McDonald's Corporation

Inflation Hits the Fast Food Counter

On a chilly Tuesday afternoon this month, James Marsh stopped by a Chipotle near his suburban Chicago home to grab something to eat.

It had been a while since Mr. Marsh had been to Chipotle — he estimated he goes five times a year — and he stopped cold when he saw the prices.

“I had been getting my usual, a steak burrito, which had been maybe in the mid-$8 range,” said Mr. Marsh, who trades stock options at his home in Hinsdale, Ill. “Now it was more than $9.”

He walked out.

“I figured I’d find something at home,” he said.

The pandemic has led to price spikes in everything from pizza slices in Manhattan to sides of beef in Colorado. And it has led to more expensive items on the menus at fast-food chains, traditionally establishments where people are used to grabbing a quick bite that doesn’t hurt their wallet.

government data. And, in some cases, portions have shrunk.

“In recent years, most fast-food restaurants had, maybe, raised prices in the low single digits each year,” said Matthew Goodman, an analyst at M Science, an alternative data research and analytics firm. “What we’ve seen over the last six-plus months are restaurants being aggressive in pushing through prices.”

This comes at a time when the hypercompetitive fast-food market is booming.

Chains like McDonald’s, Chipotle and Wingstop were big winners of the pandemic as consumers, stuck at home working and tired of cooking multiple meals for their families, increasingly turned to them for convenient solutions. But in the past year, as the cost of ingredients rose and the average hourly wage increased 16 percent to $16.10 in November from a year earlier, according to government data, restaurants began to quietly bump up prices.

But making customers pay more for a burger or a burrito is a tricky art. For many restaurants, it involves complex algorithms and test markets. They need to walk a fine line between raising prices enough to cover expenses while not scaring away customers. Moreover, there isn’t a one-size-fits-all approach. Chains that are operated by franchisees typically allow individual owners to decide pricing. And national chains, like Chipotle and Shake Shack, charge different prices in various parts of the country.

When Carrols Restaurant Group, which operates more than 1,000 Burger Kings, raised prices in the second half of last year, the number of customers actually improved from the third to the fourth quarter. “Over time, we generally have not seen a whole lot of pushback from consumers” on the higher prices, Carrols’ chief executive, Daniel T. Accordino, told analysts at a conference in early January.

Menu prices are likely to continue to climb this year. Many restaurants say they are still paying higher wages to attract employees and expect food prices to rise.

“We expect unprecedented increases in our food basket costs versus 2021,” Ritch Allison, the chief executive of Domino’s Pizza, told Wall Street analysts at a conference this month. While Domino’s hasn’t raised prices, it is altering its promotions — offering the $7.99 pizza deal only to customers ordering online and shrinking the number of chicken wings in certain promotions to eight from 10 — in an effort to maintain profit margins.

Despite the higher food and labor costs, some restaurants are seeing sales and profits rebound past prepandemic levels.

When McDonald’s reports earnings this month, Wall Street analysts expect that its revenues will have hit a five-year high of more than $23 billion, a $2 billion increase from 2019. Net income is predicted to top $7 billion, up from $6 billion in 2019. Other chains like Cracker Barrel and Darden Restaurants, which owns Olive Garden and Longhorn Steakhouse, have resumed dividend payments or cash buybacks of stock after suspending those activities early in the pandemic to conserve cash.

And next month, when Chipotle reports results for 2021, analysts expect revenues to top $7.5 billion, a 34 percent jump from 2019. Net income is expected to almost double from prepandemic levels. In the third quarter, the company repurchased nearly $100 million of its stock. Chipotle declined to make an executive available for an interview, citing the quiet period ahead of its earnings release.

While Chipotle executives blamed higher labor costs for a 4 percent price increase in menu items this summer, the company has been looking for ways to boost its profitability.

One way was to charge higher prices for delivery. Delivery orders through vendors like DoorDash and Uber Eats exploded for Chipotle and other fast-food chains during the pandemic. But so did the commission fees that Chipotle paid the vendors. So in the fall of 2020, it began running tests to see what would happen if it raised the prices of burritos and guacamole and chips that customers ordered for delivery, executives told Wall Street analysts in an earnings call. It essentially meant the customer covered Chipotle’s side of the delivery costs.

