The hubris of McDonald's management, in believing it was somehow immune to consumers feeling the pinch of higher prices, has been shattered after the company reported its first decline in global sales since 2020.
While the previous sales drop was due to the external shock of the pandemic, this time the culprit is clear: an arrogant assumption that its products were so indispensable that customers would endlessly absorb price hikes.
This delusion is now over. Consumers worldwide have made it clear they won't tolerate continued price increases, as evidenced by the three-month period ending in June.
Global comparable sales fell by 1% in the second quarter, below analysts' predicted 0.5% increase. Overall revenue rose by 1%. With US inflation at 2.6% for the quarter, both the company and its customers were outpaced by rising costs.
Sales declined in every region, including a 0.7% drop in the US. This 1% global decline more than reversed the nearly 2% increase in comparable global sales from the previous quarter, a stark indicator of McDonald's sales woes.
Investors were perplexed on Monday. Despite the surprising sales drop, they sent shares up by 3.7%. However, the stock is still down 12% year-to-date compared to the S&P 500's 15% increase.
The illusion of invulnerability persisted until the first quarter, when declining sales finally prompted management to introduce global price cuts and new, cheaper meal deals, including in Australia. McDonald's admitted it had alienated customers earning $45,000 or less annually, who no longer considered the burger giant affordable. Judging by the weak June quarter sales, the company is still struggling to regain consumer trust.
The June quarter revealed global consumers' resistance to higher prices for burgers, fries, and shakes. Essentially, they were rejecting the company's greed and ignorance regarding how much they could extract from customers during a time of rising interest rates and stagnant incomes.
Persistent inflation has forced lower-income consumers to seek more affordable at-home food options. This has compelled fast food chains like McDonald's, Burger King, Wendy's, and Taco Bell to revive their original value-for-money marketing strategy to lure customers back.
Despite their exorbitant salaries, far exceeding the annual earnings of most customers, McDonald's and its peers in fast-moving consumer goods prioritized profit margins and executive bonuses by continually raising prices.
McDonald's CEO, Chris Kempczinski, vaguely acknowledged the issue in the earnings statement, attributing the problem to consumers becoming "very discriminating." He also claimed "consumer sentiment in most of our major markets remains low." These statements suggest a fundamental misunderstanding of the situation, blaming consumer behavior rather than the company's pricing and profit policies.
McDonald's introduced a $5 meal deal in June in most US locations, extending it to August to entice customers to return. This decision highlights the company's continued disconnect with customer needs. While the deal boosted traffic in some areas, overall July sales remained lower.
The data reveals that McDonald's has lost its status as a budget-friendly option during economic downturns. The company, along with many fast-food rivals, has become part of the problem forcing consumers to seek cheaper alternatives. Reversing this trend will require time, additional investment, and potentially new leadership.
