Is this the cloud behind McDonald’s silver lining?


McDonald’s (MCD 3.44%) offset the impact of runaway inflation and rising costs by raising prices, but Chairman and CEO Chris Kempczinski suggests a storm is brewing on the horizon.

Although consumers appeared willing to pay in the quarter as U.S. same-store sales rose 3.5%, beating analysts’ expectations of a 3% increase – and rose much more elsewhere around the world – Kempczinski said consumers are also starting to trade. down on the menu for cheaper items.

Image source: McDonald’s.

In “parts of the business and in certain geographies, we’re seeing a slight drop in trading that we’re just watching,” he told analysts.

Even for a value chain like McDonald’s, the worst inflation in more than 40 years may eventually exact a heavy toll on its business.

Solid results in a deteriorating economy

First-quarter revenue jumped 11% from a year ago (14% excluding currency fluctuations) to $5.67 billion, reflecting higher compensation, which jumped 11.8 % worldwide. Much of the gains, however, were driven by price increases, which averaged 8% for the period, a significant jump in normal times, but actually a little small considering the index consumer prices rose 8.5% in March. It was the fastest one-month increase since December 1981 and even higher than economists expected.

McDonald’s says it’s no surprise these conditions are affecting its low-income customers more than middle- and high-income ones, so it’s monitoring the situation. But Kempczinski also points out that’s why it’s important for the fast-food chain to be a value menu leader.

When McDonald’s moved away from value as in the past, its business tended to go off the rails. “We need to make sure that value continues to be an important part of our proposition,” Kempczinski said.

The deteriorating economic situation, however, explains why McDonald’s is seeing fewer transactions per order and smaller order sizes. This has yet to be a major growth disruptor, so the restaurant stock may have beaten Wall Street estimates. However, as the surge in inflation is not in sight and conditions will worsen, this may not be the case in the coming quarters.

McDonald's smartphone delivery app.

Image source: McDonald’s.

Reward loyalty

Still, part of what helps McDonald’s ease the risky economic landscape has been the continued success of its customer loyalty program, MyMcDonald’s Rewards, which it relaunched last year and saw grow to 26 million members. .

Digital sales – which include mobile orders, in-store kiosk orders and delivery – now account for 30% of total sales, a 60% year-over-year gain. Although McDonald’s has always had a fairly loyal customer base, its digital initiatives are helping to generate more recurring business, and it now boasts of having the largest fast food delivery program in the world.

Delivery is even more important internationally than here, as drive-thru penetration is much lower than in domestic markets. Indeed, the company has signed a new agreement with Just eat-to-go.comEurope’s largest third-party delivery service, to support its global agreements with Uber Eat and DoorDash.

Making its food more accessible to more people in different ways has paid off for the fast-food chain.

Smiling McDonald's workers.

Image source: McDonald’s.

Storm clouds are brewing

The first quarter was solid for McDonald’s, even with the costs that the war in Ukraine imposed on its business. Russia accounts for around 9% of total turnover and the restaurant has been slow to sever its ties with the country. He now estimates it will cost around $55 million a month as he continues to pay his staff there during the suspension of operations.

Despite the hit to sales it will take, McDonald’s is expected to continue growing for the rest of the year elsewhere in the world. However, with the outlook for stagflation at home, war in Eastern Europe and continued COVID-19 lockdowns in China, investors should brace themselves for darker clouds that may cloud Goldens. Arches in the coming quarters.

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