Offering cheap meals is one of McDonald’s main focuses. Commodity inflation puts pressure on the company to increase the prices or it squeezes the operating margins. In the U.S., the company uses the Food-Away-From-Home Index (or FAFH). It’s published by the Bureau of Labor Statistics.
McDonald’s uses the index to make pricing changes. The company targets its price increase in line or below this index. The index was 2.5% as of September—compared to the company’s price increase at 2% during the quarter.
For the European market, the price increase averaged 2% year-over-year (or YoY). When the U.S. dollar is stronger, the Europe segment negatively impacts the company. In the third quarter, the strong U.S. dollar impacted earnings per share (or EPS) negatively by $0.01. It impacted it by $0.09–$0.10 on a year-to-date (or YTD) basis.
This pricing strategy outlines that its customers are price sensitive. In comparison, Chipotle Mexican Grill’s (CMG) same-store sales increased by ~19%, even though the menu price increase was ~6%.
Changing customers’ perception
We learned in our McDonald’s (MCD) business overview series that the company has been facing negative perceptions towards its food. Its food is often dubbed as “junk.” Changing this perception is the first step towards increasing McDonald’s guest count—traffic.
During the third quarter, McDonald’s launched its “Our food. Your questions” campaign. It enables communication between McDonald’s and its customers. The company stated that it’s using this platform to communicate facts. It’s also using the platform to handle “misperceptions about the freshness and quality” of its ingredients.
You may consider a broader portfolio containing restaurant stocks—like the Consumer Discretionary Select Sector SPDR Fund (XLY). XLY includes MCD and CMG. It also holds different restaurant concept stocks like casual dining—Darden Restaurants (or DRI), fast food—Yum! Brands (YUM), and café—Starbucks (SBUX).
In the next part of the series, we’ll discuss McDonald’s bottom line performance in the third quarter.