McDonald’s pricing strategy under scrutiny amid sales decline
Most investors would caution against betting against McDonald’s. The world’s leading restaurant chain has consistently demonstrated resilience, constantly modernizing and adapting to market changes.
However, the company now faces significant challenges, as revealed in its most recent quarterly results. McDonald’s has experienced a global decline in sales for the first time in almost four years, driven by rising prices, weaker demand in Asia, and ongoing boycotts related to the conflict in Gaza.
The fast-food giant reported a one percent decrease in same-store sales for the second quarter, marking its first drop since the pandemic led to the closure of thousands of branches in early 2020. This decline is substantial, particularly given that higher food inflation is typically advantageous for the fast-food industry. Yet, McDonald’s has not been able to capitalize on this trend.
Boycotts against the company began last year after McDonald’s Israel announced it was donating thousands of free meals to Israel’s troops engaged in combat in Gaza. The company acknowledged during their earnings call that these boycotts have negatively impacted its sales.
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McDonald’s today is markedly different from a decade ago. In 2014, the chain employed over 400,000 people to support its operations and restaurants. Thanks to significant operational efficiencies, that number has now decreased to 150,000, excluding restaurant outlet employees. Introducing self-service kiosks and automation has transformed the customer experience, albeit making it slower and more cumbersome as patrons navigate menu options and payment methods.
The company’s product offerings have also evolved. McDonald’s now offers Happy Meals for adults, priced between $16 to $18 before taxes, and the Big Mac is no longer as substantial, appearing more medium-sized. Consequently, McDonald’s is no longer perceived as fast or cheap. This has prompted the company to rethink its pricing strategy, as reduced customer spending has impacted sales.
Despite offering discounts in certain markets, the perception of McDonald’s as an affordable option is waning, exacerbated by price increases of 21 to 23 percent, aligning with general food inflation in many countries.
A critical issue for McDonald’s has been the speed at which it has raised prices compared to its rivals. The company’s price increases are almost double those observed at competitors like Burger King, Wendy’s, and Harvey’s. In today’s market, consumers are more price-sensitive and have noticed these differences.
Despite these setbacks, McDonald’s continues to grow. The chain now operates nearly 41,900 restaurants worldwide, a record number. For every restaurant they close, they open two more, maintaining a significant lead over the second-largest chain, Starbucks. Canada, with 1,466 McDonald’s restaurants, ranks ninth globally in restaurants per capita. While Canada’s growing population offers room for expansion, many Canadians question if McDonald’s can remain viable in a budget-conscious market.
McDonald’s supply chain practices prominently feature Canadian farmers, and the company heavily advertises its commitment to local agriculture. McDonald’s Canada is one of the country’s largest purchasers of beef, potatoes, and eggs, maintaining strong support for farmers, bolstering its reputation in farming communities.
Canadians currently spend about 35 percent of their food budget on dining out, compared to 39 percent before the pandemic. As mobility increases, spending on food away from home will likely rise, even though menu price increases are double those seen in grocery stores.
Historically, every time McDonald’s has faced adversity, it has rebounded stronger. The current economic situation mirrors conditions from 40 years ago, when inflation, unemployment, and interest rates were all above 15 percent. During that period, McDonald’s not only survived but thrived, growing even more influential. It stands to reason that the chain will navigate the present challenges and emerge resilient again.
Dr. Sylvain Charlebois is senior director of the agri-food analytics lab and a professor in food distribution and policy at Dalhousie University.
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