Inflation has been consistently high and food prices have risen in particular. In this environment, customers are turning to McDonald’s — as the burger chain raises its own prices.
In the third quarter, McDonald’s US prices rose about 10% on average year over year. Even so, the brand is gaining popularity among its less affluent customers, CFO Ian Borden said during Thursday’s analyst call.
“We are currently gaining share among lower-income consumers,” he said.
Like food Companies raise prices, finding other ways to make consumers feel like they’re getting a good deal. Packaged food and beverage makers such as PepsiCo ( PEP ) and Coca-Cola ( KO ) are offering more portion sizes in hopes that consumers will trade for smaller packages because of lower price tags. Restaurants are focusing on price, and increasing prices means customers feel they are getting more for their money.
McDonald’s is positioned as the number one brand in terms of value and affordability, Borden said. He pointed out that some cash-strapped customers are shifting from buying food to shopping for value.
As menu prices rise more slowly than grocery prices, some may trade up from more expensive chains or restaurants to McDonald’s. For the year through September, unadjusted for seasonal changes, grocery prices rose 13 percent, according to the Bureau of Labor Statistics. During the same period, restaurant prices rose by 8.5 percent.
“We feel very good about …,” CEO Chris Kempczynski said during the call. “It allowed us to push back some of that pricing.”
In the third quarter, sales at McDonald’s ( MCD ) U.S. stores open at least 13 months rose 6.1%, driven in part by higher prices. Shares rose about 3% on Thursday after the chain’s third-quarter results were released.
Kempczinski said McDonald’s is weighing various possible economic scenarios, but as a starting point, it is “expecting a mild to moderate recession in the US.” “McDonald’s has proven to be successful in any business environment,” he said.
The brand has a history of recovery during economic downturns.
In the year “Our business performed well this last downturn,” Borden said, referring to the financial crisis of 2008 and 2009. “We expect to perform well in this environment, certainly relative to our competitors.” Added.
But Borden admits there are differences between the current situation and 14 years ago.
During the financial crisis, McDonald’s had a dollar menu and raised the McCafe line. But now the chain is facing higher costs for food, packaging and labor. Consumer behavior has also changed – today’s customers are more interested in delivery.
And even McDonald’s is not immune to macroeconomic conditions. Consolidated revenues fell 5% in the third quarter. The company said the results were “negatively impacted by foreign currency translation”, pointing to the strong US dollar to explain the decline. At constant currencies, McDonald’s consolidated revenues increased 2 percent.
In addition to price hikes, McDonald’s said the introduction of core menu items helped boost sales.
Lately, the burger chain has been using promotions like popular dishes and adult happy meals to generate buzz without introducing new menu items that can complicate ordering.
The popular Happy Meal promotion “re-engages our fans with our staple foods, including Big Macs and Chicken McNugges,” Kempczinski said.
The company is building a buzz around the McRib sandwich, branding its return for a limited time starting October 31st as a “farewell tour.” This does not mean that the product will disappear forever.
“The McRib is the sandwich goat on our menu,” Kempczinski said Thursday. Like “Michael Jordan, Tom Brady and others, they are not sure if they are fully retired or not.