Inflation is relentlessly high, and food prices in particular are skyrocketing. In this environment, customers turn to McDonald’s ̵[ads1]1; even if the burger chain raises its own prices.
In the third quarter, prices at McDonald’s in the US rose by about 10% year-over-year on average. Still, the brand is gaining traction among its less affluent customers, CFO Ian Borden noted on an analyst call Thursday.
“We’re gaining share right now among low-income consumers,” he said.
Like food companies raise prices, they find 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 shoppers will pay for smaller packages because of the lower price tags. Restaurants focus on value, hoping that customers will feel they are getting more value for money even when prices rise.
McDonald’s is “positioned as the leading brand in terms of value for money and affordability,” Borden said. He noted that some customers with money go from buying meals to buying valuables.
Some may also shop down to McDonald’s from more expensive chains or restaurants as menu prices increase at a slower rate than grocery store prices. For the year through September, not adjusted for seasonal fluctuations, grocery prices rose 13%, according to the Bureau of Labor Statistics. In the same period, restaurant prices rose by 8.5 per cent.
“We feel very good about … McDonald’s value proposition,” CEO Chris Kempczinski said on the call. “That has 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 rose 6.1%, thanks in part to higher prices. Shares rose around 3% on Thursday following the release of the chain’s third-quarter results.
Kempczinski said McDonald’s is weighing a number of different potential economic situations, but that it expects “a mild to moderate recession in the United States,” as a starting point. “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 the last downturn,” Borden said, referring to the financial crisis of 2008 and 2009. “Our expectation is that we’re going to perform well in this environment, certainly on a relative basis to our competitors,” he added to.
But Borden acknowledged that there are differences between today’s situation and 14 years ago.
During the financial crisis, McDonald’s had a dollar menu and increased the McCafe line. Now, however, the chain faces higher costs for food, packaging and labour. Consumer behavior has also changed – today’s customers are far more interested in delivery.
And even McDonald’s is not immune to the macroeconomic situation. In the third quarter, consolidated revenues fell 5%. The company said results were “negatively impacted by foreign currency translation,” and pointed to the strong U.S. dollar to explain the decline. In constant currencies, McDonald said consolidated revenue rose 2%.
In addition to higher prices, McDonald’s said advertising its core menu items has helped boost sales.
Recently, the burger chain has used promotions like celebrity meals and Happy Meals for adults to generate buzz without adding new menu items that could complicate orders.
The adult Happy Meals campaign “engaged our fans to our core foods, including Big Macs and Chicken McNuggets,” Kempczinski said.
The company has also created a buzz around the McRib sandwich, positioning its return for a limited time beginning October 31 as part of a “farewell tour.” But that doesn’t mean the product disappears 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.”