The Ronald McDonald balloon floats down Central Park West throughout the Macy’s Thanksgiving Day Parade on November 23, 2023, in Recent York City.
Gary Hershorn | Corbis News | Getty Images
McDonald’s executives painted a rosy portrait of the fast-food giant’s strength and talent to realize long-term goals at its investor day, but the corporate faces some potential road bumps heading into 2024.
The event, held Wednesday, featured few surprises and a few latest long-term targets, and Wall Street’s response has been muted. Shares of McDonald’s have been roughly flat because the investor day presentations. Hit by concerns in regards to the broader economy and fears over weight-loss drugs, McDonald’s stock has risen just 8.7% this yr, trailing the S&P 500‘s gains of 19%.
Those fears in regards to the business haven’t stopped the fast-food powerhouse from setting ambitious goals.
McDonald’s plans to open nearly 9,000 latest restaurants by 2027, including 900 locations within the U.S. Its larger global footprint will boost the corporate’s sales and help meet higher demand for its Big Macs and McNuggets, in accordance with executives.
But those ambitious plans intersect with an uncertain global economy. China, McDonald’s second-largest market by variety of locations, continues to be struggling to bounce back from the pandemic. Turmoil within the Middle East has hurt McDonald’s sales in that region — and a few markets outside of it. And in its home market, recession predictions have not panned out yet, but some economists think a downturn should still come.
Listed below are the three top risks facing McDonald’s heading into 2024:
1) Weakened low-income consumer
In late January, CEO Chris Kempczinski said the corporate was predicting a “mild to moderate” recession within the U.S. and a “deeper and longer” downturn in Europe in 2023. But his predictions have not come true.
“Here we’re a yr later, and, boy, was I unsuitable,” Kempczinski said on the investor day. “So I’m a bit of leery to make any predictions about next yr because I feel we’re continuing to see that the patron has been very resilient.”
Though a recession hasn’t hit, Kempczinski also reminded investors that McDonald’s saw low-income consumers pulling back on their spending last quarter. Other corporations, equivalent to Walmart, have also called out that trend.
While McDonald’s advantages from high- and middle-income consumers trading right down to its Big Macs and french fries, low-income diners are still a crucial a part of its business.
“We walked away from the investor day more concerned than before on the state of low income consumer,” Bernstein analyst Danilo Gargiulo wrote in a note to clients.
2) Rivals’ promotional spending
Ever because the pandemic, McDonald’s has shifted away from using limited-time menu items to attract in customers. As a substitute, its marketing has centered on the brand itself, like selling core menu items through promotions based on celebrities’ favorite orders. That approach has fueled strong same-store sales growth lately, whilst inflation stretched diners’ wallets.
Generally, the fast-food giant spends a whole lot of money on marketing and promoting to keep up its brand recognizability and affinity. McDonald’s spends over $4 billion every yr on marketing investments, three to 4 times greater than its nearest competitor, Kempczinski told investors on Wednesday.
But McDonald’s might find a few of its competitors stepping up their promotional spending next yr. Low-income consumers visiting restaurants less ceaselessly means some fast-food chains will lean into deals and limited-time menu items to drive traffic.
McDonald’s can have to determine if boosting its short-term traffic is definitely worth the potential long-term consequences.
“It would be interesting to see how [McDonald’s] adapts to a potentially more promotional environment, and whether it is willing to sacrifice the short term to proceed to drive the [long-term] brand positioning,” Citi Research analyst Jon Tower wrote in a note to clients.
3) Accelerated expansion plans
Much of Wednesday’s investor presentations focused on McDonald’s plans to speed up latest restaurant openings. The corporate goals to have a worldwide footprint of a minimum of 50,000 locations by 2027 in its fastest expansion ever.
But history shows that aggressive expansion typically doesn’t end well for McDonald’s. Sales often slide after latest restaurants cannibalize existing locations’ customers, hurt franchisees’ profitability and distract from other parts of the business, equivalent to menu innovation.
Investors are largely skeptical of restaurants with plans to expand in 2024 and beyond, given ongoing economic uncertainty and the shaky consumer, Barclays analyst Jeffrey Bernstein said in a note to clients. But he also noted that McDonald’s is coming from a position of strength and has spent recent years remodeling locations fairly than constructing latest ones.
Bernstein is not the only analyst with an optimistic view on McDonald’s expansion strategy.
“Growing units off of an already remodeled existing unit base, where core menu is driving high profitability, and towards only the perfect franchisees is a change vs prior regimes,” J.P. Morgan Securities analyst John Ivankoe wrote in a research note.
And executives reassured investors Wednesday.
“We have learned the teachings of quantity over quality … We have spent the last yr, country by country, literally city by city, ensuring we were confident about where we saw the expansion opportunities and the way we could even have the teams out in the sphere to have the opportunity to go execute it,” Kempczinski said.