The company discovered customers were willing to pay for the convenience of delivery. Now, customers ordering Chipotle for delivery pay about 21 percent more than if they had ordered and picked the food up in the stores, according to an analysis by Jeff Farmer, an analyst at Gordon Haskett Research Advisors.

“I would say that our ultimate goal, so this would be over the long term, maybe the medium term, is to fully protect our margins,” said Jack Hartung, the chief financial officer of Chipotle, on a call with Wall Street analysts last fall. “When you look at our pricing versus other restaurant companies’ for the quality of the food, the quantity of the food, and the quality and convenience of the experience, we offer great value. So we believe we have room to fully protect the margin.”

That doesn’t mean customers are thrilled about the extra costs.

This month, Jacob Herlin, a data scientist in Lakewood, Colo., placed an order: a steak-and-guacamole burrito for $11.95, a Coca-Cola for $3, and chips and guacamole, which were free with a birthday coupon. The total was $14.95, before tax.

But when he clicked to have the food delivered, the price for the burrito jumped to $14.45 and the soda climbed to $3.65, bringing the total to $18.10 before tax, 21 percent more than if he had picked the food up himself.

There was more. Mr. Herlin was charged a delivery fee of $1 and another “service fee” of $2.32, bringing the total for the delivered meal to $23.20. He tipped the driver an additional $3.

Mr. Herlin said he did not mind paying for delivery and wanted drivers to be paid a decent wage. But he felt that Chipotle wasn’t being upfront with customers about the added costs.

“They’re basically hiding the fees two different ways, through that base price increase and through the hidden ‘service fee,’” Mr. Herlin said in an email. “I would very much prefer if they had the same pricing and were just honest about a $5 delivery fee.”

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McDonald’s Board Faces Challenge Over C.E.O. Firing

Despite posting robust revenue and earnings during the pandemic of the past year, executives at McDonald’s are likely to face tough questions at Thursday’s annual shareholder meeting from critics who believed they mishandled the dismissal of the former chief executive Steve Easterbrook.

On Wednesday, the institutional investor Neuberger Berman became the latest investor to say it would not vote for the re-election of Richard Lenny, a former chief executive of the Hershey Company who has been on the McDonald’s board for 16 years and was chair of the compensation committee that awarded Mr. Easterbrook more than $44 million after he was terminated in 2019 for having a consensual sexual relationship with an employee.

The board, which allowed the severance to be awarded even after determining Mr. Easterbrook had violated company policy and displayed poor judgment, later discovered he had engaged in several affairs with employees during his tenure. McDonald’s has sued Mr. Easterbrook to try to claw back the money.

The Easterbrook scandal is likely to be just one of the issues about the company’s culture brought up during the virtual meeting.

minimum wage to $15 an hour. The company is also facing myriad lawsuits involving claims of racial and sexual discrimination and harassment at some of its restaurants.

McDonald’s leadership is likely to play up its strong performance during the pandemic, taking a victory lap for producing a $4.7 billion profit during a rough-and-tumble year for the restaurant industry.

McDonald’s chief executive, Chris Kempczinski, who was hired in 2015 from Kraft Foods as a strategy chief and reported directly to Mr. Easterbrook, has made several moves in recent months to address the numerous controversies.

In February, the company set new diversity goals and tied those goals to executive compensation. In April, it mandated anti-harassment training at its restaurants. And last week, it said it would raise wages at 650 company-owned restaurants, a move that does not affect the 14,000 restaurants that are independently owned.

Still, questions continue to swirl around Mr. Easterbrook’s departure in November of 2019.

In April, Scott Stringer, New York City’s comptroller who oversees its pension funds, and CtW Investment Group, which oversees union pensions, wrote a letter to McDonald’s shareholders saying they would vote against Mr. Lenny as well as Enrique Hernandez Jr., the chief executive of Inter-Con Security Systems and McDonald’s chairman. They cited their roles in the “flawed and mismanaged investigation” into Mr. Easterbrook and the determination to terminate him “without cause,” resulting in an “unnecessary and costly” lawsuit filed in an attempt to recoup the money from Mr. Easterbrook.

In an emailed statement, McDonald’s said that its board believes there should be a balance of institutional knowledge and fresh perspectives among its directors, and that it is fully investigating all allegations of misconduct by Mr. Easterbrook and “has taken swift and unprecedented actions to address them.”

Whether the movement to oust Mr. Hernandez or Mr. Lenny from their seats has enough support remains unclear.

