People Can’t Afford McDonald’s
McDonald's is betting a menu overhaul can win back customers who are quietly disappearing, but forces far beyond the golden arches may already be deciding the outcome.
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On its last quarterly earnings call, McDonald’s (NYSE: MCD | MCD Price Prediction) hinted that low-income customers sometimes struggled to stay customers. That was true even though McDonald’s had menus with $3 meals, and sometimes less. Its CEO commented recently that inflation had become a growing enemy. His comments pummeled the stock. What he might have said, but didn’t, is that inflation is not going anywhere and there is no reason for his shares to recover.
At an investor meeting, CEO Chris Kempczinski said, “We expect industry traffic growth in our wholly owned markets will be flat while inflation remains elevated.” US comparable store sales are running lower than those overseas. Meanwhile, McDonald’s announced its “Next” plan to improve food quality and “hospitality,” according to Reuters. It sounds like a plan Starbucks (NASDAQ: SBUX) announced over a year ago.
While the CPI has recently shown inflation at about 3.2% year over year, it does not capture the heavy burden of gasoline and the effects of diesel on the food supply chain. People who drive regularly face an increase of $500 to $1,000 a year as gas prices have soared above $4 and could move closer to $5 if global crude supply does not return to a year-ago level.
The biggest hit to consumers’ pocketbooks is diesel, up more than 60% in the last year to $6.51, a record. Over 70% of freight in the US is delivered by truck. The only way truckers can keep their heads above water is to pass rising diesel costs on to their customers. Those companies, in turn, have to shift the burden onto their customers, who often cannot afford higher expenses. One supply chain that carries this burden is food. Then add a drought in the central US that has cut grain production. Grain prices go up, and so does the price of beef cattle, for which grain is a primary part of their diets.
McDonald’s may reinvent its menu and become more appealing to consumers. Investors do not believe that will keep consumers, especially those with low incomes, walking through its doors. Wall St. does not need to wait for McDonald’s next quarterly numbers. They’ll be bad. The stock is down 22% year to date.
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Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.
McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.
His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.
A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.
TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.
McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.
