McDonald’s appears to be, for the most part, out of its traffic-induced sales slump. The fast-food giant on Thursday reported its fourth straight increase in U.S. same-store sales growth, up 3.9%. The chain increased its market share domestically and in many other global markets.
For the company, the results confirmed its long-stated goal of catering to the low end of the market. McDonald’s has worked feverishly for nearly two years to strike the right tone on value, with price cuts on bundled meals, called Extra Value Meals, and national price points on the company’s 17-month old McValue Menu. Those deals were approved by the company’s franchisees.
“It all starts with value at McDonald’s,” CEO Chris Kempczinski told analysts. “Value has always been part of our DNA. As I’ve said before, and I’ll say it again, McDonald’s is not going to get beat on value and affordability.”
And yet this value push comes in the face of store-level profit challenges. Profit margins at company-owned restaurants, for instance, fell 25%.
Those margins were “not acceptable,” CFO Ian Borden told analysts. It’s so not acceptable, in fact, that McDonald’s is revisiting its ownership balance to determine the correct ratio. Translation: The company may sell more stores to franchisees, who are better at making stores profitable than McDonald’s is.
But there are signs that franchisees’ profits have been hit, too. Executives on Thursday acknowledged that beef costs, in particular, are putting some pressure on franchisee profitability.
“There’s certainly a lot of pressure we’re trying to navigate with franchisees around their own profitability,” Kempczinski said. Operator cash flow was “stable” last year. But there is “certainly concern around franchisee profitability” in the U.S. and many of the chain’s more developed international markets.
Beef costs have hit records in the U.S., which is putting pressure on fast-food chains amid a difficult operating environment. At McDonald’s, beef inflation has impacted the U.S. and other major markets.
“For a portfolio like ours, that absolutely puts pressure” on franchisees, Kempczinski said. “I think if you were to talk to our U.S. franchisees right now, they’re feeling under pressure from a cash flow standpoint.”
But company executives also said that they have more power to deal with this than other systems.
McDonald’s, after all, is the world’s largest restaurant company, one that has arguably its best-run supply chain. “There’s pressure on beef,” Borden said in an interview with Restaurant Business. “But we are at an advantage. We’ve got size and scale that’s unmatched. We’ve got a world-class supply chain.”
He noted that food and paper inflation is expected to be in the mid-single-digit range, which is lower than many other restaurant chains with a sizable demand for beef. And Borden said that there are “other opportunities” to cut costs outside of beef to lower the overall rate of inflation.
“That’s our job,” he said. “To position the impact to be minimal and to focus on making sure that we have strong value and affordability for consumers.”
There’s at least some evidence that McDonald’s value push hasn’t had quite the impact on profits that it expected.
For instance, the company expected to spend $35 million in financial support for franchisees to offset the impact on profitability from the company’s renewed Extra Value Meals promotion.
That support, Borden told analysts, is expected to be below that initial estimate. “The program continued to see positive momentum,” he said, noting that the bundled meals generated incremental sales that offset the lower profits. The financial support concluded at the end of March.
And McDonald’s can also boast that it has gained share among low-income consumers that are a crucial part of the company’s customer base. Kempczinski said that the decline in traffic among lower-income consumers is “not as pronounced” as it was a year ago—though traffic among that consumer is still down.
Gas prices, up 50% since March, are not helping. “When you have elevated gas prices, which is the core issue we’re already seeing in the press right now … that is going to disproportionately impact low-income consumers,” Kempczinski said. “And so we expect the pressures there are going to continue.”
Members help make our journalism possible. Become a Restaurant Business member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.