Two of the largest proxy advisory firms split their decision about the McDonald’s directors, with Glass Lewis recommending that shareholders vote against the two directors. Institutional Shareholder Services said both directors should keep their positions, giving the board credit for taking legal action to recoup the severance pay from Mr. Easterbrook.

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McDonald’s Will Raise Wages at Company-Owned Restaurants

Battling to hire employees in a tight job market, McDonald’s on Thursday joined a growing list of fast-food and restaurant companies that are lifting hourly wages in the hopes of attracting job seekers.

Earlier this week, Chipotle said it was raising hourly pay at its restaurants in the hopes of hiring 20,000 new employees and, in late March, Olive Garden said it was raising workers’ pay.

Fast-food and casual dining restaurants have struggled to find workers in parts of the country. As coronavirus vaccinations have increased and government restrictions have eased, the restaurant industry, which laid off or furloughed millions of employees during the pandemic, has begun a hiring spree, as have several other service-related industries.

But even as McDonald’s and other restaurant chains raise wages, union activists say it is not enough for the employees who went to work daily during the pandemic and helped the restaurants survive or even thrive.

report released last week showed a significant jump in the number of workers hired in the restaurant and bar sector, employment levels at full-service restaurants in February remained 20 percent lower than they were a year ago, according to the National Restaurant Association. That’s the equivalent of 1.1 million jobs. Employment at fast-food and fast-casual restaurants was down 6 percent over the same period.

Some restaurants say the challenge of hiring workers could slow their own recoveries from the pandemic. But some potential employees — whether concerned about the safety of serving customers dining indoors, buoyed by government stimulus checks or simply unhappy with the pay being offered — are wary of returning to work.

“We’re not only competing with our peer companies out there, and I know everybody is challenged with that,” Greg Levin, the president and chief financial officer of B.J.’s Restaurants, an American grill chain, told Wall Street analysts in April. “We’re also right now kind of competing with the federal government and somewhat of the unemployment subsidies.”

The company estimates that it needs to hire an additional 5,000 employees to return to prepandemic sales levels.

But some analysts say other factors may be playing a role in making it difficult for the restaurant industry to hire, namely employees who left permanently after the volatility of the past year and others who may have found jobs in other, faster-growing sectors.

added more than 400,000 employees last year, and on Thursday said it was planning to hire an additional 75,000 workers. It will offer a $1,000 signing bonus in some locations, and pay an average of $17 an hour.

McDonald’s, hoping to add 10,000 new employees in the next three months, said it would increase hourly wages for current employees by an average of 10 percent and that the entry-level wage for new employees would rise to $11 to $17 an hour, based on the location of the restaurant.

At its company-owned restaurants, McDonald’s said the average employee wage would increase to $13 an hour, with some restaurants getting to an average wage of $15 an hour later this year. All company-owned restaurants are expected to be at an average hourly wage of $15 by 2024, the company said.

But while the coffee chain Starbucks said last year it would raise the pay for all employees to $15 an hour over a three-year span, McDonald’s has been reluctant to commit to a similar minimum-wage move.

In 2019, the company said it would no longer use its powerful lobbying arm to fight attempts to raise the minimum wage to $15 an hour at the federal, state and local level. In a call with Wall Street analysts in January, Mr. Kempczinski, the McDonald’s C.E.O., said the company was doing “just fine” in the more than two dozen states that had increased minimum wages in a phased-in way.

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McDonald’s says sales are back to prepandemic levels.

McDonald’s said Thursday that sales of Big Macs, chicken nuggets and french fries got back to prepandemic levels in the first part of the year.

Global same-store sales grew 7.5 percent in the first quarter from the year-earlier period. That was driven by a big jump of 13.6 percent in the United States, McDonald’s reported. Revenues for the quarter rose to $5.12 billion, topping the $4.7 billion brought in a year ago as well as the $4.9 billion in the first quarter of 2019, before the pandemic struck.

Chris Kempczinski, the president and chief executive officer of McDonald’s, touted the company’s rebound, noting that it had occurred “even as resurgences and operating restrictions persist in many parts of the world.”

Profit in the quarter climbed to $1.5 billion, from $1.1 billion a year earlier.

Chicken was one of the big drivers for growth in the U.S. The company brought back its spicy chicken nuggets for a limited time and entered the competitive chicken-sandwich market with its own version in February.

ingredients.

