McDonald’s stumbles as lower-income consumers pull back, while Chipotle sprints ahead

The situation: Differing Q2 results from McDonald’s and Chipotle demonstrate how the gap between higher- and lower-income consumers’ spending habits is widening.

• McDonald’s sales fell for the first time since 2020 in Q2, with US comparable sales dropping 0.7% year over year (YoY). That’s a dramatic shift from last year when US comp sales soared 10.3% YoY thanks in part to the Grimace shake capturing the cultural zeitgeist.
• Chipotle’s same-store sales rose 11.1% YoY in Q2, well ahead of StreetAccount’s estimated 9.2%.

Sharpening its focus: McDonald’s brand positioning has long been centered around the twin pillars of value and affordability. But McDonald’s decision to pull the price-hike lever several times throughout the past few years caused it to lose ground as the “value leader” against competitors, said CEO Chris Kempczinski during the company’s earnings call.

Higher prices led consumers to think twice about pulling into a McDonald’s drive-thru or even eating out altogether, which drove McDonald’s to be “laser-focused on providing great value,” said Joe Erlinger, president of McDonald’s USA. Accordingly, the company recently extended its limited-time offering of a $5 value meal that includes a McChicken or McDouble, four-piece chicken nuggets, fries, and a drink.

• The meal is driving lower-income consumers back to McDonald’s restaurants, Kempczinski said.
• The average check for those who purchase the deal is north of $10, which suggests it is driving incremental revenues.

McDonald’s is also seeking to reestablish its affordability bonafides by offering discounts via its loyalty program and a steady stream of offers on the mobile app, including a free medium order of fries every Friday with any $1 purchase on the app.

Strong brand positioning: Unlike McDonald’s, Chipotle’s average 3.3% price increase during the quarter didn’t hurt its brand positioning. “Chipotle stands for a generous amount of delicious, fresh food at fair prices for every customer, every visit,” said CFO Jack Hartung.

• That’s because value is a more complicated calculation than just price.
• When consumers think about where to grab a quick bite they consider factors including whether the food is high-quality and healthy, how it tastes, and whether it is convenient.

The big takeaway: Of course there is one other notable difference between Chipotle and McDonald’s: Chipotle has a more affluent customer base than McDonald’s.

• Consumer sentiment among high-income earners climbed sharply over the past two years while less wealthy consumers continue to feel the burden of high prices even as inflation wanes, said Joanne Hsu, who oversees the University of Michigan’s consumer sentiment survey.
• Convincing those lower-income consumers to open their wallets isn’t easy, which is why the fast-food value meal war that McDonald’s initiated is unlikely to pass anytime soon.