Franchisees of McDonald's are experiencing a drop in profitability, predominantly in California.
McDonald's Takes Aggressive Steps in Fast-Food Price War
In a move to gain a competitive edge, McDonald's, led by CEO Chris Kempczinski, has announced plans to lower prices on a wide range of combo meals. This decision comes amidst a fierce price war in the fast-food industry that has been eroding profitability across the board.
Kempczinski spoke about the move on CNBC's Squawk Box, stating that McDonald's is in it together with its franchisees in the Extra Value Meal program. The company will provide assistance to franchisees when lower prices lead to losses.
The ongoing price war has been a concern for McDonald's and many fast-food competitors, particularly in states like California where fast-food chains are required to pay workers at least $20 an hour, adding to the challenges they face.
The fast-food industry is not the only sector feeling the pressure of higher costs. Post-pandemic inflation has forced many restaurants to raise prices more than 30%. As a result, consumers are cutting back on restaurant visits due to pricing.
Despite these challenges, McDonald's operators have higher average-unit volumes and a more stable franchise base than most franchise restaurant chains in the country. However, some areas, particularly in California, are experiencing more pressure due to higher labor costs.
This price war has intensified as competitors like Burger King, Wendy's, and Jack in the Box offer deeper discounts on combo meals than McDonald's. Franchise companies like Five Guys and In-N-Out Burger, known for their higher quality and more upscale offerings, perform better in terms of costs and revenues and can offer deeper discounts on combo menus.
McDonald's, with its dominance in the industry, remains pricey compared to these competitors. However, its scale and pricing strategy have kept it at the forefront of the fast-food industry.
The article was published by Restaurant Business, penned by a journalist with a focus on restaurant finance, mergers and acquisitions, and the economy, with a particular focus on quick-service restaurants. This article underscores the ongoing efforts by fast-food chains to adapt to changing market conditions and consumer behaviour.
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