Is McDonald’s pricing itself out of traffic?

As it becomes more expensive to eat at the fast-food chain, some customers could seek other options, says RB’s The Bottom Line.
Photograph courtesy of McDonald's Corp.

the bottom line

Last week, McDonald’s reported a surprisingly strong, 4.5% growth in U.S. same-store sales in the first quarter.

Most of the time, such an increase at a fast-food chain like McDonald’s would come with an increase in traffic, which, for a company that lost more than 2% of its transactions the year before, would be a welcome development.

It did not. The company’s traffic declined at about the same rate it did late in 2018, suggesting that average check at the burger giant rose roughly 6.5%.

In other words, McDonald’s customers are ordering more and coming in less often.

The company has generally blamed its traffic challenges on slowing service, especially in the drive-thru. But it’s difficult to look at the company’s larger average check and smaller transaction numbers and not conclude that the chain is pricing itself out of customer count.

To be sure, price increases on their own are not the reason for the higher check averages—the company said that menu price increases rose 2% in the quarter, roughly in line with a typical McDonald’s quarter.

And data from Restaurant Business sister company Technomic also suggest that consumers aren’t overly concerned about McDonald’s prices.

According to Technomic Ignite consumer data, McDonald’s scores on pricing have improved each of the past three years.

In addition, moves McDonald’s is making these days all improve average check without necessarily generating traffic.

Delivery, for one thing, is in more than half of the chain’s U.S. locations, and those orders tend to be larger. Likewise, kiosks that are now in 60% of the chain’s domestic restaurants also tend to drive up average check.

The company’s reconfigured dollar menu last year seemed to give customers reason to add items to their orders rather than generate traffic. And the Donut Sticks that worked so well earlier this year appear to be as much of an add-on as anything else.

In general, it’s good when consumers order more items or purchase more premium products. That helps with per-customer profit.

But McDonald’s operates large restaurants that are open long hours. It needs a lot of transactions. At least part of the reason franchisees created the independent National Owners Association was due to persistently weak customer count.

“With negative guest counts, that does create a challenge just from a labor productivity side,” CFO Kevin Ozan said on the company’s first quarter earnings call. “Once we’re able to turn guest counts positive, that will help labor productivity.”  

The restaurant industry is increasingly facing a challenge when it comes to pricing versus traffic. Restaurants are arguably oversaturated, which has hurt same-store sales and traffic in recent years.

Rising wages, however, are forcing many to choose between profits and customer count. McDonald’s rival Burger King chose the latter, and its same-store sales rose just 0.4% in the first quarter.

Average ticket at The Habit Burger Grill rose 7.4%, while traffic fell 4.2% last quarter, for instance, and the company plans more price increases in the future. Del Taco, meanwhile, increased prices 3.9% and saw traffic decline 5.5%.

A multiconcept operator once told me that traffic falls “every time” he raises prices.

In McDonald’s case, many of its consumers are low income, or they are young and therefore tend to be more price-sensitive.

Many believe that McDonald’s problem is not with its lower-cost items but with its more expensive, premium items. Operators, who are paying off debt from remodels in addition to rising wage and other costs, have been hiking prices at the top end more aggressively because they can’t raise prices on lower-end items.

At some point, the prices for those premium items come close to similar items from fast-casual competitors.

“Price killed the Signature Crafted line of sandwiches,” said Richard Adams, a former McDonald’s franchisee-turned-consultant, referring to the semicustomizable line of burgers and chicken sandwiches recently removed from the menu. “Deep discounting on the lower end of the menu forces franchisees to become more aggressive with price on the higher-end sandwiches. Signature Crafted got to the point that a full value meal consumed most of a $10 bill.

“That sends many customers to fast-casual competition.”

Pricing has always been a tough balancing act for restaurants. It’s especially so for McDonald’s, and one that it will have to fix in the near term.

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