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As it loses customers to grocery stores, McDonald's shifts gears on pricing

The company acknowledged that lower-income consumers are eating at home more often, largely because of moderate price hikes at grocers. Here’s how the fast food giant plans to respond.
McDonald's
McDonald's plans more value to win back low-income consumers. | Photo courtesy of McDonald's

Apparently, when restaurants raise prices by 10%, some customers stay home.

That’s at least what happened with McDonald’s last quarter. The Chicago-based fast-food giant said on Monday that its same-store sales rose 4.3%, the 26th time in the past 27 quarters it generated same-store sales growth in its home market.

But it also lost low-income customers, who opted to stay at home. “That consumer is pressured,” CEO Chris Kempczinski said, referring to people making $45,000 a year or less. “From an industry standpoint, we actually saw that cohort decrease in the most recent quarter, as eating at home has become much more affordable.”

McDonald’s is hardly the only restaurant brand in that boat. Restaurants have raised prices more aggressively over the past year to combat rising costs for labor and for food. But as those food costs have come down—they’ve slowed for the past several months—grocers have been able to hold the line on prices.

Walmart’s CEO has even suggested that retail price deflation is coming

Food at home prices were up 1.3% in December, according to federal data. Limited-service restaurant prices, meanwhile, were up 5.9%. Some brands increased prices more aggressively than others. McDonald’s said its prices overall last year increased 10%, though franchisees, and not the company, control pricing.

Consumers have noticed this, as the backlash over apparent $18 Big Mac meals attests. There is already evidence that restaurants are losing customers to grocery stores and convenience stores over pricing issues. 

“We certainly know consumers are wary or weary of pricing,” CFO Ian Borden told analysts. “We’re going to be consumer-led in our pricing decisions as we look forward to 2024.”

The company and its franchisees now appear to be downshifting on pricing, while McDonald's works to find ways to get customers to come back in more often.

McDonald’s said it expects its same-store sales will increase 3% to 4% this year as it returns to a more normalized environment, down from the 10%-plus numbers that had marked much of 2022 and 2023. But it also expects operators will be more likely to hold the line on price increases.

“Our pricing broadly is coming down in line with inflation getting back to what I’ll call more normal levels,” Borden said.

To be sure, a few McDonald’s may have to raise prices more aggressively in the coming months. California is home to 1,200 locations, about 9% of the chain’s 13,457 restaurants. The state is about to raise the minimum wage for fast-food restaurants to $20 per hour, which is expected to result in substantial increases in labor costs for those locations.

Still, the company did suggest that it would shift its attention to more value.

Executives believe their loyalty program in the U.S., MyMcDonald’s Rewards, could provide the company with more marketing opportunities that could drive more visits. The company has been generally aggressive in running promotions through the app, but executives suggested they could get even more strategic in convincing customers to come to the restaurants.

“We will better leverage the data we have across our loyalty programs to provide targeted offers and personalized experiences,” Kempczinski said.

But executives also suggested value would be on the table. “I think what you’re going to see as we head into 2024 is probably more attention to what I would describe as affordability,” Kempczinski said.

Absolute price point, he said, is more important to get customers in the door than value bundle messages, such as 2-for-$6. “Those are probably going to resonate a little bit less in 2024,” Kempczinski said.

One strategy the company could use: Promote its value menu, the Dollar 123 menu, on a local level. “I think you’re going to see some activity there in the U.S. at the local level to make sure we continue to provide good value for that low-income consumer,” Kempczinski said.

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