McDonald's franchise earnings have suffered significant setbacks, particularly in California
In a move aimed at remaining competitive, McDonald's has decided to lower the prices on a broad range of combo meals. This strategic move comes in the midst of an ongoing price war among fast-food chains, a situation that has been putting pressure on industry profitability for over a year.
The price war was highlighted by comments made by McDonald's CEO, Chris Kempczinski, during an interview on CNBC's Squawk Box this week. Kempczinski stated that Burger King, Wendy's, and Jack in the Box currently offer deeper discounts on combo meals than McDonald's, a fact that might not prompt a response from McDonald's due to their deeper discounts.
However, McDonald's is not backing down. The company believes it has more financial resources than its competitors to take aggressive steps like lowering prices. This is particularly important given the post-pandemic inflation that has forced restaurants to raise prices more than 30%.
Despite these challenges, McDonald's has a higher average-unit volume and a more stable franchise base than most quick-service restaurant chains. The company financially supports some franchise operators in the United States, particularly smaller, independent franchisees, to help lower the prices of combo meals. In cases where lower prices lead to losses, McDonald's has agreed to provide assistance to franchisees.
Kempczinski emphasized that McDonald's is "in it together" with franchisees. This sentiment is crucial, especially in light of the fact that cash flow among McDonald's operators is down 10% compared to their highs since the pandemic.
The ongoing price war is a concern not just for McDonald's but for many of its fast-food competitors. Some areas, particularly California, are experiencing more pressure due to higher labor costs, as fast-food chains in California are required to pay workers at least $20 an hour.
This news was published by Restaurant Business, a publication that requires membership for full access to all content. The article was written by a journalist specializing in quick-service restaurants, finance, mergers and acquisitions, and the economy. The journalist's approachable and straightforward style makes the complexities of the fast-food industry accessible to a general audience.
