Financing

McDonald’s executives are expecting a recession

The burger giant said it is preparing for a wide range of economic scenarios but says it is getting more lower-income consumers.
McDonald's recession
McDonald's executives are expecting a recession in the U.S., but it will be worse in Europe. / Photo by Jonathan Maze.

McDonald’s executives expect a recession both in the U.S. and Europe, they told investors on Thursday, even as they acknowledge there is a wide range of potential economic scenarios in the coming year.

They also suggested that rising inflation and interest rates are hurting consumers enough to get them to change their spending habits.

“As the macroeconomic landscape continues to evolve and uncertainties persist, we continue to consider a wider range of scenarios as we look ahead,” McDonald’s CEO Chris Kempczinski told analysts on Thursday. “Our base case scenario going forward is that we expect to experience a mild to moderate recession in the U.S. and one that will be potentially a little deeper and longer in Europe.”

The comments are the clearest yet by the chief executive of the world’s largest restaurant chain that an economic downturn is in the offing—if it isn’t here already.

At the same time, executives believe that they are in a strong position to weather any potential economic storm and suggested that they are already getting lower-income customers who are abandoning other chains in search of a better value.

“We’re gaining share right now among low-income consumers,” CFO Ian Borden told investors on Thursday. “We are positioned as a leading brand in terms of value for money and affordability.”

McDonald’s is gaining lower-income customers even though the company isn’t running aggressive value offers, leaving them instead for the company’s mobile app, where its loyalty program uses discounts to encourage visits to the chain’s restaurants.

The company is unlikely to face much pressure to discount from competitors either. Costs are rising too much and there is little stomach from much of the industry for any sort of pricing war. “Our expectation is that the industry is going to stay rational from a pricing standpoint,” Kempczinski said. “Part of that is born out of self-interest. Everybody is experiencing food and paper inflation. Everybody is experiencing labor inflation.

“And some of our competitors, their franchisees are not in the same position as our franchisees. So even if there is a desire to get more promotional in some areas to address traffic, I think you’re going to run into a lot of resistance from franchisees.”

The question of the state of lower-income consumers has been on the minds of many operators and analysts for months.

McDonald’s comments, following those from Chipotle Mexican Grill, suggests that consumers are still eating out, but are instead opting for lower-cost restaurants. Chipotle executives said earlier in the week that the company was losing lower-income diners. McDonald’s, on the other hand, is gaining them.

Company executives said rising inflation and interest rates are causing problems for a number of consumers. And the problem is most pronounced in Europe. “Inflationary pressures and related interest rate increases taken by central banks are combining to put significant pressure on the consumer and our industry,” Borden said.

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