Are consumers eating out less? Just ask McDonald’s
The U.S. consumer is experiencing conditions similar to ours. Indeed globally, consumers are now displaying the impact of inflation and the lagged effect of higher interest rates. These are beginning to bite and this is being reflected in consumer purchasing behaviour.
In the Quick Service Restaurant (QSR) sector, trading has slowed meaningfully across all markets. Traffic was negative in key markets including the U.S., Australia, Canada and Germany.
McDonald’s (MCD) is the global QSR stalwart operating in 95 countries, so its trading updates may provide a timelier insight into economic and consumer conditions than official GDP and consumer sentiment data.
MCD reported its second-quarter results this week, revealing sales growth has slowed globally. Indeed, international comps are now negative, driven by lower-income consumer pressures. While ‘value meal deals’ have resonated with the company’s “two lowest income cohorts,” those earning under $45,000, and $45,000–$75,000, it “hasn’t yet translated into sales.”
Diners have been opting to eat at home because prices for groceries have risen more modestly than restaurant meals, which have been fueled by higher wages and inflated food costs.
It’s forcing McDonalds to reconsider its pricing, reversing some of the 38 per cent average price increases it implemented on its flagship products in 2019.
And it’s worth remembering, perhaps more than competitors such as KFC, Domino’s and others, McDonald’s has greater exposure to lower-income consumers and also has a headwind from the migration towards healthier alternatives.
The deterioration in sales is being felt most by those restaurants serving predominantly lower-income consumers where the slowdown is most pronounced. These consumers are either trading down and/or eating at home more often. McDonald’s noted globally chicken sales are now on par with beef.
McDonald’s CEO Chris Kempczinski noted “we’re seeing trade-down. But what we’re seeing is that the loss of the low-income consumer is greater than the trade-down benefit. And so, you’re seeing with that low-income consumer, in many cases, they’re dropping out of the market, eating at home and finding other ways to economise, cutting down on trips. So, we are seeing the benefit of trade-down, but it’s just not enough to offset the pressure that we’re seeing on that low-income consumer.”
Part of the reason is because while MCD has introduced its McSmart meal globally, an entry-level meal and most affordable meal option, it isn’t offering a broad range of cheaper options. One or two cheap products is not enough to entertain shoppers and tempt them to become repeat patrons.
In the latest quarter, MCD U.S. same-store sales growth was negative by 0.7 percent. Chipotle, by contrast, was up 11.1 per cent over the same period.
Investors need to keep an eye on consumer conditions this reporting season as we need positive economic growth and disinflation to provide the most suitable backdrop for equities to do well.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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