McDonald’s Beefs Up Value as Rising Gas Prices Drain Customers’ Wallets

Despite spiking energy prices from the Iran war, the S&P 500 has climbed 11% in the past month, much to Wall Street’s delight.

It’s a different story on Main Street, however. The latest evidence: McDonald’s, which said Thursday that, when it comes to rising gas prices at the pump, customers are decidedly not loving it.

Running Out of Gas 

First, the good news. In the first quarter, McDonald’s managed better-than-expected revenue (up 9% from last year to $6.5 billion) and profit (net income rose more than 5% to $2 billion). Same-store sales rose 3.8% and, in the fast food chain’s US home market, climbed 3.9%, bolstered by customers spending more per visit.

Then, there’s the not-so-good. CFO Ian Borden warned on an earnings call Thursday that the second quarter looks less rosy. Sales fell narrowly in April, he said, as higher gas prices weighed on both lower-income Americans and franchisees’ margins. The average gas price nationwide was $4.56 on Thursday, up from $2.98 on February 28, the day the US and Israel attacked Iran. “When you have elevated gas prices, which is the core issue that we’re all seeing in the press right now — gas prices, inflation on that — that is going to disproportionately impact low-income consumers,” CEO Chris Kempczinski added. Others have issued similar warnings, though McDonald’s has a plan to make the best of what Kempczinski called a “challenging environment” in which consumer spending “may be getting a little bit worse”:

• Other restaurant companies, including Chipotle, Domino’s and Shake Shack, reported softening sales in March, too. Kraft Heinz CEO Steve Cahillane told The Wall Street Journal earlier this week that “consumers are literally running out of money toward the end of the month.” 
• McDonald’s mantra is value, something executives hope to leverage in enticing strapped consumers who are increasingly aware of where their money goes furthest. Last month, it added several items under $3 to its McValue menu.

Performance Review: Kempczinski was especially unhappy with himself when it came to McDonald’s company-owned restaurants, where margins fell 25% from a year ago to $59 million. “Either I fix that, or we’re going to find franchisees who could run the restaurant better,” he said.