McDonald’s is facing the brutal aftermath of price increases

It appears that McDonald’s ( MCD ) is having a rough year so far.

After warning investors in April that it is seeing “flat to declining” traffic in its stores due to consumers pulling back on their spending, McDonald’s is now facing an unusual decline in sales, which hasn’t happened since 2020.

In its second-quarter earnings report for 2024, McDonald’s revealed that its U.S. sales decreased by 0.7% compared to the same time period in 2023, which the company claims was driven by “negative comparable guest counts.”

McDonald's price hikes frustrate customers

McDonald’s global comparable sales decreased by 1%, while its net income shrunk by 12% year-over-year.

“Beginning last year, we warned of a more discriminating consumer, particularly among lower-income households,” said McDonald’s CEO Chris Kempczinski during an earnings call discussing the report. "And as this year progressed, those pressures have deepened and broadened. The QSR sector has meaningfully slowed in the majority of our markets, and industry traffic has declined in major markets like the US, Australia, Canada, and Germany.”

Kempczinski also revealed that price increases for menu items across the company’s fleet of restaurants contributed to deterring customers who increasingly prefer to eat at home more.

Related: McDonald’s new $5 Meal Deal isn’t going as planned (so far ...)

The average price of a McDonald’s menu item has increased by roughly 40% since 2019, so it is no surprise that consumers are pursuing other options for quick meals.

“Over the last several years, our system has sustained significant inflationary cost increases ranging from 20% to 40% depending on the market,” said Kempczinski. “As we absorb these cost increases in partnership with our franchisees, we look for ways to protect restaurant profitability via productivity efforts and selective price increases. These price increases disrupted long-running value programs and led consumers to reconsider their buying habits.”

McDonald's struggles to win back customers with $5 Meal Deal

McDonald’s recently released a $5 Meal Deal in late June. The deal allows consumers to purchase a $5 meal that consists of a McChicken or a McDouble, four-piece chicken nuggets, fries, and a drink. The meal will only be available for a limited amount of time, and its goal is to help lure back frugal customers.

After a BTIG analyst conducted a series of franchise checks earlier this month, revealing that the deal had failed to significantly boost foot traffic at McDonald’s restaurants, Kempczinski clarified during the call that the deal had “performed and done exactly” what the company wanted it to do.

He did, however, claim that even though the deal has “improved brand perceptions around value and affordability” and connected with lower-income customers, it has yet to result in higher sales.

Related: Chipotle CEO finally addresses biggest complaint from customers

“We wanted to see a shift in guest counts to drive both the short- and long-term health of the business, and ultimately, I believe, in guest count-led growth,” said Kempczinski. “And while it's begun to do that, it hasn't yet translated into sales.”

McDonald’s is extending its $5 Meal Deal into August and may extend it even longer as it battles declining sales.

“Performance is weaker than expected. Obviously, the concern that through inflation, McDonald's core customers, typically the budget conscious, have to some degree been priced out,” said long-time analyst Stephen Guilfoyle on TheStreet Pro .

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Fast-food prices have increased significantly in recent years, and most companies have blamed the price hikes on inflation.

According to a recent report from the Roosevelt Institute, over the past decade, fast-food prices have increased by almost 47%, compared to 28.7% for the average of all prices. Also, in 2023 alone, fast-food restaurants charged prices that were 27% higher than their production costs.

These increased costs have encouraged most consumers to tighten their spending on fast food.

A recent survey from LendingTree, 62% of Americans said they eat less fast food due to high prices, and 56% said they opt to make food at home when they want an easy and cheap meal.

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