They say elephants have long memories – and some scientists will tell you that’s true.
But the largest living land animals have nothing on ticked-off American consumers – especially consumers scorched by inflation. Those consumers have long memories about what items like hamburgers, cable bills, branded snacks, monthly rents, a gallon of gas used to cost. Like spurned lovers, consumers have villainized the companies that squeezed them the hardest – and are finding replacements or avoiding them altogether.
One of those villainized companies is McDonald’s Corp. MCD 0.00%↑ whose soaring menu prices have dented consumer wallets like a freshly detailed Mercedes in a springtime hailstorm.
Longtime customers are fleeing: They’re defecting to rivals like Burger King (owned by Restaurant Brands International (RSTRF)) and Dominoes Pizza Inc. DPZ 0.00%↑ – or are just eating at home. And investors are writing knee-jerk epitaphs for the Golden Arches.
As part of its inflationary penance (and in a bid to win back customers), the Chicago-based Big Mac maestro intends to introduce a $5 “value meal.”
Given the headlines it grabbed, that value-meal announcement counts as a definite win for McDonald’s. The question investors area asking is this: If the company pulls this off, will it be the “one-thing” that gets the company back on track?
As usual, investors are getting it wrong.
Here at Stock Picker’s Corner (SPC), we’re all about making Wealth Building simple.
But basing your “investing case” on one question isn’t simple … it’s naïve.
McDonald’s has faced – and beaten – challenges before. And it’ll do so this time … because it’s got a lot more than just this “value meal” going on.
I’m gonna show you exactly what I mean.
And I’ll start with the “pricing problem.”
Rising Sales, Declining Traffic
Shares of Mickey D’s are about 10.5% off their peak - and worries about that fleeing customer base is part of the reason.
In its latest earnings report, McDonald’s said same-store sales in the U.S. market rose 4.3%. That’s the 26th time in the past 27 quarters domestic same-store sales have risen. And it says that metric will rise 3% to 4% for the year. But those single-digit baby steps are way down from the 10%-plus gains the company reported in 2022 and 2023. And those gains were driven by higher prices – not increased foot traffic, which has actually declined as part of the blowback over higher prices.
And rising prices are the catalyst for that ire, the blowback is warranted.
Over the last 10 years, general prices have zoomed 31%, official U.S. figures show. But fast-food prices have risen even more. And with the prices of popular menu items having doubled, McDonald’s is the fast-food inflationary king, says a recent study by FinanceBuzz.
Just check out this chart …
That 100% jump in menu prices is higher than Popeyes Louisiana Kitchen (86%) and Taco Bell (81%).
And it’s way higher than Subway and Starbucks Corp. SBUX 0.00%↑ (39% each) since 2014.
But as I keep telling you folks here, inflation is “just a number” to most consumers. What they focus on is actual prices – what they are today, and what they remember them to be.
Call it the “I remember when” or “this is what I used to pay” syndrome.
Take the Big Mac. Now, prices can vary from one market to another — and definitely between cities.
At the Mickey D’s down the road from me just north of Baltimore, that menu-headliner burger currently sells for $5.19. In its study, FinanceBuzz used a price of $5.99 as its Big Mac “benchmark.”
Compare those current prices with these “look back in time” Big Mac prices (as well as their inflation-adjusted counterparts):
At its 1969 debut: 45 cents ($4.21).
In 1973, when I played Murrysville (Penna.) Rec Baseball: 65 cents ($4.57).
In 1986, in the middle of the “Go-Go ‘80s:” $1.60 ($4.58).
In 1998, right about the time of the Long-Term Capital Management fiasco: $2.50 ($4.81).
And in 2014, as noted by FinanceBuzz: $3.99 ($5.28).
(One good thing: At 590, McDonald’s has held the line on Big Mac calories; had that risen in line with inflation from 1969 onward, the chain’s signature burger would today pack a Mr. Creosote-satiating 4,150 calories. Clearly not “Wah-fer Thin.” But I digress.)
