McDonald’s earnings show low-income customers struggling
For McDonald’s, the third quarter was marked by steady international growth, but the same worrying trend domestically: the burger giant struggling to keep meals cheap enough for low-income, cash-strapped Americans.
To wit: Global comparable sales rose 3.6%, the company said Wednesday, marking only a slight slowdown from last quarter’s 3.8%. Meanwhile, U.S. same-store sales rose 2.4%, up from 2.5% last quarter, and again, driven by “positive check growth,” not increased traffic. It’s industry shorthand for higher spend per visit rather than more customers coming through the door.
Check growth versus traffic growth
For businesses like quick-service restaurants that effectively live and die by such metrics — at least on Wall Street — the struggle is showing positive same-store growth, even if foot traffic slows or declines. Enter price adjustments. But what happens when the same trend that drives away low-income customers is the same trend that makes them more price sensitive? The chains are between a rock and a hard place, and that’s where McDonald’s has found itself in recent years.
It’s no coincidence that CEO Chris Kempczinski once again cited “everyday value and affordability” and “menu innovation” as key drivers. The company’s value plays — exemplified by the $5 Meal Deal and the reintroduction of snack wraps — have helped it maintain market share even as U.S. traffic among low-income consumers continues to fall at a double-digit rate, according to the company’s previous commentary.
McDonald’s overall systemwide sales increased 8% from last year to $36 billion, with about $9 billion coming from member loyalty transactions. That’s about flat from the previous quarter, suggesting that even digital engagement — all those free fries with the purchase of any size soda — may be peaking for now.
International markets have done the heavy lifting. Comparable sales increased 4.3% in company-operated markets, led by Germany and Australia, and 4.7% in licensed markets such as Japan. Global revenue climbed 3% to $7.1 billion, while operating profit rose 5%. Net profit rose only 1% to $2.28 billion.
A new economic normal, translated into profits
McDonald’s shares rose about 1% before the market opened Wednesday, signaling that Wall Street approves of management’s efforts to somehow maintain growth, whatever the cost.
And it’s truly remarkable that, given the company’s size, maturity and market penetration, McDonald’s has found levers to pull, even if those levers are primarily discounts and promotions. There’s little the chain can do about broader economic trends that see higher-income U.S. consumers spending freely, while households earning $50,000 or less are forced to occasionally opt out of McDouble. In this sense, Golden Arches’ earnings reports reflect a new normal: a world in which even a snack package can be a kind of luxury product.
