Kempczinski said visits to its restaurants by lower-income consumers fell again in the July-September period, a trend that has persisted for almost two years. And as higher-income customers continue to dine out, they are also looking for deals.”I think sometimes there’s this idea that value is only important to low-income customers. But value is important to everyone,” Kempczinski said on a conference call with investors. “The feeling that you are getting value for your money is important.”
As a result, McDonald’s relies heavily on discounts. It launched Extra Value Meals in the US in early September, stacking them on top of other offerings, including the McValue menu, which was introduced in January. In Australia, McDonald’s said it was fixing prices for its high-value items for 12 months from July, boosting store traffic.
U.S. restaurant sales got a boost in July when Snack Wraps returned after a nine-year absence. McDonald’s said Snack Wraps were the most popular new chicken product in recent U.S. history, with 20% of customers purchasing one in the first month they were on sale. The $2.99 Snack Wraps also appealed to value-conscious consumers, Kempczinski said. McDonald’s global same-store sales, or sales at locations open for at least a year, rose 3.6% in the July-September period. That was slightly higher than Wall Street’s forecast of 3.5%, according to analysts polled by FactSet. Same-store sales rose 2.4% in the US in the third quarter.
The deals are expensive for McDonald’s. Chief Financial Officer Ian Borden said the company agreed to pay its U.S. franchisees half the cost of the Extra Value Meals price reduction, which cost $15 million in September and will reach $75 million in the fourth quarter. McDonald’s has also invested $40 million to support the marketing of the Extra Value Meals.
That makes a difference to profits. McDonald’s net profit rose 1% to $2.28 billion in the third quarter. Adjusted for one-time items, including $39 million in restructuring costs, McDonald’s earned $3.22 per share. That was lower than the $3.33 that analysts had forecast.
Third-quarter revenue rose 3% to $7.08 billion, the Chicago company said. That was in line with Wall Street expectations.
Shares of McDonald’s rose 3% in early trading on Wednesday.
Kempczinski said he doesn’t see demand returning from households making less than $45,000 a year unless those consumers start to feel some relief from the costs of non-discretionary items like food prices, child care and rent.
“There is significant inflation that low-income consumers are having to absorb, and I think that is affecting their outlook and sentiment,” he said.
Value perception proved to be critical for U.S. restaurants in the third quarter. Higher-end fast-casual chains Cava and Chipotle both reported weaker-than-expected results.
Chipotle CEO Scott Boatwright said young adults in particular are facing multiple headwinds, including unemployment, higher student loan payments and slower real wage growth. Boatwright said Chipotle is planning a new advertising campaign to highlight its fresh ingredients and portions at a reasonable price.
“Despite our exceptional value proposition, we see examples where this is not reflected in consumer perception,” Boatwright said in a conference call with investors last week.
Value-oriented Taco Bell bucked this trend. Taco Bell parent company Yum Brands said Tuesday that Taco Bell same-store sales rose 7% in the third quarter, driven by high-value items such as the $3 Grilled Steak Burrito.
“We don’t see any consumer pullback from the Taco Bell business. We do think the U.S. consumer is cautious but incredibly resilient,” said Chris Turner, CEO of Yum Brands. Turner said the brand saw more younger consumers and more families coming into its stores in the third quarter.
#McDonalds #boosts #thirdquarter #sales #emphasizing #warns #customers #remain #pressure