McDonald's reported that its U.S. sales are showing improvement, driven by a strategy of promotions and marketing efforts, a notable shift after a third-quarter decline attributed to financially strained consumers cutting back on dining out. The company's shares saw an increase of more than 5% on Wednesday.
Executives pointed to gains from increased marketing focused on entry-level meal deals and extra value offerings, bolstered by the return of promotional incentives such as a $2 breakfast sandwich and free fries with a $1 minimum purchase. These initiatives appear to be drawing back customers who had previously sought cheaper alternatives from competitors, convenience stores, or opted for home-cooked meals due to rising living costs.
"We're taking the right steps to improve our near-term performance in the US, and I'm encouraged by our baseline traffic trends in September and October," stated CEO Chris Kempczinski. Despite these recent improvements, customer visits to McDonald's restaurants experienced a 4.6% decrease compared to the previous year in the third quarter, according to Placer.ai. While the return of promotions like the Monopoly game and Halloween-themed Boo Buckets has led to recent gains, these figures remain below year-ago levels.
In June, McDonald's introduced its "NEXT" turnaround strategy, which includes operational simplification, modernization of restaurant designs, and enhanced employee training, all aimed at improving restaurant-level efficiency. However, the company has been navigating increasing tensions with its franchisees, who have expressed concerns over eroding control and escalating costs. Earlier in August, McDonald's executives noted that execution of its under-$3 menu was hampered by a third of franchisees not participating.
"How deep and how lasting those meal deals are will depend on whether McDonald's or its franchisees are willing to carry the cost," commented Nagham Hassan, a market analyst at eToro. "If McDonald's leaves the cost to franchisees, expect the deals to be patchy and the recovery slow."
Kempczinski indicated that discussions are ongoing between corporate and U.S. franchisees regarding pricing, and that the two parties are "in a good spot with the exception of this entry-level value." Comparable sales in the U.S., McDonald's largest market, decreased by 0.2% for the quarter ending September 30, falling short of analysts' expectations of a 0.1% drop. This marks the company's first such decline after a period of five consecutive quarters of growth.
Looking ahead, Kempczinski mentioned the company's plan to expand the use of Archie, an AI assistant for drive-thru orders, to a majority of U.S. restaurants by the end of 2027. This initiative comes amidst a lawsuit filed against McDonald's, alleging the use of AI-powered tools for menu price-fixing. The suit followed a Reuters report in September that revealed McDonald's employs machine learning algorithms to determine what the company terms the "optimal price" for each menu item at each location.
Globally, the company's quarterly comparable sales increased by 1.5%, meeting expectations. Adjusted earnings rose to $3.57 per share from $3.22 in the prior year, surpassing the expected $3.38, attributed to reduced operating costs and increased gains from restaurant sales through franchising.