On the morning of December 27th, many McDonald's consumers found that the price increase was as promised. From the feedback from netizens, it can be seen that the product's price increase is not as uniform as previously mentioned at 0.5 yuan, ranging from 0.4 to 1 yuan.
On December 27th, in response to the price increase, McDonald's responded to a reporter from The Paper that, taking into account recent changes in operating costs, McDonald's China has adjusted some product prices starting from December 27th, 2023, with an average increase of about 3%, and has clearly marked prices on various ordering channels.
However, unlike previous price hikes, McDonald's has not raised the price of the 1+1 on-demand package, maintaining the previous price of 13.9 yuan. McDonald's has stated that it provides customers with value for money products and services, such as the 1+1 package, Hi Flip Monday, a 60% discount breakfast card, and O McKinsey membership, among other long-term promotional activities. Every month, there are innovative promotional activities for customers.
Average increase of 3%
This is not the first time McDonald's China has raised prices for its products.
At the end of December 2021, McDonald's China raised the price of the 1+1 combo from 12 yuan to 12.9 yuan. During the same period, the prices of some individual burgers and snacks also slightly increased, but the overall impact was not significant.
In January of this year, McDonald's China once again implemented a price increase for the 1+1 on-demand package. Increase the price of the 1+1 package from 12.9 yuan to 13.9 yuan. At the same time, some of McDonald's products have also increased in price by 0.5-1 yuan.
McDonald's explained that the reasons for the past few price increases were all related to changes in raw materials and operating costs.
The price increase caused by changes in raw materials and operating costs is not limited to the Chinese market. In the global market of McDonald's, in 2022, the annual price increase of McDonald's products in the US market was about 10%. In the third quarter financial report conference call this year, McDonald's predicted that the price increase in the US market for McDonald's this year may exceed 10%.
The price increase is also one of the contributors to McDonald's increased revenue. At the third quarter financial report meeting this year, McDonald's executives stated that the growth in the US market mainly comes from the rise in product prices.
"This wave of price increases is partly due to McDonald's own cost reasons," according to Zhang Yi, CEO and Chief Analyst of iMedia Consulting, there is also a background of post pandemic consumer recovery behind McDonald's price increases in China, which has driven up demand for catering.
According to the information disclosed by McDonald's, its core menu items such as Big Mac, Cheese Burger, McNugget, and Potato Treaty account for 65% of the system wide sales. The price increase may not only cover the cost increase, but also drive McDonald's profit growth.
The highly anticipated Chinese market
Before announcing the price increase, McDonald's Group had just completed a major move to increase its presence in the Chinese market.
On November 20th, McDonald's Global and Carlyle Investment Group announced that McDonald's Global has agreed to acquire a minority stake in Carlyle's strategic partnerships in mainland China, Hong Kong, and Macau. After the transaction is completed, McDonald's Global's shareholding in McDonald's China will increase from 20% to 48%, while the CITIC consortium will continue to maintain its controlling position with 52% of the shares.
Although the above-mentioned transaction still requires approval from relevant regulatory authorities, it is expected to be completed in the first quarter of 2024. But behind the transaction, McDonald's is optimistic about the Chinese market. When it comes to this equity acquisition, Chris Kampkinski, Global President and CEO of McDonald's, said, "We believe that now is the best time to simplify the equity structure. The growing consumer demand in China brings us huge opportunities. China is McDonald's fastest-growing market globally, and its long-term development potential will continue to benefit us."
McDonald's third quarter report shows that in the third quarter, McDonald's achieved a revenue of 6.692 billion US dollars, a year-on-year increase of 14%; Net profit was 2.317 billion US dollars, a year-on-year increase of 17%. In terms of same store sales growth, international development franchising markets including China and Japan have performed well. Data shows that McDonald's global same store sales increased by 8.8% in the third quarter. Among them, the United States rose by 8.1%; International Operations and Marketing Department increased by 8.3%; The same store sales in the international development franchise market have maintained double-digit growth, reaching 10.5%.
In terms of the number of stores, China has become McDonald's second largest market globally, with over 5500 restaurants, doubling from 2017. At this time, increasing capital means that McDonald's will have more say in the Chinese market globally, and at the same time, it will also profit more from the performance of the Chinese market.
