McDonald's sales are slumping because people can't afford fast-food
McDonald's global sales slumped in the second quarter, marking the first decline for the fast-food giant since 2020 as inflation-weary consumers pull back on eating out.
In the U.S., McDonald's same-store sales between April and June fell almost 1%, a dip management attributes to slowing foot traffic as low-income consumers in particular pare spending on food outside the home. Grocery store prices, while also elevated even as inflation cools, have risen slower than restaurants'.
"This shortfall was driven by sluggish traffic, with consumers shifting a larger share of meal occasions toward grocery stores," Morningstar equity analyst Sean Dunlop said in a research note.
McDonald's CEO Chris Kempczinski said in an investor call Monday that food, labor and paper costs, which have risen by as much as 40% in some markets over the past few years, have forced it to raise menu prices.
McDonald's is also playing "defense" as it struggles to match other fast food chains' new value offerings in response to shoppers' inflation fatigue, according to one analyst. In late June, the company launched a $5 meal promotion at U.S. restaurants after Burger King and Wendy's announced similar deals aimed at budget-conscious consumers.
Despite the move to cut costs, McDonald's was sluggish in rolling out the offering, and left playing catch up with other chains, according to AB Bernstein restaurant analyst Danilo Gargiulo.
"McDonald's hasn't been able to communicate value as well as other restaurants, from a pure coordination standpoint with franchisees. Everyone went their own way and there was no national program, so they played defense in launching the $5 meal deal," he told CBS MoneyWatch.
Kempczinski acknowledged that some consumers no longer see McDonald's as the best deal, conceding in the earnings call that "our value leadership gap has recently shrunk."
Competition from grocery stores
McDonald's isn't only competing with other fast-food chains, but also low-cost grocery stores, where prices are returning to normal after more than two years of painfully high inflation.
"The context is since October of last year, you've had lower grocery prices than restaurant prices. And when prices are cheaper at grocery stores, low-income households go there. When McDonald's is cheaper, they go to McDonald's," Wedbush restaurants analyst Nick Setyan said.
But fast-food chains could see a boost early next year, he added. "Prices at the grocery store aren't going to continue to deflate, and restaurants are going to figure out how to price their offerings the right way."
