As food prices rise, US consumers turn to McDonald’s

Inflation is relentlessly high and food prices in particular are rising in the United States. In this environment, customers are turning to McDonald’s — even as the hamburger chain is also raising its prices.

In the third quarter, McDonald’s prices in the US rose about 10% year-over-year on average. Even so, the brand is gaining traction among its less affluent customers, said CFO Ian Borden during a conversation with analysts on Thursday (27).

“We are gaining share now among low-income consumers,” he said.

As food companies raise prices, they are finding other ways to make consumers feel like they are getting a good deal.

Packaged food and beverage manufacturers such as PepsiCo and Coca-Cola are offering smaller packages, hoping buyers will pay for them because of the lower prices.

Restaurants are focusing on added value, hoping customers will feel like they have the upper hand, even as prices rise.

McDonald’s is “positioning itself as the leading brand in terms of value for money and affordability,” said Borden. He noted that some cash-strapped customers are shifting from purchasing meals to purchasing value-added items.

Some may also be switching from pricier chains or restaurants to McDonald’s, as menu prices increase at a slower pace than supermarket prices.

For the year through September, unadjusted for seasonal fluctuations, supermarket prices rose 13%, according to the Bureau of Labor Statistics. In the same period, restaurant prices rose 8.5%.

“We feel really good about McDonald’s value proposition,” CEO Chris Kempczinski said during the conversation. “That allowed us to push some of those prices.”

In the third quarter, sales at McDonald’s US stores that have been open for at least 13 months increased 6.1%, thanks in part to higher prices. Shares rose about 3% on Thursday after the chain’s third-quarter results were released.

drives the recession

Kempczinski said McDonald’s is evaluating several different potential economic situations, but that he expects “a mild to moderate US recession” as a base case. “McDonald’s has proven to be successful in virtually any business environment,” he noted.

The brand has a history of resilience during times of economic hardship.

“Our business performed well in this last downturn,” said Borden, referring to the financial crisis of 2008 and 2009. “Our expectation is that we will have a good performance in this environment, certainly in relation to our competitors”, he says.

But Borden acknowledged that there are differences between the current situation and 14 years ago.

During the financial crisis, McDonald’s had a dollar menu and expanded its McCafe line. Now, however, the chain faces higher costs with food, packaging and labor. Consumer behavior has also changed – today’s customers are much more interested in delivery.

And even McDonald’s is not immune to the macroeconomic situation. In the third quarter, consolidated revenue dropped 5%. The company said the results were “negatively impacted by the foreign currency conversion”, pointing to the strong US dollar to explain the decline. In constant currencies, McDonald’s said consolidated revenues increased 2%.

Happy Meals for Adults and the McRib

In addition to higher prices, McDonald’s said advertising its top menu items helped boost sales.

Recently, the hamburger chain has been using promotions like celebrity meals and Happy Meals for adults to create reviews without adding new menu items that can complicate ordering.

The Happy McLanche for adults promotion “re-engaged our fans with our staple food, including Big Macs and Chicken McNuggets,” Kempczinski said.

The company is also creating buzz around its McRib sandwich, positioning its comeback for a limited time starting October 31st as part of a “farewell tour”. But that doesn’t mean the product will disappear forever.

“McRib is the highlight of the 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.”