McDonald's Is Still Very Cheap, But People Don't Want To Eat There

McDonald's Is Still Very Cheap, But People Don't Want To Eat There

As sales and profits have crumbled at McDonald's recently, some observers have blamed low-income Americans, saying they must not be able to afford Big Macs any more.

But that's wrong. If anything, Big Macs have gotten more affordable lately. The real problem is that the iconic chain needs to win back its true base: middle-class Americans looking for a cheap, quick meal.

For the past 11 months, sales at U.S. McDonald's restaurants open at least a year -- a key measure of an eatery's health -- have fallen or remained flat. The company announced earlier this week that U.S. same-store sales fell 4.1 percent in September, the worst monthly drop in more than a decade, and that profits plunged 30 percent in its latest quarter. The company's stock price has tumbled about 11 percent over the past six months.

One common explanation for McDonald's woes is that low-income Americans are suffering from a sluggish recovery and unable to afford eating out at McDonald's any more.

But the numbers don't back up that take. For one thing, McDonald's has actually become more of a bargain relative to other food options in recent years: McDonald’s prices haven’t risen as quickly as prices at fast-casual eateries like Panera Bread, according to data from Technomic, a food research firm. Nor have they risen as quickly as broader food inflation, according to Bureau of Labor Statistics data:

mcdonalds price chart

McDonald's menu prices grew more slowly than prices at fast-casual chains and food inflation overall between 2009 and 2014.

And yet diners are still flocking to other chains despite their typically higher costs. When Chipotle raised menu prices earlier this year, customers didn’t bat an eye -- the chain reported a profit jump of 25 percent the following quarter. That suggests McDonald's problem isn't so much pricing, but a perception that its food isn't worth any price -- unlike, say, Chipotle, which has positioned itself as offering fast, fresh and quality food for which customers are willing to pay more.

Unlike Walmart, whose fortunes have largely mirrored that of the poor, McDonald’s doesn’t take food stamps. That makes it an unlikely regular destination for low-income Americans, according to Joel Berg, the author of “All You Can Eat? How Hungry Is America?”

In fact, a 2011 study from the University of California-Davis found that fast-food consumption actually rises with income, until incomes reach about $60,000.

“That conventional wisdom is wrong,” Berg said of the notion that poor people are more likely to eat at places like McDonald’s.

Given the strength of that conventional wisdom, it's likely going to take a full revamp of McDonald's image to convince the middle-class customers who have fled the chain that it offers more than just cheap burgers for people who can’t afford anything better. What has been the quintessential McDonald’s experience for decades -- inexpensive food that tastes the same everywhere -- just isn’t as appealing any more.

To fix this, the company is working to convince diners it sells “fresh, quality food” at a reasonable price, partly through "transparency initiatives" like a campaign last week asking people to submit questions about its food, according to Heidi Barker, a McDonald's spokeswoman.

"McDonald’s appeals to customers of many diverse backgrounds and lifestyles," Barker wrote in an e-mail statement. "There’s value at every level of the menu, from our Dollar Menu and More to our premium sandwiches and salads, and McCafe beverages."

It could be a hard sell, as McDonald’s CEO Don Thompson acknowledged on a conference call with analysts Tuesday.

“The question is whether or not our value and our food options are resonating as strongly," he said. "I believe that that is the fundamental basis of some of the challenges that we are having.”

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