McDonald's expects inflation to keep traffic flat, shares dip after $8.5 billion capex plan

Sept 23 — McDonald's warned on Wednesday that industrywide customer traffic in key markets would likely remain flat as long as inflation remained elevated, sending ​its shares down as much as 6.5% even as it unveiled an $8.5 billion franchisee support plan and a slate of long-term growth initiatives.

The warning reinforced investor concerns that McDonald's turnaround could take longer than expected, even as it rolls out its "NEXT" strategy to reignite growth ‌after several quarters of slowing sales and intensifying competition from value-focused rivals.

"Look at Starbucks, these changes don't happen overnight," said Jake Dollarhide, a McDonald's investor as CEO of Longbow Asset Management, referring to ⁠the turnaround effort at Starbucks that took close to a year for ​investments to translate into boosted sales.

Last month, McDonald's missed estimates for ⁠second-quarter US sales growth, citing execution missteps that hindered efforts to win back lower-income consumers who had cut back on dining out. Its shares, which are ‌now down about 22% so far ‌this year, dropped to a near four-year low of $234.03 on Wednesday.

Newly appointed US business head Skye Anderson acknowledged those shortcomings ⁠on Wednesday, saying McDonald's had fallen short on "consistent execution" and needed to improve restaurant operations.

The chain ⁠on Wednesday outlined an $8.5 billion, decade-long support package for franchisees, who bear hefty costs under the "NEXT" plan, and set new targets for restaurant productivity and operating margins in the low- to mid-50% range by 2030.

"We expect industry traffic growth in our wholly owned markets will be flat while inflation remains elevated," CEO Chris Kempczinski said during an investor meeting. "The winners will be the companies that create more demand and deliver it more efficiently."

Announced in June, McDonald's "NEXT" strategy focuses on improving food quality, hospitality, value and innovation, with executives on Wednesday providing the first detailed ‌roadmap.

The initiative includes simplifying operations, modernizing restaurant designs, investing in employee training and expanding the use of ​ArchIQ, an AI-powered restaurant operating system that automates tasks such as drive-thru ordering.

Anderson, who was named as president of its US business last month to steer the company's turnaround strategy, said on Wednesday that McDonald's was also adapting to changing consumer preferences, including higher-protein options and greater portion flexibility for GLP-1 users.

Anderson added that the company is exploring bowls, grilled chicken and egg bites to expand protein-centered options across breakfast, lunch and dinner.

"Consumers are making choices based on more than price, and McDonald's needs to give them reasons to visit beyond a deal," eMarketer analyst Suzy Davidkhanian said.

McDonald's has seen greater tensions with franchisees who have complained about eroding control and rising costs. McDonald's executives in August said execution ​of its under-$3 menu was hurt by a third of franchisees that did not participate.

Dollarhide, the investor, said he has watched strains in McDonald's franchisee relations closely because a lack of ‌franchisee buy-in can ‌hurt execution of the company's ⁠strategies.

US restaurant remodeling required by McDonald's and upgrades under the "NEXT" plan could cost at least $1.2 million for the average location.

McDonald's will offer some assistance including rent relief, but the support does not extend to the cost of the remodels.

"It's a big commitment for franchisees," said Dollarhide.

Of the $8.5 billion investment, roughly $5 billion will be deployed by 2030 through rent relief and capital support for franchisees.

The company expects the strategy to improve restaurant-level efficiency by 250 basis points, generating about $100,000 in ‌additional annual cash flow for the average ​US restaurant.

The burger chain expects restaurant expansion to contribute about 2.5% of systemwide sales ‌growth in 2027 and around 2% by ⁠2030.

US foot traffic at McDonald's has ​declined year-over-year for every complete month since March, according to estimates from data analytics firm Placer.ai.

(Reporting by Anuja Bharat Mistry in Bengaluru; Editing by Anil D'Silva, Christian ​Plumb and Cynthia Osterman)

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