McDonald's to 'rethink' prices after sales fall
Tuesday, 30 July 2024 - 9:06 am
McDonald's is reassessing its pricing strategy after a decline in sales due to customers cutting back on spending. For the first time since the pandemic, sales at outlets open for at least a year fell by 1% during the April-June period compared to the previous year.
This downtu occurred despite the fast-food giant implementing discount deals aimed at attracting cost-conscious customers and those who have boycotted the brand over the Israel-Gaza conflict. CEO Chris Kempczinski acknowledged the disappointing results and stated that the company is undergoing a 'comprehensive rethink' of its pricing.
In an effort to reverse the sales decline, McDonald's plans to rely on discounts. Recent promotions, including a $5 Happy Meal in the U.S. and a campaign in the U.K. offering three items for £3, will be extended in the coming months. The company is also collaborating with franchisees to explore additional 'value' initiatives.
Following this update, McDonald's shares rose more than 3%. Kempczinski expressed confidence in the company’s ability to implement this strategy effectively, noting, 'We know how to do this. We wrote the playbook on value and we are working with our franchisees to make the necessary adjustments.'
The company has faced backlash from customers following significant price increases during the pandemic. Last month, the head of McDonald's U.S. operations addressed customer conce s in an open letter, arguing that social media misrepresents the situation. He pointed out that the average price of a Big Mac in the U.S. is now $5.29, a 21% increase since 2019, which aligns with overall inflation rates. However, some items have experienced smaller price hikes.
During the investor call, Kempczinski acknowledged the need to restore the brand's reputation for value. He admitted that previous price increases, driven by inflation, had caused consumers to reconsider their purchasing habits. While some markets have successfully adapted, others require a more extensive reevaluation.
Bank of America analyst Sara Senatore noted that McDonald's has raised prices on key items at a faster rate than its competitors, making consumers more conscious of the changes. She stated, 'The $5 meal they have launched may be starting to change perceptions, but we are not seeing a trend change yet in terms of transactions, and that’s what they need to see.'
McDonald's is not alone in facing challenges from slowing consumer spending, with other major companies, including those in China, reporting similar trends. The fast-food chain reported flat overall revenue year-on-year and a 12% drop in profits. The loss of lower-income customers has not been compensated by wealthier households opting for cheaper meals.
In the U.S., McDonald's experienced decreased demand, and challenges in France, along with price wars in China, also impacted sales. The brand has been caught in boycott calls in France related to the ongoing conflict in Gaza, mirroring issues faced by other U.S. companies like Starbucks.
A McDonald's executive stated that consumers are becoming more selective about where, when, and what they eat, and the company does not anticipate significant changes in this consumer behavior over the next few quarters.
