and from what we gather, they are testing it internationally and a few very limited market in the US. There is no word on when the bigger burgers will hit menus nationwide.
There are multiple issues surrounding McDonald’s business model right now with the biggest and most glaring? It just doesn’t pay to play with McDonald’s anymore as customers realize they can buy more food at a better price elsewhere. The chain is now seeing the result of their efforts to exploit their loyal customers, squeezing every last cent out of them. McDonald’s has painted themselves into the corner as a chain with negative connotations, and most importantly…one that can’t be trusted.
Other fast-casual chains like Domino’s have made it work by leaning into more value deals for their customers, a tactic which has seen the pizza chain win on quarterly profit results.
Kempczinski confirmed: “We have seen that our relative superiority on affordability has declined in some markets,”
Can McDonald’s Turn This Around?
McDonald’s and the international market is another source of anxiety for the chain. Global comparable sales growth, a metric that tracks revenue from existing stores, has dipped for the fourth consecutive quarter which the company attributes to boycotts and the ongoing conflict in the Middle East, along with a sluggish Chinese economy, their second-largest market after the United States.
Moving forward the company will have to consider introducing new menu items and more importantly, offer better competitive promotions to win back customers. If they’d like to regain sales momentum, McDonald’s is going to have to play by the new rules, the customers rules.