What remains unclear is which consumer behaviors that changed during the pandemic will stick. In the call with analysts, executives said they expected delivery and drive-through to remain important. But breakfast has been slower to rebound.

“We believe that certainly as some consumer habits return to prepandemic ways of life, that the breakfast day part will continue to come back,” Mr. Erlinger said. “And similarly to how it was a real market-share battle prepandemic, we think that market-share battle will absolutely continue and we’re ready and prepared for that.”

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Drive-Throughs That Predict Your Order? Restaurants Are Thinking Fast

Starbucks has employees at hundreds of busy locations strolling through car lines, taking orders with hand-held devices so customers can get their caffeine fix a few seconds faster. Shake Shack, which has long emphasized that quality ingredients are worth waiting a few extra minutes for, will soon feature its first drive-through window. And the vast majority of new Chipotles this year will have “Chipotlanes,” where customers can drive up to a window and pull away with preordered meals in less than a minute.

With dining room restrictions in place for much of the country during the pandemic, drive-through and pickup windows became critical ways for a variety of restaurants to remain afloat.

Now, as the dining industry looks toward a post-pandemic world, many companies are betting big that digital ordering and drive-throughs will remain integral to their success. And the basic experience of sitting in a single line of cars, speaking into a sometimes garbled intercom and pulling up to window to pay for your food before driving away is poised to be demonstrably altered for the first time in decades.

has been sued by neighboring businesses that say its long drive-through lines block their customers’ access.

For most restaurants, the solution has many parts. First, more are trying to encourage customers to use ordering apps, which improve the accuracy of orders and are often connected to loyalty programs that give them points for free food. They are also trying to figure out how to best speed consumers through the drive-through or pickup process without disrupting traffic patterns or other businesses.

Drive-through times average 4 minutes and 15 seconds, according to Bluedot, a geolocation company. Like a Daytona 500 pit crew, restaurants are always looking for ways to shave off minutes, or even seconds.

To be competitive in this race, Chipotle, whose digital orders soared from 20 percent of its sales to as high as 70 percent at the height of the pandemic, installed in many of its kitchens a second assembly line where employees put together tacos or burrito bowls for mobile and online orders exclusively.

The chain also expects that 70 percent of its restaurants that open this year will have the dedicated Chipotlanes for online orders.

“In the traditional drive-through experience, you wait in line to order, you wait in line to pay and pick up, you wait in line for your food to be prepared,” said Jack Hartung, the chief financial officer of Chipotle. “We’re trying to get our service time from when you pull up to the restaurant, pick up your food and drive off to 40 or 50 seconds.”

Others, like McDonald’s and Burger King, are adding multiple drive-through lanes, which have been a feature at some busy fast-food spots like Chick-fil-A but are becoming more commonplace. Burger King is running three-lane tests in the United States, Brazil and Spain. In the U.S. and Spain, the third lane is “express” for advance orders made through the app. In Brazil, the lane takes delivery drivers to a pickup area with food lockers or shelves.

Burger King is also looking to propel its drive-throughs into the future with a Big-Brother-like artificial intelligence system, Deep Flame.

Right now, roughly half of Burger King’s drive-throughs with digital menu boards are using Deep Flame’s technology to suggest foods that are particularly popular in the area that day. It also uses outside factors, like the weather, to highlight items like an iced coffee on a hot day.

But this year, Burger King is testing a Bluetooth technology that will be able to identify customers in Burger King’s loyalty program and show their previous orders. If a customer ordered a small Sprite and a Whopper with cheese, hold the pickles, the last three visits, Deep Flame will calculate that chances are high that the customer will want the same order again.

It’s unclear whether the technology pays off. McDonald’s is moving in a similar direction. The fast-food giant acquired the Israeli artificial intelligence firm Dynamic Yield in 2019 with an eye toward boosting sales by providing personalized digital promotions to customers.

Restaurant Brands International — the parent company of Burger King, Tim Hortons and Popeyes — hopes to have the predictive personalized systems at more than 10,000 of its restaurants’ locations across North America by mid-2022.

“We’re taking what was an outdated, old, static sales channel and bringing it to the forefront of the industry,” said Duncan Fulton, the chief corporate officer for Restaurant Brands International. Now, customers can have the “the ability to automatically reorder things and pay for the items at the board, which, ultimately, speeds up the window time, allowing you to collect your food and go on your way.”

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