Mike Cieplak: Our next question is from Dennis Geiger with UBS.
Dennis Geiger: Thank you. Wondering if you could speak a little bit more to kind of what you’re seeing with that U.S. consumer, whether it’s by income cohort or spending pattern? And then sort of beyond affordability and aligning the system on a national value plan, can you speak at all to sort of some of the other key levers that maybe can be supportive of U.S. sales growth in the current environment? Thank you.
Chris Kempczinski: Sure. Well, I think one of the things that we noted when in our opening is that the consumer is certainly being very discriminating in how they spend their dollar. And the inflation that has occurred over the last couple of years in the U.S., I think, has certainly created that environment. And while it may feel — it may be more pronounced with the lower income consumer, I think it’s important to recognize that all income cohorts are seeking value. And so our focus is on making sure, as I said, that we’re offering strong value to our customers. And that’s going to have benefits, not just to low income, that will have benefits to middle and upper income as well. And so the actions that you take are the same regardless of the income cohort that you’re talking about.
From other sales driver standpoint, on that score, I feel really good about where we’re at in the U.S. As I look at most importantly, how we’re running our restaurants, our franchisees in partnership with our U.S. team are doing a really nice job of running strong restaurant operations. We’re seeing improvements in speed of service. We’re seeing the turnover in our restaurants is down. All of those things in combination are improving customer satisfaction. We’re seeing our satisfaction scores increase in the U.S. And then we will, of course, have menu innovation that happens throughout the year. It’s part of what we do. I’m not going to get into detailing exactly what the menu innovation is going to be and when it comes, but certainly you can expect that we will use menu innovation as well to find ways to engage our customers.
And lastly, I would just point out, we always have to be finding ways to be driving consumer interest around great marketing plans. And if we’re doing great marketing, you can grow the business just with your core menu. And so I know the U.S. team, along with our agency in the U.S., Widen and Kennedy, they are continuing to look for what’s the next big idea that we have from a marketing standpoint to drive the business. So multiple levers at our disposal.
Ian Borden: And Dennis, maybe I’ll just build on what Chris was saying because I think it’s such an important point. I mean our — the foundation of our business, the vast majority of our business is in an incredibly strong position. I mean I think we come into this more challenged macro environment kind of in an advantaged position. And I think the emphasis with that would be we have a fully modernized estate, as Chris kind of referred to. We’ve got, I think, a marketing and brand engine that’s best-in-class, meaning I think the team continues to deliver great creative execution. I think that’s resonating with customers in culturally relevant ways. We’ve got our system financial strength that’s at one of its strongest points in our history.
So we’ve got the ability to kind of lean into opportunities together because of all the work we’ve done over the last couple of years. And then if you think of our 3Ds of delivery, drive-thru, and digital, we have a leadership position in each of those areas. We’re continuing to invest to drive growth in those areas, delivery, for example, the U.S. business kind of hit all-time highs in the first quarter. Delivery is — sorry, digital, as you know, we’ve made a lot of progress in, and we know we continue to drive growth in digital more broadly. So I think we feel really good about the vast majority of our business. We just know the consumer is looking for more on affordability and value, and we’re going to lean in and make sure we can meet those needs.
Mike Cieplak: Our next question is from John Ivankoe with J.P. Morgan.
John Ivankoe: Hi, thank you. I was wondering what kind of opportunity or maybe need that we have to address core menu pricing in the U.S. and I speak specifically about things like quarter pound or combo pricing or Big Mac combo pricing that can actually be very different across the restaurant base even within a given market and obviously, the press will communicate some of the highest pricing in certain stores as you can talk about what the direction of pricing has happened to McDonald’s across the country even if it is just certain stores. So is there a need or an opportunity to kind of get back and communicate around core menu pricing to kind of give the perception of value for consumers that maybe even are outside of the value menus of what we did pre-COVID? Thank you.
