McDonald’s investor day signs and top risks in 2024

McDonald’s executives painted a rosy picture of the fast food giant’s strength and ability to achieve long-term goals in its business days, but the company is facing some bumps in the road. towards 2024.

The event, held on Wednesday, revealed a few surprises and some new long-term goals, and Wall Street’s reaction has been mixed. Shares of McDonald’s have fallen sharply since the trading day announcement. Buoyed by concerns about the general economy and fears over weight loss drugs, McDonald’s shares have risen just 8.7% this year, trailing the S&P 500 at 19 %.

Those concerns about the business haven’t stopped the fast food giant from setting ambitious goals.

McDonald’s plans to open nearly 9,000 new restaurants by 2027, including 900 locations in the U.S. Its broad global footprint will increase the company’s sales and help meet the high demand for its Big Macs and McNuggets, according to management.

But those ambitious plans are linked to the uncertainty of the world economy. China, McDonald’s second-largest market by number of locations, is still struggling to recover from the pandemic. The unrest in the Middle East has hurt McDonald’s sales in that region – and some markets abroad. And in his domestic market, the information of the recession has not been fulfilled, but some economists think that a recession may be coming.

Here are the top three threats facing McDonald’s in 2024:

In late January, CEO Chris Kempczinski said the company sees a “mild to moderate” decline in the US and a “lower and longer” decline in Europe in 2023. .But his predictions did not come true.

“Here we are a year later, and, boy, was I wrong,” Kempczinski said on investment day. “I’m hesitant to make any predictions about next year because I think we continue to see the consumer very resilient.”

Although there was no drop, Kempczinski also reminded investors that McDonald’s saw lower-income customers pull back their spending last quarter. Other companies, such as Walmart, have also made that point.

While McDonald’s benefits from upper- and middle-class consumers trading down to its Big Macs and French fries, lower-income diners remain a key segment. his business.

“We walked out of the business day more worried than before on the level of people with low incomes,” wrote Bernstein analyst Danilo Gargiulo in a letter to clients.

Since the pandemic, McDonald’s has moved away from using limited-time items to draw in customers. Instead, its marketing is centered on the brand itself, such as selling key products through promotions based on celebrity endorsements. This trend has fueled strong growth in single-serve purchases in recent years, even as the cost has increased in consumers’ wallets.

In general, most fast food companies spend a lot of money on marketing and advertising to maintain their identity and loyalty. McDonald’s is spending more than $4 billion annually on marketing investments, three to four times more than its nearest competitor, Kempczinski told investors on Wednesday. .

But McDonald’s may get some of its competitors to increase their spending next year. Low-income customers visit restaurants more slowly, meaning some fast-food chains will rely on deals and limited-time items. to buy traffic.

McDonald’s may have to decide if increasing its short-term traffic is worth the long-term effects.

“It will be interesting to see how (McDonald’s) adapts to a more promotional environment, and if it is willing to sacrifice the short term to continue to drive the position (for a long time),” he wrote Citi Research analyst Jon Tower in. a note to customers.

Most of the investor comments on Wednesday focused on McDonald’s plans to accelerate the opening of new restaurants. The company hopes to have a global footprint of at least 50,000 locations by 2027 in its rapid expansion.

But history shows that over-expansion usually doesn’t end well for McDonald’s. Sales often slip after new restaurants crowd out existing customers, hurt business owners’ profits and disrupt other sectors of the economy. the business, such as food innovation.

Investors are largely skeptical of restaurants and plans to expand in 2024 and beyond, due to continued economic and consumer uncertainty, said Barclays analyst Jeffrey Bernstein. in a letter to clients. But he also noted that McDonald’s is coming from a strong position and has spent recent years renovating locations rather than building new locations.

Bernstein isn’t the only analyst with an optimistic view of McDonald’s expansion plans.

“Increasing units from an area that has already been renovated, which is driving a lot of revenue, and only the best franchisee is a change and first management,” JP Morgan Securities analyst John Ivankoe wrote in a research note.

And the management assured investors on Wednesday.

“We have learned the lesson of quantity rather than quality… We have spent the last year, country by country, indeed city by city, and we are confident about what we have seen. growth opportunities and how we can actually get the team out on the field to be able to go into action,” Kempczinski said.