Grocery & Restaurants

McDonalds credited sales growth to menu price hikes that it worked to implement with franchisees

Net sales rose 13% to $6.01 billion thanks to “menu price hikes.” “Net sales rose 13% to $6.01 billion, missing expectations of $6.03 billion. The company’s same-store sales climbed 12.3% from a year ago and 10.8% on a two-year basis. Menu price hikes that were implemented to combat rising costs helped boost sales. In McDonald’s home market, same-store sales rose 7.5%, topping StreetAccount estimates of 6.9%. On a two-year basis, U.S. same-store sales climbed 13.4%. In addition to higher menu prices, the company credited its growing loyalty program and promotional menu items like the McRib for the market’s strong performance. McDonald’s loyalty program counts 21 million members as active users.” (CNBC, 1/27/2022)

McDonalds credited strong sales and average sale amount growth “driven primarily by strategic menu price increases.” “Kevin Ozan, CFO: In the U.S., we finished the year strong with comp sales up 7.5% for the quarter and over 13% on a 2-year basis. We saw positive comps across all dayparts, which are still benefiting from average check growth, driven primarily by strategic menu price increases. Our MCD pillars continued to drive U.S. comps as strong marketing efforts behind McRib and the Crispy Chicken Sandwich were complemented with digital adoption by our customers.” (McDonalds Corp Q4 2021 Earnings Call, 1/27/2021)

McDonalds’ CFO said franchisees “decide pricing” but were advised by a “third party” that helped “take small increments of pricing at various times.” “Kevin Ozan, CFO: From a pricing perspective, our franchisees, I think you know they obviously decide pricing for their individual restaurants. They’re advised by a third party, and the pricing mechanism or methodology that’s used is a consumer-based research approach. We take into account market conditions, economic environment, competitive landscape, et cetera, and generally try to take small increments of pricing at various times versus taking a lot at one time.” (McDonalds Corp Q4 2021 Earnings Call, 1/27/2021)

McDonalds said pricing was up little over 6%, compared to a 4% increase in commodity costs.“Kevin Ozan, CFO: From a pricing perspective, in the U.S. in 2021, consistent with what I had been saying kind of for the first 9 months, we ended up with pricing for the year a little over 6% or so. Again, that was to deal with the 4% commodity price increases or food and paper increases we had as well as labor inflation and just the competitive environment. That was relatively similar to where food-away-from-home was for the year in 2021.” (McDonalds Corp Q4 2021 Earnings Call, 1/27/2021)

McDonalds said despite price increases customers believed the company was providing a good value for money. “Kevin Ozan, CFO: And really, the most important thing that we’re trying to balance is cost pressures with making sure that we provide good value to our customers and that our customer ratings on value remain high. We do keep a close eye on that. Our customer ratings have continued to score well on the idea of providing good value for money, and that’s a really important metric for us because, obviously, a lot of our customers are looking to make sure that they’re getting value as inflation rises. So that’s some of the pricing dynamics that go on.” (McDonalds Corp Q4 2021 Earnings Call, 1/27/2021)

McDonalds disappointed investors because it raised wages for workers 

McDonalds reported $1.64 billion in net income in Q4 2021, but underperformed expectations because of higher costs. “McDonald’s on Thursday reported quarterly earnings and revenue that missed analysts’ expectations as higher costs weighed on its profits. It marks the fourth earnings miss for the company in eight quarters. Shares of McDonald’s fell slightly in afternoon trading….The burger chain reported fourth-quarter net income of $1.64 billion, or $2.18 per share, up from $1.38 billion, or $1.84 per share, a year earlier. Excluding charges related to the sale of McD Tech Labs to IBM and other items, McDonald’s earned $2.23 per share, falling short of the $2.34 per share expected by analysts surveyed by Refinitiv.” (CNBC, 1/27/2022)

Operating costs and expenditures rose by 14% driven by rising compensation and more expensive ingredients.“Operating costs and expenses rose by 14% in the quarter. Those higher costs include wage hikes by McDonald’s and many of its franchisees to attract and retain workers in a tough labor market. The ingredients for menu staples like Big Macs and McNuggets are also becoming more expensive.” (CNBC, 1/27/2022)

McDonald’s CEO said there had been labor cost inflation in the “mid-teens.” “Christopher Kempczinski, CEO: I think for us, part of what we’ve needed to do in 2021 to be able to leave the year with expanded roster size, as you’ve certainly seen that there has been labor inflation. And we announced, as you know, back in April of last year, a move from McOpCos, where we were going to take up the average wage in McOpCos, we are — had about low teens, I’d say, increases at that point. We went up probably a tick higher as the year progressed on that in McOpCos. And our franchisees similarly saw inflation, call it, in the mid-teens from a labor standpoint.” (McDonalds Corp Q4 2021 Earnings Call, 1/27/2021)

McDonald’s CEO said the company worked with franchisees on benefits like paid leave, tuition reimbursements, and employee value propositions “beyond wages.” “Christopher Kempczinski, CEO: One of the things that we also did though, and I think Joe and the U.S. team did a lot of good work with our franchisees on this, is talking about our employee value proposition, and beyond wages, other things that we can be doing to make sure that we’ve got the best proposition to get people in our restaurants. Things like paid time off, Archways and what we do around tuition reimbursement. And just a focus on making sure the reward and recognition is there. All of those things cumulatively, wages, focus on the employee value proposition and just engaging with the crew is what allowed us to make the progress.” (McDonalds Corp Q4 2021 Earnings Call, 1/27/2021)

McDonald’s CFO suggested large wage increases were now past and the company would not have a “one time big bang.” “Kevin Ozan, CFO: Yes. So to Chris’ point, we had kind of this one time, if you will, adjustments or concerted effort to adjust people’s wages. Right now, there isn’t a specific plan to have a one time event like that in 2022. But what we do need to do is continue to make sure that our folks are being paid at a similar level compared to industry, as the intent was last year. So that will continue to have some pressure, but we won’t have kind of the onetime big bang, if you will.” (McDonalds Corp Q4 2021 Earnings Call, 1/27/2021)