Chris Kempczinski: Sure. Well, let me start with — I think it’s important to recognize that if you look at margins in the U.S. today, restaurant-level margins for franchisees versus where we were in 2019, we’ve just now rebuilt franchise restaurant level margins back to where we were in 2019. So the pricing that’s been taken over the last several years with all taken as a means off-set what we were seeing around quite high labor inflation and quite high commodity and food and paper inflation. So restaurant margins are now back to where we are — where we were again in 2019 in the U.S., which then says to me that we do have the ability to be thinking about what we do from a value proposition going forward and I talked about that in my answer to the earlier question.
I think the idea of where do we need to stay from a pricing standpoint on core menu, we’ve done a lot over the last several years building our pricing capabilities and the pricing capabilities that we have happen at the local level. So we will go and we will take a look at what are the competitive products around us, what are they priced at, and how do our products match up against that, and all of that is then used to inform at the franchisee level at the restaurant level, what our relative pricing is. So I think from where we are, I feel like we are in a decent shape from an overall menu standpoint. Yes, there will be the one-offs that gets sensationalized and reported on. But again, our opportunity is we need to speak in a more compelling way with one voice about what are those entry point, affordable price points that will be attractive to consumers, and that’s what the focus for our U.S. team, I know is.
Ian Borden: Maybe John, I’ll just build a little bit on what Chris talked to because I think — maybe the way to think about it is what do we think good looks like in getting value and affordability right. And I would — I think we would say it’s a couple of things. It’s making sure, as Chris said, we’ve got those entry-level items at affordable price points for people or for consumers. It’s making sure that we’ve got an entry-level meal bundle that’s at an affordable — compelling affordable price point and doing that generally with products that consumers know and that we’ve got strong equity behind. And then I think if breakfast is a big part of our business like it certainly is in the U.S., making sure we’ve got compelling value at breakfast as well.
And I think, obviously, from an executional standpoint, we’ve got to make sure we’ve got the right products at the right price, and we’ve got, as you’ve heard Chris talk about, that consumer awareness at a level of significance so that consumers are aware of the offers and the affordability price points and that’s going to influence their visits as we look forward and they’re looking across different options. So again, I think we’re working hard to make sure we’re delivering against each of those opportunities. And as Chris talked about, in markets where we’ve done that well, we’re seeing really strong performance, and that’s the opportunity we’re focused on making sure we have in place in each of our top markets.
Mike Cieplak: Our next question is from David Palmer with Evercore.
David Palmer: Thank you. You noted that customer satisfaction scores had been heading higher. And that definitely doesn’t surprise me given all the improvements to the restaurants and digital and the core food renovations. But it does — I guess what does surprise me is that the gap to the industry, at least in the U.S., has eroded and that outperformance gap, I wonder whether it’s the surveys or certain consumer trends as you slice it in, even dayparts, what are the insights about why that gap has narrowed because it has been surprising. Is it just an entry price point opportunity in the value scores that you’re seeing with certain income cohorts and how does the opportunity for the U.S. differ from maybe some of your other international big five markets? Thank you.
Chris Kempczinski: Sure. I think on our overall satisfaction, again, we look and we’re seeing improvement across all of our major markets on satisfaction. And as you noted, there’s multiple aspects to that. I think where we see — the one opportunity as you sort of then decompose drivers of satisfaction, certainly, in some markets, we have seen that our relative superiority on affordability has declined. And I think if there’s any pressure on overall satisfaction or if there’s anything that’s closing it, it’s probably losing some of that relative superiority on affordability. Again, that’s not in all markets, but that’s in a few markets. It’s important to still note we still are viewed as a superior value proposition but the degree of gap in a few markets has narrowed. And so that leads back to all the things that we’ve been talking about on this call is things that we need to be focused on.