In early December, McDonald's announced its new global strategic goals. The preliminary guidance for 2024 is for a total system sales growth of nearly 2% (calculated at a fixed exchange rate). This means an increase of approximately $2.6 billion, and McDonald's global system sales are expected to approach $130 billion this year. During the same period, the operating profit margin is expected to be in the mid to high range of 40% -50%; Capital expenditure is approximately $2.5 billion. The unit net growth of the restaurant exceeded 4%.
After 2024, McDonald's performance targets will be even greater. The company stated that its average long-term financial target after 2024 is a system wide sales growth of approximately 2.5%; The operating profit margin continues to increase; Capital expenditures will increase by approximately 300-50 million US dollars annually by 2027.
In the new round of strategic goals, the Chinese market remains one of its important driving points. At the McDonald's Global Strategy Conference held on December 7th, the CEO of McDonald's had high hopes for the Chinese market.
"There are three things that make us very excited about the possibility of the Chinese market, first of which is the potential of new restaurants. Currently, we have nearly 6000 Chinese restaurants." McDonald's Global CEO Chris Kampkinsky said that McDonald's China's next goal is to reach 10000 stores by 2028.
McDonald's ambition in the Chinese market goes far beyond ten thousand stores. Chris Kampkinski pointed out that, considering the penetration rate of McDonald's other markets - whether this number is an average of 100000 people owning two, three, or four McDonald's, the Chinese market seems to have "no reason not to open 20000 to 25000 stores", which will make it McDonald's world's largest market.
The domestic fast food market with internal competition
In Zhang Yi's view, there are only two paths ahead for fast food brands: accelerating high-end price increases to increase profit margins, or focusing on cost-effectiveness to occupy the lower tier market.
From McDonald's approach, both may be possible.
In the third quarter financial report of this year, McDonald's executives mentioned that the growth of single store revenue in different markets was mainly due to the increase in product prices in the US market. In markets such as Germany, the increase in sales comes from launching more cost-effective package combinations.
In the domestic market, the existence of the 1+1 on-demand package allows McDonald's to maintain a subtle balance between high price and cost-effectiveness. As one of McDonald's classic packages, the 1+1 on-demand package includes 12 items, and consumers can choose the same item from the white and red areas to pair into the package. Due to its ultimate cost-effectiveness, the 1+1 on-demand package is also one of the reasons why many students and white-collar workers choose to shop and consume.
But in the Chinese market, in addition to foreign fast food brands such as KFC, Burger King, and Subway, McDonald's also faces competition from local brands such as Wallace and Tasting.
Burger King China CEO Bo Tao previously stated in an interview with Paper that the advantage of local brands such as Wallace and Tustin lies in their price.
Under price pressure, Burger King, McDonald's, KFC, and others have all launched more discount plans. Burger King has launched activities such as starting breakfast at 9.9 yuan and 6 yuan per day; McDonald's recently launched promotions such as half price for the second item; KFC, in addition to its anniversary and holiday promotions, has launched a three piece OK package with a minimum combination price of 19.9 yuan. In the case of an additional item, the price difference with McDonald's 13.9 yuan package is only 6 yuan.
According to data from Narrow Door Meal Eye, as of November 28th, the average unit price of Tastings is 19.18 yuan, McDonald's is 27.88 yuan, and KFC is 34.36 yuan. Although there is still a margin of around 6 yuan per customer between McDonald's and KFC based on data, this gap is gradually narrowing with the arrival of a new wave of price increases.
In this fiercely competitive market, McDonald's is not the only one running wild. At this year's third quarter financial report meeting, Yum! China stated that in the next two years, Yum! China will continue to accelerate its store opening speed. In the 2024-2026 growth target set by Yum! China, the number of stores is expected to reach 20000 by 2026. And Burger King and Subway are also running at lightning speed.
When opening a store becomes the main way for various brands to drive performance growth, the sinking market will be the main market for McDonald's future competition. In this year's third quarter report, McDonald's stated that due to the growth in same store sales and the increase in new stores, McDonald's China's sales and overall growth in the first half of this year far exceeded pre pandemic levels. As of June 30th, the number of McDonald's Chinese restaurants has increased to over 5400, doubling from 2017, with nearly half located in third - and fourth tier cities.