As prices soar, consumers turn to McDonald’s


New York
CNN Business:

Inflation is relentlessly high and food prices in particular are soaring. In this environment, customers are turning to McDonald’s — even as the burger chain raises its own prices.

In the third quarter, McDonald’s US prices were up about 10% year-over-year on average. Even so, the brand is gaining traction among its less affluent customers, noted CFO Ian Borden during an analyst call Thursday.

“We’re gaining share right now among low-income consumers,” he said.

As food companies raise prices, they are finding other ways to make consumers feel like they’re getting a good deal. Packaged food and beverage makers such as PepsiCo (PEP) and Coca-Cola (KO) are offering more serving sizes, hoping that shoppers will shell out for smaller packages because of the lower price tags. Restaurants are focusing on value, hoping that customers will feel they’re getting more bang for their buck even as prices rise.

McDonald’s is “positioned as the leading brand in terms of value for money and affordability,” said Borden. He noted that some cash-strapped customers are shifting from buying meals to purchasing valuable items.

Some might also be trading down to McDonald’s from more expensive chains or restaurants as menu prices increase at a slower clip than prices in grocery stores. For the year through September, not adjusted for seasonal swings, grocery prices increased by 13%, according to the Bureau of Labor Statistics. In that same period, restaurant prices jumped 8.5%.

“We feel very good about … McDonald’s value proposition,” said CEO Chris Kempczinski during the call. “It’s allowed us to push through some of this pricing.”

In the third quarter, sales at McDonald’s (MCD) US stores open at least 13 months jumped 6.1%, thanks in part to the higher prices. Shares rose about 3% on Thursday following the release of the chain’s third-quarter results.

Kempczinski said that McDonald’s is weighing a number of different potential economic situations, but that it is expecting “a mild to moderate recession in the US,” as a base case. “McDonald’s has proven to be successful in just about any business environment,” he noted.

The brand has a history of resilience during periods of economic distress.

“Our business performed well in that last downturn,” Borden said, referring to the financial crisis of 2008 and 2009. “Our expectation is that we are going to perform well in this environment, certainly on a relative basis to our competitors,” he added.

But Borden acknowledged that there are differences between the current situation and 14 years ago.

During the financial crisis, McDonald’s had a dollar menu and ramped up its McCafe line. Now, though, the chain is facing higher costs for food, packaging and labor. Consumer behavior has also changed — today’s customers are far more interested in delivery.

And even McDonald’s is not immune from the macroeconomic situation. In the third quarter, consolidated revenues fell 5%. The company said that the results were “negatively impacted by foreign currency translation,” pointing to the strong US dollar to explain the decline. In constant currencies, McDonald said consolidated revenues were up 2%.

In addition to higher prices, McDonald’s said that advertising its core menu items has helped boost sales.

Recently, the burger chain has been using promotions such as celebrity meals and adult Happy Meals to create buzz without adding new menu items that can complicate orders.

The adult Happy Meals promotion “re-engaged our fans to our core food, including Big Macs and Chicken McNuggets,” said Kempczinski.

The company has also been creating buzz around its McRib sandwich, positioning its return for a limited time starting October 31 as part of a “farewell tour.” But that doesn’t mean the product is going away forever.

“The McRib is the GOAT of sandwiches on our menu,” Kempczinski said Thursday. Like “Michael Jordan, Tom Brady and others, you’re never sure if they’re fully retired or not.”

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