Ian Borden: David, just maybe to build because I think experience, as you noted, is encompassing of a number of different factors. I mean I think we know we are driving better speed of execution consistently across our top markets. We know when we put capabilities in place, as you’ve heard us talk about previously, like ready on arrival, which is in place in the U.S. that we’re delivering hotter, fresher food as customers arrive to our restaurants and delivering an overall better experience. I think the sharp point and Chris mentioned this is just we’ve got that opportunity on affordability, and we’re really laser-focused on making sure we can meet the need that consumers are expressing in the current context, but we feel really good about all the other aspects of the experience and how we’re delivering against what customers are expecting.
Mike Cieplak: Our next question is from Eric Gonzalez with KeyBanc.
Eric Gonzalez: Hi, good morning and thanks for the question. On the pricing discussion, and I appreciate the point that your store level margins are back to 2019 levels. But perhaps you could speak to the current level of year-over-year pricing and your current inflation expectations for food and labor this year? And then just maybe whether you’ve seen any changes in the flow-through of that pricing or any elasticity changes?
Chris Kempczinski: Sure. Well, my guess is your question is focused on the U.S. because obviously, I could give a different answer depending on where you are in the world. But if I focus just on the U.S., most of the pricing that you see now in the U.S. is carryover pricing. It’s not new pricing per se. Most of it again is carryover pricing. That said, we do continue to see there’s certainly labor inflation. Much of that is coming out of what happened in California. And on a national level, you could probably see we’re expecting high single-digit labor inflation. Again, much of that from the bleed over of what California introduced. And then on food and paper inflation, I think that’s gone down to much more historical levels. So we’re back at more historical levels on what we see from a food and paper inflation going forward.
Ian Borden: Maybe just to build Eric, to what Chris said, I mean the food and paper low single digits. So I think we have seen kind of favorable movement in this year, although we’ve still got a fair bit of carryover effect from 2023 inflation, certainly to the first part of 2024 from both food and paper and labor. I think what’s important to note on pricing is, I think our business, including our owner-operators, understand that the consumer is price weary. And I think we certainly are going to be prudent and thoughtful about any further price increases that we’re looking at for the rest of 2024 on that backdrop and keep working on the opportunity that we’ve talked about a fair bit already on the affordability and getting that in place to kind of address the consumer need.
Mike Cieplak: Our next question is from Sara Senatore with Bank of America.
Sara Senatore: Thank you. I guess one clarification and then a question. You mentioned that the QSR industry traffic gets flat to declining. I guess, I always think of this as an industry where traffic is kind of at best flat. So I’m just trying to understand, given you usually have better data than I do, whether that’s an inflection point or this — the sort of traffic trends have been more consistent, which is what it sort of sounds like. And then the question I have is you mentioned margins are right back to where they are. I think franchisee cash flow is also back to pre-COVID, not COVID peaks. But I guess as you think about maybe investing in value, do you contemplate you doing anything to support franchisees, I don’t know if it’s sort of fee abatements like digital fees or we’ve seen some other restaurants kind of pull back on those when franchisees are making investments, whether they be capital investments or in other operating expenses.
So just is supporting franchisees something that you can do if you really need to reinvest in value? Thanks.
Ian Borden: Good morning Sara, it is Ian. Let me take the clarification, and then I’ll let Chris address your question. So what I said earlier was that industry traffic, and I was talking about across many of our top markets is flat or we’re seeing declining trends. If I talked specifically about the U.S. in quarter one, industry comparable traffic was negative, and we expect it to be negative for the full year. And I think that’s the context that’s important just to give the context to the more challenging macro environment.
Chris Kempczinski: Yes. And then turning to franchisee and your question about how we support franchisees, you’re right that our U.S. franchisees, and I could go through other markets as well. But they’re in a strong position. When you look at franchisee cash flow, we are at, I think, our second highest levels ever, 2021 being the peak, but we’re at very strong franchisee cash flows. We’re going to see franchisee cash flows increase in Q1. And if you think about the balance sheet for our franchisees, the modernization that we did on our restaurants in the U.S. many years ago now was all done in a period of super low interest rates. And so any debt that’s being carried on the books for our franchisees is at significantly lower interest rates than what we’re seeing in the market right now.
