McDonald’s franchisee profitability is down 10% from its highs. | Photo courtesy of McDonald’s.
Years of rising costs and weak sales are taking a bite out of franchisee profitability.
Or so says Chris Kempczinski, CEO of McDonald’s. Speaking on the CNBC program Squawk Box this week, Kempczinski acknowledged that cash flow among the chain’s operators are down 10% compared with their highs since the pandemic.
“We’re probably off maybe 10% from where our franchisees had all-time cashflows,” he said.
But some areas are worse, particularly in California, where fast-food chains are required to pay workers at least $20 an hour.
“There are definitely pockets of the market, like in California, where there is much more pressure on that,” he said.
The comments highlight the concern, not just for McDonald’s but for many of the chain’s fast-food competitors, as they fight an ongoing price war.
Post-pandemic inflation hammered a lot of restaurants, forcing them to raise prices more than 30% to cover higher cost for food and labor. While that inflation has eased, for the most part, consumers are now actively cutting back on restaurant visits, at least because of pricing.
That has diminished industry profitability broadly. Yet it’s a particular challenge for fast-food chains that are paying higher minimum wages in some states and a higher-than-minimum in California.
A year-long value war has put more pressure on that profitability, without bringing in the traffic that many restaurants hoped for. And now McDonald’s this week opted to intensify that price war by agreeing to lower the prices on a broad range of combo meals.
Because of those profitability challenges, McDonald’s agreed to provide some assistance to franchisees when those lower prices lead to losses.
“That’s part of why we wanted to step in and coinvest with them, to do this Extra Value Meal program, to show that we’re in it together,” Kempczinski said. With the cost pressures franchisees have, he added, “we’re also not asking them to do everything on pricing. We’re willing to step in.”
McDonald’s and its operators have said that they believe they have more wherewithal than their competitors to take an aggressive step such as this. The company has higher average-unit volumes and a more stable franchise base than almost any franchise restaurant chain in the country.
At the same time, however, Burger King, Wendy’s and Jack in the Box all provide deeper discounts on combo meals currently than does McDonald’s—which might keep them from responding to the company’s Extra Value Meal strategy at all.
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