Not lovin’ it: Australians enticed by premium rivals as McDonald’s records rare fall in sales
Fast food giant increasingly seen as too expensive for what it offers and under pressure from new chains, analysts say
McDonald’s has recorded a rare, global decline in sales as price-sensitive customers curb spending at the fast food giant.
In Australia, the chain is also under pressure from a host of new rivals, with consumers swapping their traditional burger and fries for a burrito or charcoal chicken pack.
The change in buying habits is raising questions over whether customers can still find a convenient, well-priced meal at McDonald’s after a series of menu price increases.
In a cost-of-living crisis, is the famed burger chain now just too expensive?
Price check
McDonald’s has just reported its steepest quarterly drop in US sales since early in the pandemic, with same-store sales down 3.6%. It also reported a decline in global sales.
The results came amid sluggish spending by consumers across the US and in its key overseas markets, which include Australia.
McDonald’s executives remarked that high living costs were not just affecting lower-income consumers but also those on middle incomes in a worrying sign for a business reliant on the mass market.
Shaun Weick, the deputy portfolio manager at Sydney-based Wilson Asset Management, says the rise of competitors – including the Mexican-themed Guzman y Gomez – are enticing customers away from McDonald’s.
“McDonald’s has lost that perception of representing value,” says Weick.
“I’m continually hearing that McDonald’s is losing market share because they’ve priced themselves out of the market; they’ve gotten too expensive.”
The fast food market is highly sensitive to price changes, given customers constantly weigh the cost and convenience of buying takeaway.
In the past three years, McDonald’s has lifted the price of a pack of six nuggets by about 22% to above $8. The price of a small Big Mac meal is now more than $12, while a larger meal deal can cost more than $15 for some of the bigger burger varieties.
The question for Australian consumers is whether the narrowing price differential between a McDonald’s meal and a more premium offering – such as a sub-$20 burger meal at Middle Eastern-style chicken chain El Jannah – is enough to get them to the golden arches.
Research from Sydney-based Fonto shows that McDonald’s consistently underperforms on customer satisfaction when compared with other brands.
“There is definitely a preference for those alternatives, particularly as the gap in cost for those meals reduces,” says Fonto’s chief executive, Ben Dixon. “McDonald’s has the least satisfaction of the major brands and this is mostly around the price people pay for what they are getting.”
Loose change
It’s not all bad news for McDonald’s. Fonto’s research shows customers still value convenience – something that McDonald’s excels in.
The chain, which opened its first Australian store in 1971 in the Sydney suburb of Yagoona, has expanded to more than 1,050 locations across the country, second only to Subway, according to researcher GapMaps.
The McDonald’s global chief financial officer, Ian Borden, told analysts earlier this month that the chain was making progress in Australia in the face of declining sector-wide traffic and the company was looking forward to seeing momentum build.
Its Australian business is relying in part on its “loose change menu” to bring customers back during a cost-of-living crisis. It has found success in Canada by offering a C$1 coffee.
McDonald’s Australia and its US corporate headquarters did not respond to questions.
The sluggish appetite for McDonald’s is not evident in the company’s US stock price, which is trading near record highs.
But it’s likely a different story for its franchisees, who pay significant sums to operate the restaurants with the hope of tapping into its long-term success.
Fast food stores have been treading a fine line between raising menu prices to retain or increase profit margins in response to higher costs, and trying not to put off price-conscious customers.
When KFC, which has a strategy of undercutting McDonald’s on price, found Australian customers weren’t happy with some of its own price increases, it quickly tried to regain trust by unveiling value deals for lunch and dinner.
After a prolonged period of fast-rising living costs, there are early signs that households are getting on top of their finances as the pace of inflation eases.
Weick says further interest rate cuts would also help consumers, especially those in the “mortgage belt” who are among the most frequent visitors to fast food outlets.
He says there is still a question over whether McDonald’s will share in that recovery, or lose further ground to rivals.
“The sector is not shooting the lights out at the moment, but there’s a feeling it has bottomed and there’s improvement,” says Weick.
“But I don’t think the recovery will be uniform.”
