A Donald McDonald balloon floats over Central Park West during the Macy’s Thanksgiving Day Parade on November 23, 2023 in New York City.
Gary Hershawn | Corbis News | Getty Images
mcdonalds While executives painted a rosy portrait of the fast-food giant’s strength and ability to meet long-term goals at its investor day, the company faces some potential challenges heading into 2024.
Wednesday’s event contained few surprises and included some new long-term goals, but the reaction from Wall Street was muted. McDonald’s stock has been roughly flat since the company’s investor presentation. McDonald’s shares are up just 8.7% this year, lagging stocks, hit by concerns about the general economy and concerns about weight-loss drugs. S&P500earned a profit of 19%.
These business concerns haven’t stopped the fast-food giant from setting ambitious goals.
McDonald’s plans to open nearly 9,000 new restaurants by 2027, including 900 in the United States. Executives say McDonald’s global footprint expansion will boost the company’s sales and help it meet growing demand for Big Macs and McNuggets.
But these ambitious plans intersect with an uncertain global economy. China, McDonald’s second-largest market by number of restaurants, is still struggling to recover from the pandemic. The turmoil in the Middle East is hurting McDonald’s sales in the region and some markets outside. And in the domestic market, while recession predictions have not yet come true, some economists believe a recession could still come.
The three biggest risks facing McDonald’s heading into 2024 are:
1) Vulnerable low-income consumers
In late January, CEO Chris Kempczinski said: He said the company expects a “mild to moderate” recession in the U.S. in 2023 and a “deeper and longer” recession in Europe, but his predictions are It didn’t become reality.
“A year later, I wonder if I was wrong,” Kempczinski said at an investor day. “So I’m a little hesitant to make any predictions about next year because I think we continue to see consumers showing great resilience.”
Kempczinski also reminded investors that although the economy is not in a recession, McDonald’s has seen low-income customers cut back on spending in the last quarter.Other companies, e.g. walmartalso points out this trend.
McDonald’s benefits from high- and middle-income consumers buying Big Macs and fries, but lower-income customers still make up an important part of the company’s business.
“We left the investor day more concerned than ever about the situation for low-income consumers,” Bernstein analyst Danilo Gargiulo said in a note to clients.
2) Promotional expenditures of rival companies
Since the pandemic, McDonald’s has moved away from using pop-up menus to attract customers. Instead, marketing has centered around the brand itself, selling core menu items through promotions based on celebrity favorite orders. This approach has fueled strong same-store sales growth in recent years, even as inflation has tightened customers’ wallets.
Fast food giants typically spend a lot of money on marketing and advertising to maintain brand awareness and affinity. Kempczinski said Wednesday that McDonald’s spends more than $4 billion annually in marketing investments, three to four times more than its closest competitor.
However, McDonald’s may see some of its competitors step up promotional spending next year. Low-income consumers are visiting restaurants less frequently, meaning some fast-food chains are turning to specials and limited-time menus to boost foot traffic.
McDonald’s may need to decide whether increasing foot traffic in the short term is worth it, considering the potential long-term consequences.
“It will be interesting to see what happens.” [McDonald’s] If you are willing to adapt to a potentially more promotional environment and sacrifice things in the short term to continue to drive promotion; [long-term] brand positioning,” Citi Research analyst John Tower wrote in a note to clients.
3) Accelerate expansion plans
Much of Wednesday’s investor presentation focused on McDonald’s plans to accelerate the opening of new restaurants. The company aims to have at least 50,000 locations globally by 2027, in its fastest expansion ever.
But history shows that aggressive expansion usually doesn’t yield good results for McDonald’s. Sales often decline when new restaurants cannibalize existing customers, hurting franchisees’ profitability and distracting them from focusing on other parts of their business, such as menu innovation.
Barclays analyst Jeffrey Bernstein said in a note to clients that given continued economic uncertainty and consumer volatility, investors should plan for expansion beyond 2024. He said he is generally skeptical of restaurants that do so. But he also noted that McDonald’s is coming from a position of strength and has spent the last few years renovating stores rather than building new ones.
Bernstein isn’t the only analyst optimistic about McDonald’s expansion strategy.
“Growing units from an existing unit base that has already been renovated, with a core menu that delivers high profitability and growing units for only the best franchisees,” JPMorgan Securities analyst John Ivankoe said in a research note. “Expanding the system is a change compared to the previous regime.”
And executives reassured investors Wednesday.
“We have learned the lesson of quantity over quality…We have spent the last year increasing our confidence, country by country, literally city by city, about where the opportunities for growth are and how we can actually grow. We’ve tried to have that, and our team can go out on the field and do that,” Kempczinski said.
