McDonald’s unveiled a new $5 Meal Deal in June and on Tuesday company executives said that it did everything they wanted. It brought back lower-income customers, who typically ordered more than just the meal deal. And traffic to the chain’s restaurants improved, even if it didn’t actually increase.
And then earlier this month the company started selling the Chicken Big Mac, which helped drive sales and traffic in the first half of October.
But that momentum was wiped out by an E. coli outbreak in several western states, notably Colorado, now believed to have been caused by slivered onions. “Of course there’s been impact,” CFO Ian Borden told analysts on Tuesday.
Same-store sales rose 0.3% in the third quarter, with slightly negative traffic, which bested competitors in the fast-food space. They improved markedly in October, into the mid-single-digit range, with traffic not far behind. All that turned negative last week.
“We had positive momentum,” Borden said. “And then we saw that shift to having daily negative sales and guest count results since the food-safety incident.”
The question for McDonald’s is how long the negative impact from that incident will persist. Though the company has said repeatedly that the offending onions from a Taylor Farms facility in Colorado Springs could have been sent to more than just its restaurants, the investigation and all the known cases have been traced to McDonald’s.
Those cases, now at 75 in 13 states, are likely to grow, particularly given the number of customers an average McDonald’s serves on a daily basis.
The company reaffirmed much of its earnings guidance for the remainder of the year, “under the assumption” that the public health crisis “will not have a material impact on our business.”
Executives expressed confidence in their ability to recover from the situation quickly. The company has indicated that the slivered onions believed to be the cause of the outbreak have been removed from the system, and restaurants in 12 states are restarting sales of quarter-pound burgers.
“I’m relieved we’re now past this and on the getting back to serving our customers as we are used to doing,” CEO Chris Kempczinski said.
He said that the company has had some success with the $5 Meal Deal thus far, which has been extended into December. And he said the company plans more innovation with its menu to drive more sales, which has helped fuel sales in October, at least until the E. coli outbreak.
Beyond that, Kempczinski said, the company has the ability to take other steps if necessary to generate sales. “We stand ready to do more if we need to, to make sure that we are bringing the full resources of McDonald’s to bear to reengage that customer,” he said. “So you saw, coming out of COVID, we made some moves to make sure we could reengage with the customer. And if we have to make some of those same moves in the U.S., we’re prepared to do that.”
Company executives were bullish on their value strategy. The $5 Meal Deal helped the company increase its share of lower-income diners for the first time in more than a year, and Borden said that average check on orders featuring the offer was $10—slightly lower than the company’s typical average check.
McDonald’s plans to do more value in the coming year. Company executives said that the U.S. market plans to develop and release a “more holistic,” permanent value menu in the new year. The chain would adopt strategies used in other markets to brand the menu, similar to the “McSmart Menu” in places like Australia and Germany, while providing an option that works both for in-store and digital customers. That menu features a selection of bundled meal offerings.
Executives said they’re currently working with franchisees to develop the menu, though they would not provide specifics.
“It needs to have a meal deal component, whether that’s a $5 Meal Deal or some other meal deal,” Kempczinski said. “That will be something that’s included in it. And it needs to be able to incorporate some of the digital offers we do.
“I think you can look to some of our other markets where we have platforms like either a McSmart or a Saver, where you’ve got a branded platform that can house all of these various individual value components.”
The value push does suggest, however, that the company’s franchisees, who operate about 95% of the chain’s 13,500 U.S. restaurants, will see lower profit margins. Indeed, company store margins were lower than expected last quarter.
But executives believe that marketing promotions, such as the Collector’s Cups or Chicken Big Mac, can generate “full margin” traffic to the restaurants, bolstering the sales generated by any value offer.
“What we’re trying to do with stronger value and affordability is drive more traffic and more guest counts,” Borden said. “And as we bring more traffic into the restaurants, we’re pairing that with things like the Collector’s Edition or the Chicken Big Mac LTO. That’s where we’re going to get that check growth and profit growth.”
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