McDonald’s has spent the past year promoting discounts and working to get more people onto its loyalty program, all in a bid to improve traffic.
It has worked only to a point. McDonald’s traffic has been weak for two years. And while last quarter’s same-store sales were better, they slowed again after the end of the Minecraft Movie promotion
The company’s answer: Fix its menu prices. McDonald’s executives on Wednesday said they are working with franchisees to address the prices for its core menu items across the system. That could mean more nationwide price points similar to the $2.99 franchisees are charging for Snack Wraps or $5 bundled offers on the McValue menu.
“We recognize that consumers’ value perceptions are most influenced by our core menu pricing,” CEO Chris Kempczinski told analysts on Wednesday. “We’re working closely and collaboratively with our U.S. franchises on this opportunity, and we’re developing ideas for how we might address this as an entire system.”
McDonald’s did not provide details on the effort or what it may look like.
Fixing that issue won’t be easy, however. Franchisees are the ones who set prices. And their costs vary considerably. Some states only require the federal minimum wage of $7.25 an hour, for instance, while in California fast-food chain restaurants must pay a minimum of $20. Some cities’ minimums are even higher. Other costs vary, too, such as real estate.
As a result, the prices charged to consumers can vary widely depending on the market and those costs.
According to Technomic Price Pulse data, the cost of a Big Mac can range from just over $4 to $6.39, depending on the metro area, a range of about 58%. (One metro area shows a price of $3.40, though that is an outlier.) The average price nationally is $5.56. But prices for lower-priced items like cheeseburgers can be more than double in higher price markets than in the lowest-priced markets.
The cost of a Big Mac meal can be over $11 in some markets. The most expensive markets are 43% higher than the least expensive markets, according to Technomic.
Kempczinski acknowledged the difficulty and the risk to franchisees when it comes to national price points. “The wage rates that exist are quite varied,” he said. “So we need to respect that and work with franchisees on how we solve that in a way that works for everybody’s” profit-and-loss statement.
At the same time, he said, the company wins with value and if it can get that right, then operators’ cash flow will follow. “And if we’re winning on value and affordability with our brand, with our menu innovation, we’re absolutely going to be able to take share, and then you’re going to be able to grow cashflow,” Kempczinski said.
“That’s the conversation we’re having with franchisees right now, which is cashflow growth is within our control if we execute the playbook.”
Executives believe this effort is necessary. For one thing, the company and other fast-food chains are dealing with a low-income consumer who is eating out less often and is frustrated by rising prices.
Executives on Wednesday told analysts that traffic to quick-service restaurants—not just McDonald’s—is down in the double digits this year, even as traffic from middle-income consumers has recovered and higher-income diners keep visiting, period.
Fast-food restaurants depend heavily on lower-income consumers who are concerned about the stability of the job market and whose real wages remain depressed due to inflation.
“Real incomes are down with the low-income consumer. That is absolutely going to put pressure on visits in the QSR industry,” Kempczinski said. “Second thing is there’s a lot of anxiety and unease with that low-income consumer.”
Those consumers as a result are skipping breakfast—the daypart under the most pressure—or they’re buying cheaper items or they’re just not eating out.
McDonald’s has been using two main tools to get those consumers in its loyalty program and its McValue Menu. But Kempczinski said that “roughly 50%” of the company’s customers do not use either program.
He argued on Wednesday that more national price points would generate incremental sales. “We know when you have a nationally advertised price point, it drives significantly more incrementality than if everybody is doing their own pricing,” Kempczinski said. “I think we have good alignments with the franchisees on the need and the power of doing nationally advertised price points.”
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