- McDonald’s investor day focused on the company’s long-term future, but the short term could bring more turbulence.
- Low-income consumers are spending less, hurting companies like McDonald’s and Walmart.
- McDonald’s unveiled aggressive expansion plans, which historically have not worked well for the company.
The Ronald McDonald balloon floats through Central Park West during the Macy’s Thanksgiving Day Parade on November 23, 2023 in New York City.
Gary Hershorn | Corbis News | fake images
McDonald’s executives painted a rosy portrait of the fast-food giant’s strength and ability to achieve long-term goals at its investor day, but the company faces some potential bumps in the road heading into 2024.
The event, held Wednesday, featured few surprises and some new long-term goals, and Wall Street’s reaction has been muted. Shares of McDonald’s have remained broadly stable since the investor day presentations. Hit by concerns about the broader economy and fears about weight-loss drugs, McDonald’s shares have risen just 8.7% this year, trailing the S&P 500’s gains of 19%.
Those business fears haven’t stopped the fast-food powerhouse from setting ambitious goals.
McDonald’s plans to open nearly 9,000 new restaurants by 2027, including 900 locations in the U.S. Its expanded global presence will boost the company’s sales and help meet increased demand for its Big Macs and McNuggets, according to executives.
But those ambitious plans intersect with an uncertain global economy. China, McDonald’s second-largest market by number of locations, is still struggling to recover from the pandemic. The turmoil in the Middle East has hurt McDonald’s sales in that region and in some markets outside it. And in its domestic market, recession predictions have not yet come true, but some economists believe a slowdown may still occur.
These are the three main risks that McDonald’s faces heading into 2024:
In late January, CEO Chris Kempczinski said the company was predicting a “mild to moderate” recession in the United States and a “deeper and longer” recession in Europe in 2023. But his predictions have not come true.
“Here we are a year later and, boy, was I wrong,” Kempczinski said at the investor day. “So I’m a little cautious about making predictions about next year because I think we continue to see that the consumer has been very resilient.”
Although a recession has not occurred, Kempczinski also reminded investors that McDonald’s saw low-income consumers reduce their spending last quarter. Other companies, such as Walmart, have also denounced this trend.
While McDonald’s benefits from high- and middle-income consumers opting for its Big Macs and French fries, low-income diners remain an important part of its business.
“We left investor day more concerned than before about the plight of low-income consumers,” Bernstein analyst Danilo Gargiulo wrote in a note to clients.
Since the pandemic, McDonald’s has stopped using limited-time menu items to attract customers. Instead, its marketing has focused on the brand itself, such as selling menu staples through promotions based on celebrities’ favorite orders. That approach has driven strong comparable sales growth in recent years, even as inflation drained diners’ wallets.
Overall, the fast food giant spends a lot of money on marketing and advertising to maintain its brand recognition and affinity. McDonald’s spends more than $4 billion each year on marketing investments, three to four times more than its closest competitor, Kempczinski told investors Wednesday.
But McDonald’s could find some of its competitors increasing their promotional spending next year. Low-income consumers visiting restaurants less frequently means some fast-food chains will turn to limited-time deals and menu items to drive traffic.
McDonald’s may have to decide whether increasing its traffic in the short term is worth the potential long-term consequences.
“It will be interesting to see how [McDonald’s] suits a potentially more promotional environment, and if you are willing to sacrifice the short term to continue driving the [long-term] brand positioning,” Citi Research analyst Jon Tower wrote in a note to clients.
Much of Wednesday’s investor presentations focused on McDonald’s plans to accelerate the opening of new restaurants. The company aims to have a global presence of at least 50,000 locations by 2027 in its fastest expansion to date.
But history shows that aggressive expansion usually doesn’t end well for McDonald’s. Sales often decline after new restaurants cannibalize customers from existing locations, hurting franchisees’ profitability and distracting attention from other parts of the business, such as menu innovation.
Investors are largely skeptical of restaurants with expansion plans in 2024 and beyond, given the current economic uncertainty and unstable consumer sentiment, Barclays analyst Jeffrey Bernstein said in a note to clients. But he also noted that McDonald’s comes from a position of strength and has spent the last few years remodeling locations rather than building new ones.
Bernstein is not the only analyst who has an optimistic view of McDonald’s expansion strategy.
“Unit growth from an already remodeled existing unit base, where the core menu is driving high profitability, and towards only the best franchisees is a change from previous regimes,” wrote JP Morgan Securities analyst, John Ivankoe, in a research note.
And executives reassured investors on Wednesday.
“We’ve learned the lesson of quantity over quality…We’ve spent the last year, country by country, literally city by city, making sure we were confident in where we saw growth opportunities and how we could actually take advantage of growth opportunities.” teams on the field to be able to execute it,” Kempczinski said.