McDonald’s executives expect a recession

McDonald’s executives expect a recession in the United States, but it will be worse in Europe. / Photo by Jonathan Maze.

McDonald’s executives expect a recession in the United States and Europe, they told investors Thursday, although they recognize there is a wide range of potential economic scenarios for the year ahead.

They also suggested that rising inflation and interest rates hurt consumers enough to cause them to change their spending habits.

“As the macroeconomic landscape continues to evolve and uncertainties persist, we continue to consider a broader range of scenarios for the future,” McDonald’s CEO Chris Kempczinski told analysts Thursday. “Our baseline scenario for the future is that we expect to experience a mild to moderate recession in the US and potentially a bit deeper and longer in Europe.”

The comments are the clearest yet from the chief executive of the world’s largest restaurant chain that an economic downturn is in sight, if it isn’t already here.

At the same time, executives believe they are in a strong position to weather any potential economic storm and have suggested they are already getting low-income customers who are abandoning other chains in search of better value.

“We’re gaining market share right now among lower-income consumers,” Chief Financial Officer Ian Borden told investors Thursday. “We are positioning ourselves as a leading brand in terms of value for money and affordability.”

McDonald’s wins low-income customers even though the company doesn’t offer aggressive value offers, leaving them instead for the company’s mobile app, where its loyalty program uses discounts to encourage visits to chain restaurants.

The company is also unlikely to come under heavy pressure for discounts from competitors. Costs are rising too much and much of the industry is reluctant to engage in a price war. “We expect the industry to remain rational from a pricing perspective,” Kempczinski said. “Some of it was born out of self-interest. Everyone knows the inflation of food and paper. Everyone knows about labor inflation.

“And some of our competitors, their franchisees are not in the same situation as our franchisees. So even if there is a desire to get more promotion in certain areas to manage traffic, I think you’re going to encounter a lot of resistance from franchisees.

The question of the situation of low-income consumers has been on the minds of many operators and analysts for months.

Comments from McDonald’s, following those from Chipotle Mexican Grill, suggest that consumers are still eating out, opting instead for lower-cost restaurants. Chipotle executives said earlier in the week the company was losing low-income diners. McDonald’s, on the other hand, earns them.

Company executives said rising inflation and interest rates were causing problems for a number of consumers. And the problem is most pronounced in Europe. “Inflationary pressures and related interest rate increases taken by central banks are combining to put significant pressure on the consumer and our industry,” Borden said.

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