Why McDonald’s Is Still Making Bank Despite Economic Woes
McDonald's has been raising the prices of its menu items to combat the increased costs associated with inflation, but instead of customers shying away from the chain, they are still spending.
This article is more than 2 years old
Many in the restaurant industry are finding their sales suffering these days. Inflation is taking a toll on everyone’s wallets, and the price increases at some eateries are simply too much for customers. However, McDonald’s just released news of a stellar third quarter that vastly outpaces the rest of the industry.
With the cost of ingredients skyrocketing and gas prices forcing transportation costs through the roof, restaurants are hurting. Many have resorted to raising their rates to compensate for the painful spikes behind the scenes. Unfortunately, that decision is costing them.
In the wake of increased costs, consumers are slowly changing their eating habits. Many restaurant chains have reported a dramatic drop in customer traffic. And that is disappointing news for the industry as a whole.
However, one fast-food giant is defying that trend. McDonald’s held an earnings call on Thursday, revealing shocking news. The chain is thriving in these uncertain economic times.
They far surpassed Wall Street’s expectations for third-quarter performance. CNBC broke down the numbers. Here’s what they found out.
Wall Street projected that the company would take in $5.69 billion in revenue. Instead, they reported $5.87 billion in revenue. And earnings per share followed a similar trend, with $2.68 reported versus an expected $2.58.
But when looking at year-over-year data, that number did decline. In last year’s third-quarter earnings report, McDonald’s reported a net income of $2.15 billion, which is $2.86 per share. And this year, that net worth came in at $1.98 billion.
StreetAccount had estimated a worldwide same-store sales growth for the company at 5.8%. However, McDonald’s shocked everyone with the news that its sales growth had climbed 9.5%. Much of that was thanks to countries where licensees own the various locations.
McDonald’s saw strong growth in Japan and Brazil, which fueled overseas same-store sales growth of 16.7%. The company also saw significant same-store sales growth in the division where it owns the locations. That includes countries like the UK, Australia, Germany, and France.
The US market lagged. It only showed a sales increase of 6.1%. But that is still impressive, given the steep price hikes the chain has implemented. Its menu prices are 10% more than they were a year ago.
Despite the good news, the CFO and CEO both urged caution. On the sales call, “CEO Chris Kempczinski said there’s increasing uncertainty and unease about the economic environment. CFO Ian Borden told analysts that inflationary pressures and interest rate hikes are putting “significant pressure” on consumers and the restaurant industry.”
And that does seem to be reflected in consumer behavior. The fast-food giant found that its low-income customers are dramatically changing their eating habits. They are either staying home or trading in for cheaper menu options.
However, the company is seeing increased customer traffic from other economic demographics to offset that shift. Higher-income customers are starting to forgo sit-down restaurants in favor of fast food joints like Mickey D’s. McDonald’s expects to see continued growth due to this shift and projects same-store sales growing by the low double-digits this month.