It’s pretty clear that Big Mac prices have raced way ahead of general inflation. And that perception was exacerbated by last summer’s New York Post report that a Connecticut rest stop was charging $18 for a Big Mac combo meal.
That brings us back to the $5 value meal.
McDonald's has to be “laser-focused on affordability," McDonald's CEO Chris Kempczinski told analysts during the company’s first-quarter earnings call.
Words are one thing.
Action is another.
The value meal deal will reportedly include choices of a McChicken, McDouble or four-piece chicken McNuggets with fries and a drink. Franchisees rejected the plan once, but McDonald’s is pushing forward – reportedly with a marketing money contribution from The Coca-Cola Co. KO 0.00%↑ .
And it’s not the only initiative McDonald’s has going.
The “Story Arc” for the Golden Arches
McDonald’s has been around for a long time. And I’ve followed it for a long time.
So I’ve watched this company tumble into, respond to and navigate tough stretches before.
Who remembers the “Super Size Me” spat – the 2004 shockumentary in which filmmaker Morgan Spurlock examined the health impact of eating nothing but upsized McDonald’s orders for a month. The blowback caused Mickey D’s to shelve its supersize portions just six weeks after the flick debuted.
Fast-forward two decades … and we see that McDonald’s wasn’t stopped by that tempest in a soda cup.
The successful running a big company across many decades demands innovation, adaptation and scads of new initiatives to drive growth, generate buzz, manage costs and beat back challengers.
McDonald’s has been able to do that over and over again. And it’s doing it now. I mean, at this moment I’m watching such company initiatives as:
Artificial intelligence (AI): Unlike some of the companies that look to be AI laggards, McDonald’s was ahead of the curve. It’s just played its AI efforts … quietly. Since buying “sound-to-meaning” player Apprente in 2019, the company has clearly been working toward a future that’s rich in robotics and automation and light on human employees. Workers can demand higher wages, get sick, bolt for other jobs and even unionize. Check out our full report on McDonald’s AI and automation efforts.
Innovation: Innovation isn’t just about technology. It’s about creativity. About new ways of thinking. In a bid for a slice of the $100 billion “afternoon beverage pick-me-up” market, McDonald’s last year unveiled CosMc’s, a drive-thru-only venture that Kempczinski described as "what would happen if a McDonald's character from the 1980s that was part alien, part surfer, part robot" opens a restaurant. CosMc's menu is focused mostly on drinks ... with a few sandwiches and snacks available. But as Fortune reported earlier this year, “CosMc’s is a McHit” – and the early returns say it’s twice as popular as its parent company. Stay tuned.
New Deals: In late March, McDonald’s announced a pretty groovy distribution deal with Krispy Kreme Inc. DNUT -1.68%↓ What started as a Tennessee pilot program between the fast-food giant and the 87-year-old North Carolina-based donut maker will go nationwide at Mickey D’s by the end of 2026. Demand from McDonald’s customers during the tests alone far exceeded either company’s forecasts. Glazed, iced chocolate with sprinkles and iced chocolate cream-filled donuts will be all-day menu staples – served individually or in packs of six. McDonald’s wanted to “lean into” coffee – and get more of a bang from its breakfast and bakery offerings. This does all that. Check out our full report here.
Continued Expansion: Even as it refines what it already has, McDonald’s is making a play for an even bigger customer base. The company plans to expand from a little over 40,000 restaurants in 2022 to 50,000 by the end of 2027. A major focus will be on China – the company’s second-largest market behind the United States – where plans call for growth from 6,000 stores now to 10,000 stores by 2028. During my reporting foray to China and Japan a few years back, I “brunched” at a new multi-level Mickey D’s in Beijing. The restaurant was packed.
There you have it, folks … a path for McDonald’s to follow … a way forward.
McDonald’s has a knack for finding its way … and I think it’s done so again.
See you next time;