McDonald's Discounts: A Double-Edged Sword for Profitability

As McDonald's (MCD) prepares to report its earnings on Monday, investors are bracing for the impact of the company's recent discount strategies on its profit margins. While these promotions aim to attract cost-conscious customers and stop the decline in sales, they may also lead to a temporary decrease in profit margins. Let's delve into the potential short and long-term implications of McDonald's discount strategies on its profitability.

Short-term impact: Margin compression

Discounts typically lead to lower average check sizes, which can negatively affect profit margins. For instance, the $5 Happy Meal promotion in the US and the three meals for £3 in the UK are likely to have lower average check sizes compared to regular meals. This could result in a temporary decrease in profit margins, similar to the 1% decrease in consolidated operating income (1% in constant currencies) reported in the third quarter of 2024, despite a 3% increase in consolidated revenues.



Long-term impact: Increased sales and market share

While discounts may initially lower profit margins, they can also drive customer traffic and increase market share. If executed effectively, these strategies can lead to higher sales volumes, which can offset the impact on margins. For example, McDonald's has seen strong comparable sales growth since 2019, driven by its Accelerating the Arches strategy, which includes value offerings. In the long run, these strategies can help McDonald's maintain or even improve its profit margins by attracting and retaining customers.



Competitive response and market share implications

Competitors have been responding to McDonald's discount strategies by implementing their own promotions and value menus to maintain market share. For instance, Burger King introduced its "Your Way" value menu, Wendy's launched a "4 for $4" deal, and Taco Bell introduced its "Stacker" menu. These competitive responses suggest that McDonald's discount strategies have been effective in driving customer demand, prompting competitors to follow suit. However, the long-term implications for market share depend on various factors, including customer loyalty, pricing strategy, menu innovation, and economic conditions.



In conclusion, McDonald's discount strategies may lead to a temporary decrease in profit margins due to lower average check sizes. However, these promotions can also drive customer traffic and increase market share in the long run, helping McDonald's maintain or even improve its profit margins. As McDonald's reports its earnings on Monday, investors should closely monitor the impact of these discount strategies on the company's financial performance and market share.