McDonald’s annual report, which the company released this week, continued the fast-food giant’s view that the economy, particularly as it relates to the impact from inflation, remains difficult.
“Although broader inflationary pressures in the economy continue to ease, the challenges of an inflationary environment still exist," the fast-food giant said.
McDonald’s then said this: “The company has demonstrated an ability to manage these inflationary pressures effectively, through its rapid inventory turnover, ability to adjust menu prices, cost controls and substantial property holdings, many of which are at fixed costs.”
And thus we have the industry’s views of the coming year in a nutshell: Executives are cautious about the state of the economy this year. But they are far more bullish about their own prospects, at least based on an analysis of earnings calls on the financial services site AlphaSense.
That makes sense. CEOs have control over their companies and would not put plans into place they didn’t think will work—or if they do they’re certainly not going to say that to Wall Street. But they do not have control over the state of the economy, and these days it makes all kinds of sense to be cautious.
The economy remains in an odd position. Consumers are spending, generally. They have jobs and those jobs are paying growing wages. But many consumers don’t feel like things are great. Consumer confidence is low. And they remain frustrated by menu prices, particularly at fast-food chains.
“We expect the consumer environment to remain choppy with continued pressure on our core consumer,” Wingstop CFO Alex Kaleida said earlier this month, according to AlphaSense. The chain was coming off its first annual same-store sales decline in 22 years, though it’s worth noting that it was comparing itself to a 30%+ two-year quarter.
He then added, “We believe the strategies we have in place position us to navigate this current environment.” Yet the chain is predicting flat to low-single-digit same-store sales growth this year.
The economy has hit a number of chains, including several that have previously avoided such problems.
To wit: Chipotle, which just completed a surprisingly weak year, including a 1.7% decline in same-store sales for the full year, its first decline in a decade. “We believe it’s prudent to keep our full-year guidance grounded in a conservative baseline given the evolving consumer dynamic,” Adam Rymer, CFO of the Mexican fast-casual chain, said early this month.
The chain is holding the line on price increases, even if it means weaker profits, because of that consumer dynamic.
“We will continue to take a disciplined and measured approach to pricing, but do not expect it will fully offset inflation in the near-term as we remain committed to delivering exceptional value for our guests,” Rymer said, noting that pricing in the first quarter will be about 70 basis points, compared with mid-single-digit inflation.
Much of the challenge for executives is in the divergent consumer. Many consumers are perfectly fine and, in fact, are increasing their visits.
But lower-income consumers, on which the fast-food business relies, remain under pressure, hurt by years of inflation. It’s a dynamic that McDonald’s CEO Chris Kempczinski has mentioned numerous times over the past two years.
“We’ve talked about on prior calls the fact that, industrywide, we’ve seen traffic hold up pretty well with upper-income consumers and traffic has been pressured with lower-income consumers,” Kempczinski said. “And of course, lower-income consumers are more value and affordability sensitive.”
Unsurprisingly, several chains have unleashed new value offers this year, including Taco Bell, Wendy’s, and even the privately-held Panera Bread. McDonald’s has generated some success with its lower-priced Extra Value Meals.
Executive concern about the lower-income consumer means this that value push is unlikely to change anytime soon.
“This isn’t a limited-time offer, it’s a permanent value platform to broaden our appeal, give customers more choice, and capture incremental eating occasions, like snacking, at attractive price points,” Ken Cook, interim CEO of Wendy’s, said on the company’s earnings call this month.