Financing

Inflation hits McDonald’s and its European operators

The burger giant expects thinner margins this year and it is spending up to $150 million to support franchisees in Europe hit by higher costs.
McDonald's inflation
McDonald's expects to spend as much as $150 million to help operators, mostly in Europe, hit by inflation. / Photo by Jonathan Maze

Higher costs are expected to hit McDonald’s in more ways than one this year.

The burger giant on Tuesday warned that “macro-related pressures will continue to weigh on both our consumers and our business,” with profit margins at corporate stores expected to be lower this year than in the last three months of 2022.

But inflation pressures are causing enough of a problem for its franchisees, particularly in Europe, that the company expects to pay $100 million to $150 million to provide “temporary and targeted support” to those operators. Ian Borden, McDonald’s CFO, said the cost environment is “impacting restaurant cash flow for our franchisees, particularly our European markets.”

“Particularly across Europe, we’re seeing some quite strong headwinds due to the levels of inflation on things like commodity costs, energy prices and, of course, labor,” Borden said. “I think the pace and scale of inflation mean those headwinds are creating relatively significant levels of short-term impact to our margins and then, of course, to our franchisee cash flows.”

The warning on inflation came during a fourth-quarter earnings report in which McDonald’s reported results across the board that bested investors’ expectations, including strong sales globally and higher earnings. It also continued a strong run coming out of the pandemic for the company, which has increased system sales by $20 billion globally despite the closure of some 800 Russian restaurants. System sales at the burger giant neared $110 billion in 2022.

But the inflation warning kept investors at bay, at least to a degree. The company’s stock fell nearly 2% on Tuesday on inflationary concerns.

Chris Kempczinski, McDonald’s CEO, reiterated the company’s belief that a recession is in the offing in the U.S., though it would be “mild to moderate.” It will be worse in Europe, he said.

That problem will be more severe in Europe, he said. And inflation has already taken its toll across the Atlantic. Inflation hit 10.6% in Europe in October, though it has fallen to 9.2% in December.

“We’ve seen significant levels of food inflation, significant levels of energy inflation,” Borden said. “The pace and scale of that impact is creating quite a bit of pressure on margins and cash flow.”

McDonald’s comments on inflation are mindful of executives’ comments in 2020 when, shortly after the pandemic first hit, they expressed a willingness to help operators make it through that period without shutting down.

They noted on Tuesday that helping operators through difficult times is a reflection of the brand’s “size and scale,” and that such assistance could prepare franchisees for a speedier recovery.

“If you remember, during COVID, we did provide support to our system,” Borden said. “It was critically important because it allowed all of our system to stay focused on our plans and was really fundamental to the accelerated momentum that we saw through and then coming out of the pandemic.

“This is a very similar situation. I think that’s really going to help us stay focused on the category-leading momentum we have and make sure we’re in the strongest possible position.”

The economy and inflation are benefiting McDonald’s in other ways, however. The company is likely pulling in customers that might otherwise dine at more expensive restaurants. Company executives said that lower-income consumers are coming in more often but buying less when they do, a sign that those diners are looking for value.

But any benefit is “on the margin,” Kempczinski said. “Overall, the consumer, whether it’s in Europe or the U.S., is actually holding up better than what we would have probably expected a year ago or six months ago,” he said. “The question is, as we go into 2023, there is going to continue to be inflation. The environment is going to continue to be challenging. So, do you reach a point where maybe it does start to materialize around the consumer?

“But we’re not seeing it right now.”

 

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