Heading into its year-end 2023 update this week, we knew that McDonald’s collective trade area in the U.S. skewed toward lower income households than many other QSR and fast casual chains and that many of these consumers started to reach their breaking point as 2023 progressed. The company reported 4.3% comparable sales growth in its U.S. stores during the quarter, but much of the growth was driven by menu price increases; our data indicated low-to-mid single-digit declines in visits year-over-year (below). Admittedly, some of this was expected with the company lapping last year’s successful “Adult Happy Meal” promotion with Cactus Plant Flea Market, but much of the focus coming out of the company’s update was weaker visit trends among McDonald’s lower-income consumers and its plans to win them pack.
McDonald’s CEO Chris Kempczinski added additional color about the situation: “[W]here you see the pressure with the US consumer is that low-income consumer–call it $45,000 and under. That consumer is pressured. From an industry standpoint, we actually saw that cohort decrease in the most recent quarter, particularly I think as eating at home has become more affordable. There's been much less pricing that's been taken more recently on packaged food. So, you're seeing that eating at home is becoming more affordable. That I think is putting some pressure from an informal eating out (IEO) standpoint on that low-income consumer.” We’ve discussed the topic of grocery stores becoming more affordable in recent issues of the Anchor, and CPI data looking at prices for food away from home (restaurants) and food at home (grocery) indicates that the food prices at restaurants have widened relative to grocers considerably the past few months (below), with grocery stores nearing deflationary levels.
Our visitation data across different food retail categories also tells a similar story, with food at home channels–particularly value-oriented channels like dollar stores and warehouse clubs–taking share from the restaurant categories thus far in January (admittedly, weather was also a meaningful headwind for many restaurant operators this month as well).
Kempczinski noted that McDonald’s isn’t “seeing any real change in behavior” with middle- and high-income consumers and that the company continues to “gain share with those groups”. Still, he acknowledged that 2024 would likely be a battleground for low-income consumers. As such, McDonald’s plans to pay more attention to affordability this year, with the “a lower absolute price point to get [a lower-income consumer] into the restaurants than maybe a value message which is a 2 for $6 or something like that. Those probably are going to resonate a little bit less in 2024, particularly if we think in the front half with the consumer, there may be something that's lower absolute price point. The company also plans to market its value menu (the “D123” platform) at the local level to better connect with its low-income consumer. While Kempczinski is correct about absolute price points resonating with lower-income consumers, it’s also important to strike a balance with innovation, where we saw grocers who balanced innovation and value drive visit outperformance last year. Perhaps it’s time to roll out some of the beverage and food innovations from CosMc’s at a national level.
