McDonald’s Prices Make Me Grimace. Are Consumers Fed Up?Published: May 17, 2024 at 12:30 a.m. ET
By
Jack Hough
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Prices for a McDonald’s meal are triple what they were 30 years ago, outpacing inflation. ANTHONY DEVLIN/GETTY IMAGES
I would like to report an attempted cheeseburglary. The McDonald’s near me wants $9.19 for two cheeseburgers, a medium fries, and medium soda. Thirty years ago that same spread—known to meal deal fans as the No. 2—went for $2.99. I’d ask for extra pickles on the side, receive a kiddie cup half full of them, and construct what tasted like two pickle sandwiches with a thin rumor of beef. Sometimes I’d smuggle the whole affair into a $3 matinee of, say, Ace Ventura: Pet Detective. No girlfriend, if you can believe it, so it was a cheap date.
But this isn’t about my love life. It takes $6.36 today to match the buying power of $2.99 back when Jim Carey as Ventura first challenged audience preconceptions about the use of buttocks ventriloquism in an interrogation scene. That’s going by the U.S. government’s online inflation calculator. So why has the price of a two cheeseburger meal tripled rather than doubled? McDonald’s , it seems, has been quietly ditching discounts and pushing upmarket all these years.
Maybe it pushed too far. At the end of last month, McDonald’s reported U.S. same-store sales growth of 2.5% for the first quarter, but said that its second quarter was off to a flattish start.
This past week, it confirmed that it will launch a limited-time $5 meal starting June 25. It includes either a McChicken or McDouble sandwich, a four-piece chicken nuggets, fries, and a drink. The shares, meanwhile, are down 8% year to date, bucking an 11% gain for the S&P 500 index.
Is this a sign of consumer stress? Maybe. Oreo maker Mondelez International has called out increasing price sensitivity; and ketchup king Kraft Heinz, a pullback by low-income shoppers. In restaurants, UBS expects more promotional activity in the second half of this year, and says there has been a performance bifurcation, with chains that have the most low-income exposure faring worse. To its point, Jack In the Box, one of the names on UBS’ list of companies most exposed to lower-income households, has seen shares sink 34% this year. Chipotle Mexican Grill, which skews high-income, is up 38%.
But there are some notable exceptions. Starbucks skews posh. Those shares are down 20% this year, including a one-day, 16% plunge after quarterly results. Same-store sales swung so violently from growth to decline that BofA Securities said the closest historical comparison is Chipotle following a 2015 E. coli outbreak. BofA sees little sign of economic stress in average check sizes or add-ons. Its best guess is that Starbucks has been hurt by social-media boycotts related to Israel and Gaza.
Buy Starbucks on the dip, BofA recommends, citing the valuation—recently 21 times projected earnings for the fiscal year ending September.
Not so fast, says William Blair analyst Sharon Zackfia, who downgraded Starbucks from Outperform to Market Perform, saying there are more questions than answers for now. “There’s a big head-scratcher going on,” she says. “Is it price? Is it speed?”
Zackfia’s top pick in restaurants is Chipotle. “I love that they’ve discovered the drive-through and that their next 3,000 stores are going to be higher [return on investment] than their first 3,000,” she says. “That’s pretty unusual.” Other favorites include salad chain Sweetgreeen and Cava, a Mediterranean eatery that went public last summer.
What all of these have in common is that fans visit frequently, growth comes by word-of-mouth, and discounts are typically found only through the apps. “They maintain kind of a pricing integrity,” Zackfia says. “They don’t train bad consumer behavior—just looking for that deal.”
Speaking of which, I might just drop a fiver on that new McDonald’s deal next month. No matinee, though. The summer film slate is a snooze, and I’ve retired from burger smuggling.
Let’s turn our attention to electricity. Artificial intelligence needs heaps of it to power the chips that do all the hard thinking, and to cool them. A ChatGPT request uses about 10 times as much power as a Google search. Imagine all the extra wattage that will be required as companies make good on their plans to AI-ify everything in sight. And that’s atop existing, critical demand drivers–like electronic mining for parody cryptocoins.
BofA has done some math on this. Data-center demand for electricity could rise from 1% or 2% of supply today to 8% by 2030. By then, the U.S. could need 70 gigawatts of new generation—the equivalent of adding another Michigan each year. But near-term supply growth is pegged at only 55 to 60 GW, due in part to regulatory, permitting, and political obstacles. Electricity inflation has already been on a tear in recent years.
Gabriele Sorbara, an energy analyst with Siebert Williams Shank, reckons the outlook for AI and power generation bodes well for natural gas, which is used to generate electricity.
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“There are some big estimates out there—up to 30 [billion cubic feet] a day of incremental demand by 2030,” he says. “And we produce around 100 BCF a day, so that’s a huge uplift if those numbers actually materialize.”
BofA writes that for the “big new digital darlings” of AI to win, “the ruddy old real world may have to win first.” It likes utilities like Entergy and Xcel Energy ; commodity stocks like BHP Group and Freeport-McMoRan ; industrials like Caterpillar and Eaton ; and nuclear players like Cameco.
Old Economy sectors recently made up about 15% of the market value of the S&P 500. The average during the 20th century was 40%.
Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron’s Streetwise podcast. |
