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McDonald's share price surged to all time highs yesterday. Who cares? Well, McDonald's earnings can tell us quite a bit about the economy...
Obviously McDonald's isn't the whole economy, so we'll look at a few other companies too...
There's been a weird dichotomy of earnings so far... Companies keep beating estimates (which isn't that weird when advance estimates are often guided lower explicitly for this purpose) but still, they're reporting pretty good earnings now while evidence for a slowdown ahead keeps stacking up.
McDonald's has been a great example of consistency over the years, and they're not afraid to shout about it continuing...
What's notable about this earnings call is McDonald's consistency, consistency in the strength of our numbers, consistency in the powerful drivers of our business... Let's start with the numbers. At the top line, you only need to know one number, 12.6%.
US comparable sales, 12.6%, IOM comparable sales, 12.6%, IDL comparable sales, 12.6%, and global comparable sales, you guessed it, 12.6%. These results reflects strong consumer demand for McDonald's that we are seeing around the world despite a challenging operating environment and historically low consumer sentiment in many markets.
It's another example of watching what the public do rather than what they say.
Confidence surveys capture the first part of this sentence...
"I'm really worried about the future, my confidence is low..."
But not the second...
"F**k it, let's go to McDonald's anyway"
And when people go to McDonald's, what do they do? Well, luckily for us, Ronald's always watching...
... we do see some of the pressures that give us reason to believe that our view on the macro outlook is accurate, which is, one, we are seeing a slight decrease in units per transaction. So things like did someone add fries to their order, how many items are they buying per order, we're seeing that go down in most of our markets around the world slightly, but it's still going down.
And then the other thing is we continue to monitor very closely the acceptance of our pricing. I'm really proud of how our system has executed pricing in light of the double-digit inflation that we have been experiencing. But we are seeing, in some places, resistance to pricing, more resistance than we saw at the outset.
Consumer pushback against higher prices is no surprise at this point, but it's important to remember that we're going from zero pricing resistance to some resistance.
Any company with pricing power has been pushing pricing for a while now, even if that meant sacrificing sales volumes. i.e. they're selling fewer units, but the price hikes are more than compensating for it.
We talked about this last year, focusing on PepsiCo. The TL;DR
Pepsi: "We'll keep raising prices until you stop paying them" 👇
(PepsiCo repeated the trick this quarter - "Average prices jumped 16% in the first quarter, while organic volume slipped 2%" )
There's a definite slowdown story for McDelivery too...
... I think it is fair to say that the growth of delivery whether that's a function of it just being at a large number now or if it might, in fact, be some of the consumer pressures, but the growth of delivery has certainly slowed.
There is still growth, but it's not nearly the growth that we saw previously. So I think as we look at it, delivery is going to remain an important part of the business, but it's certainly not going to be the degree of growth driver that it has been historically
And McDonald's still sees a recession ahead:
I would say our view remains unchanged, which is our base expectation is for a mild recession in the U.S.
In Europe, we expected it to be more challenging ... compared to the U.S., I think more challenging in Europe. So our base expectation from a macro standpoint for 2023 is unchanged.
Now, McDonald's aren't the only ones pushing price. Chipotle saw profit margins jump in the last quarter 👇
Chip also mention lower delivery volumes, which is worth noting, but the bigger picture is one of higher prices ("about 10% higher in the first quarter versus last year, but they will be only about 5% higher in the second quarter as previous price hikes roll off")
While input costs are falling...
Food, beverage and packaging costs in the first quarter were 29.2% of total revenue, a decrease of 180 basis points compared to the first quarter of 2022
Restaurant level operating margin was 25.6% compared to 20.7% in the first quarter of 2022. The improvement was primarily due to the benefit of sales leverage and, to a lesser extent, lower avocado prices and lower delivery expense due to lower delivery volumes.
These decreases were partially offset by higher inflation across several food costs and to a lesser extent, wage inflation.
Which ties in with this...
Another chink in the armour of the strong labour market narrative.
Now, there's a lot of chatter lately about excuseflation, which the excellent Sam Rines has been covering for at least a year.
Plenty of commentators have jumped aboard the blame train and berated corporates for raising prices. While this is an entirely valid observation, please contain your moral outrage until the end of this note.
First up, it's not all one way traffic...
I think the one thing, David, that is different now is labor rates are much, much, much higher. And our menu pricing hasn't really stayed caught up all the way with the labor over the last few years.
And in fact, the biggest move that we made in the second quarter of 2021, we basically raised wages by 15% and only raised price by 4%. So we basically offset the dollar value of that. We didn't try to protect the margins and certainly didn't try to protect the labor line at all. So I think there's been a bit of a dislocation there...
Even though margins are clearly back above the pre-pandemic trend, there's still room for improvement 👇
Overall, there's little doubt that corporate profits have been exceptional but that seems like old news now...
This chart shows the trends more clearly, a slowdown of everything is expected this year before growth recovers in 2024... 👇
Surely it's going to be hard to price gouge in this environment? And is price gouging even the right term for what we've been seeing? Not for me...
I mean, one man's price-gouging is just another man's price optimisation strategy to find the true breaking point of customer demand elasticity...
Too economisty I know...
In financial markets we call(ed) it price discovery - the corporate & financial world is basically a massive, continuous experiment to see the price people will pay for stocks (or products and services) in real time.
In any case, aren't we all supposed to 'make hay while the sun shines'?
If you got a pay rise from your firm over the past couple of years, or moved jobs to get one, are you also GUILTY of the heinous crime of price-gouging?
Of course not! Everything's cyclical. Massive monetary and fiscal expansion wasn't sustainable, so everyone grabs their share while they can.
The monetary punchbowl left the party long ago, and the fiscal effect is gradually being drained too, potentially with spending cuts ahead... ? 👇
Which is why we're feeling pretty paranoid about the next 12 months, the air of complacency, and transitory green shoots of illusion that keep sprouting 👇
Nearly forgot, the Dallas Fed manufacturing survey comments are always refreshingly honest - themes that will be familiar to regular readers 👇