McDonald's Struggles in 2024: The End of an Era for Fast Food?

McDonald's Struggles in 2024: The End of an Era for Fast Food?

The year 2024 may mark a turning point for the fast food industry, with McDonald's facing significant challenges due to soaring costs and declining customer traffic. The company's CEO has warned that low-income consumers, those earning less than $45,000 annually, have stopped visiting their restaurants, attributing this decline to the substantial price hikes in recent years.

The cost of a Big Mac meal at McDonald's now averages $11.79 before taxes, a staggering 280% increase from the 1990s when a meal cost less than $3. In some states like New York and Connecticut, the price of a Big Mac meal can reach a whopping $18. This alarming inflation in food prices has outpaced wage growth, making fast food increasingly unaffordable for many Americans.

McDonald's, renowned for its affordable menu options in the past, has been forced to adapt to rising commodity prices and labor costs. The cost of cattle used for burgers has nearly doubled since the pandemic's onset, while states like California have implemented a $20 minimum wage for fast-food workers, further straining the industry's profitability.

Surprisingly, despite these challenges, McDonald's stock price continues to soar, trading at $298 per share, three times higher than eight years ago. This paradoxical situation can be attributed to McDonald's unique business model, which positions the company as a real estate empire rather than a traditional fast-food chain.

With 93% of its 40,000 restaurants franchised, McDonald's generates a significant portion of its revenue from franchise and rent fees paid by franchisees rather than relying solely on food sales. This ingenious strategy allows McDonald's to profit from the top line, insulating it from the direct impact of rising food and labor costs borne by franchisees.

However, the situation for McDonald's franchisees is far from rosy. A typical franchisee, generating $3.2 million in annual revenue, pays 20% to McDonald's corporate in fees and an additional 30% for food and labor costs. After these expenses, the franchisee is left with a mere $290,000 in profit, a relatively low return considering the substantial investment and effort required.

As costs continue to escalate and consumer demand wanes, franchisees may find themselves in a precarious position, potentially leading to a wave of business closures or sales in the coming years. This could ultimately undermine McDonald's corporate brand and valuation, signaling the end of an era for the fast-food industry as we know it.

To combat these challenges, McDonald's and other fast-food chains may turn to automation and workforce reductions, as evidenced by McDonald's recent launch of a fully automated restaurant in Fort Worth, Texas. However, this strategy raises concerns about job losses and the potential erosion of the industry's value proposition of providing affordable, convenient meals.

As the economic landscape shifts, the sustainability of the current fast-food model is being called into question. With small businesses reporting lower earnings and reduced sales volumes, the strain on the broader economy becomes increasingly apparent. While corporations like McDonald's may continue to thrive in the short term, the long-term viability of the fast-food industry hinges on finding a delicate balance between profitability, affordability, and adaptation to changing consumer preferences and economic realities.

Back to blog

Leave a comment