McSlowing: Evidence of McDonald's Growth Stalling Out
If MCD says it's cheaper to eat at home, what does that say about how expensive their meals have become?
Last quarter, McDonald's saw its same-store sales climb by 4.3%, continuing its impressive growth streak—achieving an increase in 26 out of the last 27 quarters. Despite this success, the company observed a decline in patronage from low-income consumers, attributing this shift to a significant 20% price hike over the past two years. These customers have opted for the more economical choice of dining at home. This situation mirrors the wider challenges faced by the restaurant sector, which has been compelled to raise prices in response to escalating costs for labor and ingredients, in stark contrast to grocery stores, which have managed to maintain more stable pricing. In light of the evident impact of price sensitivity on its customer base, McDonald's is recalibrating its pricing approach. The aim is to nurture more regular visits by targeting a same-store sales growth of 3% to 4% over the current year. Additionally, the company is doubling down on its strategy to draw customers through its loyalty program and the promotion of value deals.
The issues MCD is facing in 2024:
- The most significant effects of boycotts in the Middle East have been observed in predominantly Muslim nations such as Malaysia and Indonesia, with France also experiencing notable impacts.
- For the year 2024, there's an anticipation of sales growth normalizing to a rate of 3% to 4%, aligning with past trends.
- In France, challenges stem from a disconnect in value perception and operational hurdles, though a reshuffled leadership cadre is poised to usher in enhancements.
- The United States encountered mid-to-high single-digit pricing adjustments in 2023, attributed to inflationary pressures; however, projections for 2024 lean toward a more subdued inflation rate and corresponding pricing adjustments in the low single digits.
- China's broad economic growth is slowing, but McDonald's retains a positive view of their ability to sustain strong results. However, an increasingly promotional landscape that bears monitoring to ensure they match the competition has emerged. Maintaining affordable, value-driven offerings calibrated to consumer sentiment will be key to defending their competitive standing. With tougher near-term conditions, their growth ambitions appear more long-term-focused.
- Observations within the U.S. market highlight the financial strain on lower-income demographics, evidenced by decreased transaction sizes and a tendency towards more economical options.
- Over time, General and Administrative (G&A) expenses are expected to become more efficient to sales, notwithstanding an immediate emphasis on strategic investments to bolster efficiency. McDonald's strategic priority is to invest in technology, digital, and other areas that they see as opportunities for driving growth. As a result, they are projecting an increase in G&A spending as a percentage of sales in 2024 to support these investments. Efficiency gains are more of a long-term goal.
YUM EARNINGS PREVIEW
YUM! Brands is on the calendar to unveil its fourth-quarter financial achievements on February 7th, before market opening. Yum generated 56.7% of its revenues from the USA and then a diverse stable of countries, with China being the next largest at 4%. Dive into the anticipated figures and strategic insights. A Glimpse into Expectations:
The best-performing regions globally for Yum! Brands in Q3 2022 were:
- Africa - KFC Africa had 9% same-store sales growth, delivering its 11th consecutive quarter of same-store sales growth.
- Australia - KFC Australia continues to deliver fantastic performance, with kiosk sales growing over 90% compared to last year.
- Latin America and the Caribbean - KFC Latin America and the Caribbean saw 8% same-store sales growth. With an incredible consumer reception, the region also launched KFC's hand-breaded Original Recipe nuggets this quarter.
- Taco Bell US - Taco Bell US grew system sales by 11%, with an impressive 8% same-store sales growth. The brand continues to deliver through its "magic formula" of balanced commercial strategies.
- Pizza Hut USA SSS were Flat in 3Q23
- No specific call-out for any regions of the world underperforming in 3Q23
Quarter 4 Highlights:
- Comparable sales growth stands at +3.7%, showcasing a balanced performance across the board. Breakdown by brand reveals KFC leading with a +4.7%, Pizza Hut presents a modest +0.6% growth, and Taco Bell matches the overall comps growth at +3.8%. SSS is expected to slow to 2.6% in 1Q24 and remain in the mid-2s for the year's balance.
- Total revenue is anticipated to hit $2.11 billion, up 4.3% YoY and 6.4% growth in 1Q23, with a detailed composition of Company revenue at $650.3 million and Franchise revenue at $933.9 million. Additionally, franchise contributions towards advertising and other services are expected to be $529.4 million.
- Key profitability metrics include a restaurant margin of 16.9% and an operating margin of 30.6%, up 130bps YoY, and operating profit growth of 11.3% YoY.
- Earnings Per Share (EPS) is projected at $1.40, up 7.2% YoY (with easy comparisons in 1Q24).
