American fast food giant McDonald’s has reported a worldwide drop in sales in its latest Q2 earnings report, the first such drop in 13 quarters.
This sales drop comes amid recent high levels of inflation that have continued to keep prices high, changing the spending behavior of its low-income customers who are trying to secure better deals.
Q2 Earnings
On Monday, the McDonald’s Corporation announced its Q2 results, which ended on June 30.
Notably among these results, McDonald’s revealed that global comparable sales decreased by 1%, and sales in the United States fell by 0.7%.
Acknowledging Hardships
McDonald’s CEO Chris Kempczinski acknowledged the company’s struggles with customer spending dollars, saying they are trying to create a sense of value on their menus to bring customers back.
“We are confident that Accelerating the Arches is the right playbook for our business and as consumers are more discriminating with their spend, we are focused on the outstanding execution of delivering reliable, everyday value and accelerating strategic growth drivers like chicken and loyalty,” said Kempczinski.
McDonald’s Inflation
This earnings report from the fast food giant follows a recently released Finance Buzz study that found that menu prices at US McDonald’s have risen by 100% in ten years, which the report noted was three times the rate of US inflation.
The report also found that Popeyes prices had increased by 86%, and Taco Bell’s had increased by 81% in that same period.
Customer Pullback
Many fast food chains have been grappling with the effects of high inflation in recent years, which accelerated price hikes that have still not come down.
While inflation in the United States has recovered from its high point, the consequences of the sustained period of high inflation is still being felt in the economy.
Global Inflation Rate
According to the International Monetary Fund, the average global inflation rate peaked in 2022 at 9.8%, nearly double digits. At the time, economists were hesitant to celebrate the peak even though it meant inflation would probably be going down.
“[This] doesn’t mean the worst is over,” said Tom Orlik, Bloomberg’s chief economist. “Even as they edge down, consumer price readings will remain way above the comfort zone for central banks, necessitating further tightening even as recession risks loom.”
Traffic Decline
The persistent high prices have led to customers going elsewhere, leading to a traffic decline for McDonald’s.
“Industry traffic has declined in major markets like the U.S., Australia, Canada, and Germany. In several markets, we also continue to be negatively impacted by the war in the Middle East,” said Kempczinski.
Value Execution
While Kempczinski brought up external factors like war, he also acknowledged there were factors inside the company’s control that led to the sales slump.
“These external pressures certainly weighed on our performance for the quarter, with declines in comparable sales globally and across each of our segments, but there were also factors within our control that contributed to our underperformance, most notably, our value execution,” said Kempczinski.
Prices Too High
McDonald’s leadership admits that their customers see their prices as too high, though this is a problem they assert many of their competitors have as well.
“We recognize that in several large markets, including the U.S., we have an opportunity to improve our value execution. Consumers still recognize us as the value leader versus our key competitors but it’s clear that our value leadership gap has recently shrunk. We are working to fix that with pace,” said Kempczinski.
Struggles Will Continue
While McDonald’s tries to focus on a strategy of making customers feel like they are offering value for their dollar again, the company is expecting economic conditions to continue to put negative pressure on their efforts.
“At the end of the day, we expect customers will continue to feel the pinch of the economy and a higher cost of living for at least the next several quarters in this very competitive landscape,” McDonald’s U.S. President Joe Erlinger said.
Not Meeting Wallstreet Expectations
Wall Street’s expectations were let down in the latest McDonald’s Q2 earnings report. NBC reported that the earnings per share were $2.97 against the Wall Street expectation of $3.07.
McDonald’s revenue also missed the mark at $6.49 billion reported versus $6.61 billion as expected.
$5 Meal Deal
At the end of June, McDonald’s launched a $5 meal deal right before the quarter ended to try to bring back customers with promises of value.
Since the quarter ended June 30, it remains to be seen if this latest effort will be reflected in the data positively in the next earnings report.
