“$5 MEAL DEAL!” screams a sign outside a McDonald’s, just off Interstate Highway 49 in north-west Arkansas.
The message is a new special offer that McDonald’s launched across the US in late June. Consisting of a carton of four Chicken McNuggets, a sack of fries, a cold drink and the option of a double burger or a chicken sandwich, it makes a filling if somewhat oily lunch.
McDonald’s executives hope it provides something else: a reason for reluctant customers to return. “We must act with conviction, with purpose and with urgency on value, pricing and affordability,” the company told US franchisees and employees this week in a memo viewed by the Financial Times, noting that a goal of the $5 Meal Deal was to “reverse our guest count momentum”.
The fast-food chain is on a growing list of big brands under pressure as the American consumer, who once seemed so unstoppable, displays mounting evidence of fatigue.
McDonald’s revealed this week that fewer diners were turning up at its roughly 13,500 US restaurants’ service counters and drive-through windows. Globally, comparable sales declined for the first time since 2020 and the first year of the pandemic.
Hershey, the food company famous for its chocolate bars, on Thursday said consumers were “pulling back on discretionary spending” as it revealed organic net sales fell by a sixth. Rival Kraft Heinz blamed “waning consumer sentiment” as it reported falling sales volumes across North America. Starbucks, the coffee chain, disclosed a second quarter that sales had declined in the US compared with the year before.
The trend extends beyond food and beverages: this week Procter & Gamble’s shares slid after the company behind household brands such as Oral B toothbrushes and Bounty paper towels reported weakening sales growth. Amazon chief financial officer Brian Olsavsky said North American shoppers were looking for cheaper products, while their spending was “not as strong as it’s been in a normalised economy”.
Consumer goods companies have been in the centre of the inflationary wave that washed over the US in the past three years. Emerging from the pandemic, they faced tangled supply lines, soaring energy prices and a strong labour market that emboldened workers to demand higher wages.
Most moved decisively to raise prices, contributing to increases of more than a quarter for groceries, consumer goods and restaurant food since 2019, according to government statistics. The companies’ sales, and in many cases profits, rose in tandem.
Consumers in the US also helped feed the wave. Flush with excess savings thanks to the lockdowns and government stimulus payments of the pandemic, and then buttressed by the strong labour market, many households continued to spend freely even as goods prices rose. Even poorer households, usually the first victims of inflation, managed to keep up as wages rose faster than the inflation rate at lower income tiers.
Now consumption is faltering. The shift has important implications for the largest economy in the world, two-thirds of which is driven by consumer spending.
“The signs have become increasingly clear that momentum in the real economy has slowed,” says David Wilcox, who led the research and statistics division at the Federal Reserve until 2018.
Most economists believe, however, that this will not amount to a hard landing for the US economy. Some also suggest that the weaker sales outlined this week are partly the result of a post-pandemic normalisation whereby some consumer spending is shifting back to services from goods.
“If you combine healthy income growth with high levels of wealth, it’s very hard for me to see a sharp downturn in overall consumer spending,” says Dean Maki at Point72 Asset Management.
The health of the US consumer is a vital backdrop for this year’s presidential election. The most severe cost of living crisis in two generations has become one of the principal issues in the campaign.
Donald Trump has reminded voters of the inflation surge at every turn. Now that President Joe Biden has ended his re-election bid, Trump has sought to transfer the blame to Biden’s vice-president and presumptive Democratic nominee, Kamala Harris.
At a recent rally in Minnesota, Trump accused Harris of helping to cause “the worst inflation in half a century, I believe the worst inflation we’ve ever had”. He added: “If she wins, inflation will only get worse.”
Biden has attacked what he has called corporate price gouging, as inflation has overshadowed his record of navigating the US out of the worst recession since the Depression and ushering in landmark legislation to boost domestic investment.
The White House has sought to take some credit for the declarations of lower prices in recent months by retailers such as Target and Walmart, claiming in May that they “have begun to answer the president’s call to lower prices for household goods”.
The political impact of the apparent shift on consumer sentiment is unclear. While the Harris campaign will hope that voters welcome the drop in inflation — and new low price deals from retailers — the risk is that they punish her for any slowdown in spending.
