Despite a host of challenges, McDonald’s operators are making a lot more money today than they did three years ago.
Company executives on Thursday told investors that franchisee cash flow hit record levels in 2021, up $125,000 on an individual restaurant basis. Over the past three years, cash flow is up 50%. An individual restaurant now generates over $500,000 in cash flow.
The record cash flow, which does not take into account an individual operator’s debt service, is an indication of an evolved McDonald’s business. The company’s shift away from its Dollar Menu several years ago freed operators to raise prices more aggressively than they had done in years.
And customers, apparently, have been OK with this. Franchisees raised prices more than 6% last year, the company said on Thursday. But so far, there has been little pushback. Same-store sales rose 7.5% in the fourth quarter, and 13.4% on at two-year basis.
For the full year, U.S. same-store sales rose 13.8%--a record for the chain.
“The most important thing that we’re trying to balance is cost pressures with making sure that we provide good value to our customers, and that our customer ratings on value remain high,” CFO Kevin Ozan said on Thursday. “We do keep a close eye on that. Our customer ratings have continued to score well on the idea of providing good value for the money, and that’s an important metric.”
To be sure, operator profitability could face a dual challenge in 2022 from higher costs for food and labor.
Ozan said food and paper rose 4% in 2021. That is expected to double this year, into the high single digits. That would combine with wage rates, which rose 10% last year and are expected to go up further in 2022 as labor pressure continues.
What’s more, the consumer remains in an uncertain position given the state of inflation right now. Value, Ozan said, will continue to be an important element this year. “Inflation is hitting customers potentially harder than it’s hit people in a long time,” he said. “We’re very cognizant of making sure that our value proposition continues to be strong.”
But McDonald’s strong cash flow growth over the past three years shows what happens when a company opts to stop focusing on unprofitable customers while recognizing its core strength. In this case, the company opted against value-only customers and instead realized that its incredible convenience—it is one of the most prevalent restaurants in the U.S. and operates arguably the best real estate—is worth a higher price.
For years, the company used a Dollar Menu to great effect, driving considerable traffic into its restaurants. But that also served as something of an anchor on the chain’s prices. Operators were limited in how much they could charge for a Quarter Pounder or a Big Mac if the McChicken was just $1—a point former McDonald’s franchisee Jim Lewis brought up for this story analyzing the chain’s prices that we did last year.
When the company moved away from that menu, operators had the freedom to charge more for their premium items because they no longer worried that customers would opt for a $1 McChicken instead of a $4 Big Mac.
That has also given the company an ability to withstand the high inflationary environment. Operators use a third party to determine their pricing. Ozan said that the levels are carefully determined given numerous factors—particularly the prices charged by competitors like Chick-fil-A or Burger King.
“The pricing methodology that’s used is a consumer-based approach,” Ozan said. “We take into account market conditions, economic environment, competitive landscape, etc., and generally try and take small increments of pricing at various times versus taking a lot at one time.
“The most important thing that we’re trying to balance is cost pressures with making sure that we provide good value to our customers and that our customer ratings on value remain high.”
Higher profits at the store level gives the company a better ability to add technology or remodel stores. It could also fuel unit count growth—something that McDonald’s hasn’t had in years.
That said, the higher labor and food costs could threaten operator profits. So could a shift in consumer attention toward value. For now, however, customers appear to be paying the higher prices. And franchisees are getting the benefit.