If the key to understanding the world economy may be through its stomach, the latest financial results from the world’s largest fast food chain suggests this is a moment of global indigestion.
McDonald’s reported a mediocre first quarter Friday, announcing that sales at outlets open at least a year fell across the globe, including a 1.2 percent drop in the United States, 1.1 percent down in Europe, and a 3.3 percent drop in Asia, the Middle East and Africa. The details of the report, and executives’ comments in a conference call with analysts, show what economic risks policymakers should be fretting about and which they might wish to put on the back burner.
In all parts of the globe, customers seem to be apprehensive about spending money, McDonald’s executives said in a conference call. An analyst asked whether the weak results are about general economic weakness, or if there are more “competitive issues or any structural issues that are limiting the global eating out market from growing?”
“I don’t know if I would call them structural,” said Donald Thompson. “I would call them basically just human behavior and consumer behavior. Consumer confidence is down in many of the markets around the world, and as a result, when consumer confidence is down, clearly then discretionary spending is down.”
And that general economic malaise is, in turn, putting downward pressure on the company's ability to charge higher prices, and hence its profit margin. Operating income fell 1 percent over the past year as revenues rose 1 percent, reflecting that squeeze.
Part of that has come about because McDonald's is emphasizing its offerings as a “value” offering for consumers, such as by emphasizing its dollar menu at U.S. stores. (Another factor has been efforts to launch new products at discount prices with the hope of raising them later; the executives specifically mentioned “McWraps,” sandwiches which are being sold for around $2 in an effort to attract first-time buyers but will be closer to $4 in the future.
But the bigger story behind McDonald’s falling margins is that weak demand, driven by high unemployment in much of the world, means that McDonald’s feels no real ability to raise its prices, even as many of its costs are stable or rising. The reason for falling margins, said Thompson, “is because consumers are very sensitive to price. So we don’t have the inflationary environment or the consumer sentiment environment to go out and take the kind of price increases that historically we did.”
It’s no one thing driving it; rather, it is a mix of things reflecting the overall economic environment: Cash-strapped consumers buying more value items off the dollar menu for which margins are low than premium products; fixed costs like management salaries, equipment depreciation, and rents that are stable to rising; and an inability to hike prices without seeing customers flee.
“We do believe this is not a structural kind of change,” Thompson continued. “We think that it is based upon the economy at this point.”
In other words, what McDonald’s shows is one of the central realities shaping the economy: As long as growth remains depressed and unemployment high, whether in the United States or around the world, inflation probably isn’t the thing that policymakers need to stay awake at night worrying about.