The new limits on the US consumer are in part down to the Fed, whose monetary policymakers this week once again chose to keep the benchmark interest rate at a 23-year high of 5.25-5.5 per cent. The central bank drove up rates from zero beginning in 2022 in a bid to stamp out upward price pressures that followed the disruptions of the pandemic.
Those rates have made it much more costly to buy a house or a car, to expand a business or carry a floating-rate loan balance. Meanwhile, consumers fully burnt through their pandemic-era savings around March, according to the Federal Reserve Bank of San Francisco. The personal savings rate has cratered to around 3 per cent of income, after surging above 30 per cent at the onset of the pandemic.
More Americans are now struggling to pay off their credit card debt, with delinquencies recently notching a new record, according to data from the Philadelphia Fed.
“The consumer in the aggregate is still looking pretty comfortable,” says Nathan Sheets, a former US Treasury official who is now global chief economist at Citigroup. “But we’re clearly seeing some emerging strains among the bottom 40 per cent of the income distribution [and] and the big question is if this weakness is starting to migrate.”
At Mondelez, the manufacturer of Ritz crackers and Chips Ahoy! cookies, CEO Dirk Van de Put told analysts this week that two or three years ago consumers were buying more “family size” or “party size” packages.
Such large packages are becoming increasingly out of reach for lower income consumers, who are now turning towards smaller packages they can afford even at a higher price per unit. “If the biscuit brand that they like can fit in there at the right price point, they will buy. If not, they will not buy any biscuits,” Van De Put said.
The labour market, full of buzzphrases like the “Great Resignation” and “quiet quitting” at the height of workers’ bargaining power, has become tougher for workers. Companies, once desperate for staff, are increasingly putting hiring plans on ice. The 8.2mn job openings listed at the end of June were almost 1mn fewer than a year ago, the labour department reported this week.
The unemployment rate has also steadily crept higher in recent months. In July it climbed to 4.3 per cent, according to government data released on Friday.
The Fed’s campaign against inflation is showing results: the consumer price index in June rose at an annual rate of 3 per cent, far off highs of 9 per cent in late 2022. While prices for groceries were up only 1.1 per cent, “food away from home” — the kind consumed at restaurants — was still 4.1 per cent higher.
For now, “persistent inflation . . . is really weighing on consumers and weighing on their wallets”, says Debra Crew, CEO of Diageo, as the UK-listed spirits group reported sales volumes declined in North America — including a 5 per cent drop in sales of tequila. She said lower interest rates would help with a consumer recovery in the US, which the Fed signalled this week could come as early as its next policy meeting in September.
That could be a boon for the Harris campaign at a crucial time ahead of the election. “There are a lot of Americans who will be happier once mortgage rates are lower and the monthly payment on that first home has come down,” says Wilcox, who now works at the Peterson Institute for International Economics and Bloomberg Economics.
In Springdale, north-west Arkansas, there is a Walmart across the road from the McDonald’s by Highway 49, which is one of thousands of the retailer’s stores in the US that have imposed temporary price cuts on more than 7,000 products, 45 per cent more than the number a year ago.
Walmart became the world’s largest retailer by maintaining what it calls “every day low prices”, so the extent of this year’s markdowns was noticed in the industry. Rival retailer Target soon followed with markdowns on 5,000 goods across its assortment.
Testifying to the continued strength of the US labour market, the McDonald’s branch is touting $500 hiring bonuses for new recruits. Indoors, two young jobseekers were filling out applications and interviewing with the manager.
David Chandler stopped by to pick up two cheeseburgers en route from his job as a warehouse manager to go and mow the lawn of his church. The 61-year-old says he is a regular at McDonald’s because it’s relatively cheap, especially when he uses its app to order. But he and his family have curtailed their outings to other establishments and forgone their traditional Saturday morning restaurant breakfast. “A $50 meal is now $75,” he says.
A young sales associate takes an order from behind the counter for one of its new $5 Meal Deals. Handing over the tray, she adds: “It’s very popular.”
Additional reporting by Camilla Hodgson
