McDonald’s first-quarter earnings beat analysts’ expectations Thursday because the Chicago-based colossus has understood that affordability is the word of the moment.
Elsewhere in the fast-food universe, we’re seeing $11 takeout Italian beefs (no fries) at local joints and $25 solo lunch checks at the likes of Five Guys for a burger, fries and a shake. Certainly, costs have risen, but those sorts of checks have made a hurried meal feel like an expensive indulgence and really not that different, cost-wise, from a full-service experience. Sweetgreen, which typically charges between $15 and $20 a pop for its healthy salads and protein bowls despite being counter service, reported Thursday that same-store sales fell by 12.8% during the quarter, even though its $125.8 million profit was higher than expected thanks to cuts in administrative costs.
To its credit, McDonald’s has better read the room of the moment, finally cutting prices on its combo meals, which were not much of a bargain before, and being rewarded by a 9% first-quarter increase in revenue to a hefty $6.52 billion. The results were also yet another reminder that in our world, the only thing worse than bad publicity is no publicity: CEO Chris Kempczinski was widely mocked for not credibly chomping down with enough gusto on his Big Arch burger, but the public humiliation also drew more people into the chain’s restaurants.
Kempczinski, you might say, took one for the franchisees.
Surely more important, though, were the better bargains to be had on the newly simplified value menu, where a price-sensitive (and savvy) customer can find a decent deal. As of April 21, the chain has said, there are now 10 items on that side of the order board that cost less than $3, including the McDouble burger. Obviously, that makes increased sales volume an imperative, but it appears that McDonald’s has pulled that off. Other chains such as Wendy’s and Taco Bell also have gotten the message that a lot of Americans right now are spending most of their free money on filling up their vehicles at pumps charging $5.49 a gallon or more in Chicago.
Another lesson from these results is that Americans really don’t want to spend a lot on breakfast. At a time when a latte and a cheese Danish at a local Starbucks can cost you more than $10, McDonald’s is delivering a Sausage McMuffin for three bucks and selling oodles of them.
Different market, for sure. But with plenty of overlap.
McDonald’s also has successfully weaned its customers off ordering at the counter, as have rival chains such as Shake Shack and Raising Cane’s. On one recent morning at O’Hare International Airport, we saw a McDonald’s worker waving, gesticulating and otherwise trying to coax customers to step up to a human when they seemed to prefer standing in lines at the screens where no morning conversations were required. That’s good news in the long term for the chains, if not the workers therein. Fast-food ordering screens work far better than the widely loathed (and fraud-friendly) self-checkouts in grocery stores.
As with dollar stores and other businesses that cater to lower-income Americans, high gas prices can be counterintuitively good for the likes of McDonald’s in that they make consumers more cognizant of their expenses but bad in that they ultimately can make even an extra-value meal something difficult to afford. Clearly, McDonald’s can thrive when its customer base feels a little strapped for cash, but the company is right to fear what happens when that consumer stress goes too far.
Addressing analysts, Kempczinski used unusually blunt phrasing to describe current consumer sentiment, calling it “heightened anxiety.”
That’s true only of a sector of the market, most likely, but it’s a hefty enough chunk of Americans that politicians should be paying careful attention.
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