McDonald’s moves off the grill and into the fryer
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Jennifer Saba
NEW YORK, Oct 23 (Reuters Breakingviews) -Foodborne illness is the last thing McDonald’s MCD.N wants on the menu. The fast-food restaurant chain has pulled Quarter Pounders from some U.S. locations following an E. coli outbreak. Its quick response suggests it should be able to weather the crisis, but it can ill-afford to scare off more customers.
The U.S. Centers for Disease Control and Prevention said on Tuesday that one person died and 49 others in 10 states were sickened from eating at McDonald’s. Early indications suggest slivered onions are the cause.
McDonald’s mobilized swiftly to try and contain the problem, learning from missteps by restaurant rivals. Chipotle Mexican Grill CMG.N, for example, failed to prevent its own 2015 E. coli incident from spiraling, and it took years before the burrito chain’s stock price recovered. Fellow burger flipper Jack in the Box JACK.O, which suffered from the same bacterial outbreak in the early 1990s, denied it was the culprit only to become a U.S. Defense Department case study on how not to respond.
Although McDonald’s may be able to pin the problem on a supplier rather than its own kitchens, the nuance may be lost on diners. The company led by Chris Kempczinski is already dealing with other challenges, including its high prices, the appetite-suppressing threat from weight-loss drugs, and a slow-moving desire for healthier foods.
Last quarter, McDonald’s reported that worldwide sales at sites open for at least 13 months fell 1% from a year earlier, partly because it has been charging more. The average price of its menu items is up 40% over the past five years, nearly double broader national inflation of 23%. A temporary $5 meal promotion introduced in the spring has been extended, and is helping lure customers back. Headlines about E. coli might give them fresh pause.
McDonald’s shares tumbled 5% early on Wednesday. This implies initially, based on the enterprise’s valuation of nearly 19 times EBITDA next year and its 54% margin, that investors anticipate a 4% hit to sales, according to Breakingviews calculations using estimates gathered by Visible Alpha.
If the maker of the Happy Meal can limit the fallout, the damage may be less severe. At the same time, sales were already projected to tumble 9% in 2024, per LSEG data. The danger is that McDonald’s already has moved off the grill and into the fryer.
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CONTEXT NEWS
McDonald’s said on Oct. 22 it removed its Quarter Pounder hamburger from menus in several states including Colorado, Utah and Wyoming following an E. coli outbreak. The fast-food chain said early indications suggest the illness may be linked to onions from one of its suppliers.
The U.S. Centers for Disease Control and Prevention said one person died and 49 people from 10 states have gotten sick.
McDonald’s shares were down about 5% at 1030 EDT on Oct. 23.
McDonald's global sales are trending down https://reut.rs/3C7Z7Ry
Editing by Jeffrey Goldfarb and Pranav Kiran
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