The Ronald McDonald balloon floats down Central Park West throughout the Macy’s Thanksgiving Day Parade on November 23, 2023, in New York City.
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McDonald’s executives painted a rosy portrait of the fast-food large’s energy and skill to realize long-term targets at its investor day, however the firm faces some potential highway bumps heading into 2024.
The occasion, held Wednesday, featured few surprises and a few new long-term targets, and Wall Street’s response has been muted. Shares of McDonald’s have been roughly flat since the investor day shows. Hit by issues about the broader financial system and fears over weight-loss medicine, McDonald’s inventory has risen simply 8.7% this yr, trailing the S&P 500‘s beneficial properties of 19%.
Those fears about the enterprise haven’t stopped the fast-food powerhouse from setting bold targets.
McDonald’s plans to open almost 9,000 new eating places by 2027, together with 900 areas in the U.S. Its bigger international footprint will increase the firm’s gross sales and assist meet increased demand for its Big Macs and McNuggets, in line with executives.
But these bold plans intersect with an unsure international financial system. China, McDonald’s second-largest market by variety of areas, remains to be struggling to bounce again from the pandemic. Turmoil in the Middle East has damage McDonald’s gross sales in that area — and a few markets exterior of it. And in its residence market, recession predictions have not panned out but, however some economists assume a downturn should come.
Here are the three top risks facing McDonald’s heading into 2024:
1) Weakened low-income shopper
In late January, CEO Chris Kempczinski said the firm was predicting a “delicate to reasonable” recession in the U.S. and a “deeper and longer” downturn in Europe in 2023. But his predictions have not come true.
“Here we are a yr later, and, boy, was I improper,” Kempczinski mentioned at the investor day. “So I’m just a little leery to make any predictions about subsequent yr as a result of I believe we’re persevering with to see that the shopper has been very resilient.”
Though a recession hasn’t hit, Kempczinski additionally reminded buyers that McDonald’s noticed low-income customers pulling again on their spending final quarter. Other firms, comparable to Walmart, have additionally known as out that development.
While McDonald’s advantages from high- and middle-income customers buying and selling all the way down to its Big Macs and french fries, low-income diners are nonetheless an essential a part of its enterprise.
“We walked away from the investor day extra involved than earlier than on the state of low revenue shopper,” Bernstein analyst Danilo Gargiulo wrote in a word to shoppers.
2) Rivals’ promotional spending
Ever since the pandemic, McDonald’s has shifted away from utilizing limited-time menu objects to attract in clients. Instead, its advertising and marketing has centered on the model itself, like promoting core menu objects by way of promotions primarily based on celebrities’ favourite orders. That method has fueled sturdy same-store gross sales development in recent times, at the same time as inflation stretched diners’ wallets.
In common, the fast-food large spends some huge cash on advertising and marketing and promoting to keep up its model recognizability and affinity. McDonald’s spends over $4 billion yearly on advertising and marketing investments, three to 4 occasions greater than its nearest competitor, Kempczinski informed buyers on Wednesday.
But McDonald’s would possibly discover a few of its rivals stepping up their promotional spending subsequent yr. Low-income customers visiting eating places much less often means some fast-food chains will lean into offers and limited-time menu objects to drive visitors.
McDonald’s might must resolve if boosting its short-term visitors is price the potential long-term penalties.
“It can be attention-grabbing to see how [McDonald’s] adapts to a probably extra promotional atmosphere, and whether it is keen to sacrifice the quick time period to proceed to drive the [long-term] model positioning,” Citi Research analyst Jon Tower wrote in a word to shoppers.
3) Accelerated enlargement plans
Much of Wednesday’s investor shows targeted on McDonald’s plans to speed up new restaurant openings. The firm goals to have a world footprint of no less than 50,000 areas by 2027 in its quickest enlargement ever.
But historical past reveals that aggressive enlargement usually does not finish nicely for McDonald’s. Sales usually slide after new eating places cannibalize present areas’ clients, damage franchisees’ profitability and distract from different elements of the enterprise, comparable to menu innovation.
Investors are largely skeptical of eating places with plans to increase in 2024 and past, given ongoing financial uncertainty and the shaky shopper, Barclays analyst Jeffrey Bernstein mentioned in a word to shoppers. But he additionally famous that McDonald’s is coming from a place of energy and has spent latest years transforming areas quite than constructing new ones.
Bernstein is not the solely analyst with an optimistic view on McDonald’s enlargement technique.
“Growing items off of an already reworked present unit base, the place core menu is driving excessive profitability, and in direction of solely the finest franchisees is a change vs prior regimes,” J.P. Morgan Securities analyst John Ivankoe wrote in a analysis word.
And executives reassured buyers Wednesday.
“We’ve discovered the classes of amount over high quality … We’ve spent the final yr, nation by nation, actually metropolis by metropolis, ensuring we have been assured about the place we noticed the development alternatives and the way we might even have the groups out in the subject to have the ability to go execute it,” Kempczinski mentioned.