McDonald’s is struggling with lower-income consumers moving over to grocery

McDonald’s reported mixed results from its Q4 and full-year earnings report Monday morning. The restaurant company’s quarterly same-store sales, at 3.4%, fell short of expectations and were weighed down by the war in the Middle East.

Domestically, same-store sales were up 4.3%, mostly in line with expectations but well below the company’s performance in its most recent quarters. U.S. same-store sales in Q4 2022 were up over 10%, for instance, while the company is up over 30% versus where it was in 2019. CEO Chris Kempczinski said he expects the rest of this year to play out similarly to Q4, which is “normalized growth.”

“We are moving into a 2024 that is going to look more like what you would consider a typical year to look like prior to Covid,” he said during Monday’s earnings call.

Still, executives acknowledged that what is happening in the Middle East is anything but normal and will continue to impact the company’s overall performance “as long as the war is going on.” Those impacts affect not just Middle Eastern markets, but also other countries like Indonesia and France, where there are larger Muslim populations.

In the U.S., McDonald’s is navigating transaction reductions from its lower-income consumers making $45,000 and below. Kempczinski noted that these consumers are likely opting to eat at home as grocery/supermarket inflation has cooled faster than food-away-from-home. The company is focused on re-engaging these customers this year.

“The battleground is with the low-income consumer. What you’re going to see is more attention to affordability. Think about that as an absolute price point, which is more important for that consumer to get them into the restaurants than maybe value messaging,” Kempczinski said. “We are set up well to go after that; we have our Dollar 1, 2, 3 platform. There will be some activity at the local level to make sure we continue to provide value for the lower income consumer.”

Tempered pricing could also win some of these consumers back this year. The company’s overall pricing for 2023 was around 10% and in Q4, that pricing came down to the high-single-digit range, in line with inflation. Executives anticipate low-single-digit pricing this year as inflation continues to cool.

“Consumers are more weary of pricing and we’ll continue to be consumer led in our pricing decisions and knowing the environment will continue to be competitive,” CFO Ian Borden said during the call.

McDonald’s is also leveraging its marketing capabilities and digital platforms to promote value. Borden said, for example, Canada’s McMuffin and hot coffee bundle drove market share gains in breakfast, while the company’s signature Monopoly campaign drove record-setting results in that market, with more than 43 million Monopoly codes digitally redeemed during the promotion. The company continues to lean into its One McDonald’s Way approach with these types of promotions, taking learnings into other markets.

Meanwhile, McDonald’s loyalty program continues to grow and has over 150 million active today who generated over $20 billion in sales in 2023 and over $6 billion in Q4 across 50 markets. The platform allows the company to better leverage consumer data to provide targeted, relevant offers, which is an advantage in an environment in which the consumers are becoming “more discriminating.” Because of this, executives noted the company will continue to invest “significantly” in technology platforms and digital capabilities and they expect 250 million active users by the end of 2027.

“We expect (consumer) headwinds to continue this year,” Borden said. “We are investing in areas where we feel like we can drive growth – technology and growth.”

Notably, the company is also investing heavily in development. As previously reported, McDonald’s is targeting 50,000 restaurants globally by 2027, which would mark the fastest period of growth in the company’s 68-year history. This year, the company expects 4%-unit growth – 500 new units in the U.S. and International Operated Markets segment, and more than 1,600 in the International Developmental Licensed markets, including about 1,000 in China. Executives expect net restaurant growth to contribute nearly 2% in same-store sales this year.

By the numbers – Q4

By the numbers – full year 2023

Contact Alicia Kelso at [email protected]