US consumer confidence slumps but the reality may be different… for some. 📉 Americans aren’t feeling great about the economy. In the April US Consumer Confidence Survey many reported that they’re pulling back their spending, with the biggest hit categories being life’s little luxuries. 

Over the next six months US consumers plan to reduce — or cut entirely — their spending on food away from home (44.8%), fashion (31.5%), entertainment (30.7%), and holidays (23.3%).

Yet despite the gloomy sentiment — and the Fed holding interest rates steady — JPMorgan Chase CEO Jamie Dimon told The Wall Street Journal last week that for the majority of Americans ‘the consumer's in pretty good shape’. A large chunk, however, are struggling to get ahead - and have been for decades.

‘The bottom 20% of America have not done particularly well over the last 20 years. Incomes barely went up. They're actually starting to go up for the first time in almost 20 years. Some people can't get mortgages, can't buy their home, so yeah, there's part of society who's kind of struggling. There's part of society who's not.’ — JPMorgan Chase CEO Jamie Dimon, WSJ

Fast food on a go slow. 🐌 American and global consumer belt-tightening has rippled across a buffet of All American fast food chains. McDonald’s (MCD), Wendy’s (WEN), Yum! Brands (YUM), owner of KFC and Pizza Hut, and sugary drink fave, Starbucks (SBUX), are experiencing a ‘long-predicted consumer pullback’ — something many economists had been expecting for months. 

Is buying a burger the new line between rich and poor? 

McDonald’s says they’re feeling the loss of low-income consumers. But are they? 👛 Two years ago, diners may have inadvertently downsized their (not-so-)Big Macs, when McDonald’s was accused of shrinkflation. Then last month, McDonald’s (MCD) was called out in a report for increasing their prices more than 100% between 2014 and 2024 — nearly double the cumulative national rate of inflation over that time — using data that McDonald’s disputes.

Last week, McDonald’s CEO Chris Kempczinski expressed concerns about losing low-income earners. This follows Kempczinski acknowledging in February that the restaurant chain had lost many of their ‘pressured’ low-income customers. That’s people who earn less than US$45,000 a year. No small number in the US — around one-third of all Americans, or 100 million people.

‘It is clear that broad-based consumer pressures persist around the world. Consumers continue to be even more discriminating with every dollar that they spend as they faced elevated prices in their day-to-day spending.’ — McDonald’s CEO Chris Kempczinski, CNBC

However, some - like chartered financial analyst and Bloomberg columnist Nir Kaissar - challenge that McDonald’s is hurting financially. Kaissar went as far to say ‘McDonald’s is contributing to the problem it now complains about, because it doesn’t pay its workers a living wage’.

Kaissar crunched the numbers to show how McDonald’s has made money since 2015 by ‘serving more rich customers than it is losing poor ones’. He found that despite last week missing their Q1 earnings — which Bloomberg said is ‘sending warning signals on consumer spending’ — McDonald’s gross margin had ‘skyrocketed’ to 58% last year, up from 39% in 2015. 

He found that the company’s EBITDA margin, that’s their earnings before interest, taxes, depreciation and amortisation, is ‘way higher’, up to 59% in 2023 from 34% 2015. He concluded that overall, ‘McDonald’s is making bank’.

‘There's the proverbial bottom line, aka the profit margin, which is how much money McDonald's makes after taking all expenses into account. That has nearly doubled to 33% in 2023 from 18% in 2015. So no matter how you slice it, kicking one-third of Americans to the curb is proving to be a money making strategy.’ — Nir Kaissar, Bloomberg TV

In January, Kempczinski also warned of ‘meaningful business impact’ due to the Israel-Hamas conflict and boycotts by Muslim-majority countries in the Middle East, Malaysia and Indonesia. In response to the company’s perceived support of Israel, McDonald’s finalised the purchase of 225 McDonald’s Israel-owned franchise restaurants in April. In the company’s Q1 statement, they noted that ‘The continued impact of the war in the Middle East more than offset positive comparable sales in Japan, Latin America and Europe’. 

McDonald’s building their biggest burger ever

McDonald's is coming out ‘street fighting’. 🥊 In the fast food battle to get more feet through the Golden Arches, the company is ‘laser focused’ on bringing back affordability. McDonald's CFO Ian Borden told analysts in last week’s first quarter (Q1) earnings call, ‘It’s a street fight. Everybody is fighting for fewer consumers. We have to make sure we have that street fighting capability’.

McBehemoth Satiating Deluxe Burger? 🍔 As well as bringing in a ‘national value offer’, Borden says the company is adding a ‘larger satiating burger’ to the menu, ready for market testing this year. The bigger burger comes after making ‘small tweaks’ to their burger staples earlier in the year.

How’s fast food stacking up for investors?

A hedge fund shopping spree. 🛍️ After selling off their consumer discretionary stocks, last week hedge funds were buying them back again. And zooming out five years, despite the impacts of covid lockdowns and many US restaurant chains’ stock value dropping year-to-date (YTD) and year over year (YOY), cheap food stocks may be still on the menu for investors.

• McDonald’s (MCD) has dropped 9.34% YTD and down 9.23% YOY
• Starbucks (SBUX) has fallen 22.17% YTD and is down 31.98%
• Wendy’s (WEN) has held steady YOY falling just 0.93%, but had slumped 16.14% YOY
• Yum! Brands (YUM) is up 5.54% YTD, and has remained stable YOY falling just 0.26%

‍We watch. We wait. 👀 On Sunday, former Starbucks CEO Howard Schultz weighed in on the coffee chain’s ‘dismal’ Q1 earnings miss, suggesting they shift to a ‘maniacal focus on the customer experience’. And yesterday, Citigroup CEO Jane Fraser expressed hopes for more positive economic conditions in 2024 while warning of the ‘cautious low-income consumer’, impacted by the high cost of living and escalating debt costs. But ultimately, in what feels like a rerun of 2023, everyone’s watching the Fed, waiting for them to ease interest rates — and possibly hoping that the US central bank does not end up in the control of the Oval Office.

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