Many people regard McDonald’s (MCD) as one of the best value investments around. For example, Mr. Market paid $243.16 for McDonald’s (NYSE: MCD) on 14 October 2022.
I think people buy McDonald’s stock because they think it is inflation and recession proof. To explain, the belief is people will buy more cheap McDonald’s fast-food because they have less money to spend. Hence, McDonald’s can survive economic turmoil when more expensive competitors lose customers.
Will the Restaurant Labor Shortage Destroy McDonald’s (MCD)?
McDonald’s bears will argue inflation helps Mickey D’s by making necessities more expensive.
For example, the US Food Inflation Rate rose from 4.6% in September 2021 to 11.4% in October 2022. Consequently, people pay more for groceries and have less to spend on lunch, so some of them head for the Golden Arches.
Similarly, US energy inflation has been over 20% for over a year. In depth, the US energy inflation rate was 24.827% in September 2021. US energy inflation rose to 41.624% in May 2022 and fell to 23.813% in August 2022.
Conversely, McDonald’s (MCD) quarterly revenues rose to $6.201 billion 30 September 2021 and fell to $5.718 billion on 30 June 2022. Plus, McDonald’s quarterly revenue growth fell by -2.89% in the quarter ending on 30 June 2022. However, McDonald’s revenues grew by 56.53% in the quarter ending on 30 June 2021.
Thus, McDonald’s business is shrinking as inflation rises. One reason for this could be that people are spending more at the gas pump, so they have less money to spend at McDonald’s.
Will the Labor Shortage kill McDonald’s?
Strangely, the biggest threat to McDonald’s (MCD) could be America’s growing labor shortage.
To elaborate, the classic fast food business model created by McDonald’s in the 1950s relies on a large supply of cheap labor. McDonald’s can charge low prices for burgers, fries, and soda because it pays low wages.
Historically, American fast-food operators could tap large pools of cheap labor. For example, high school and college students, working-class women, seniors, African Americans, and immigrants.
However, there is evidence those pools of cheap labor are shrinking. For example, the National Restaurant Association estimates 21% of limited-service (fast-food) restaurant operators admitted their establishments were over 20% under staffed in August 2022.
Similarly, 76% of limited-service restaurant operators admit their locations have job openings that are difficult to fill. Plus, 63% of limited-service restaurant operators admit their establishments do not have enough employees to meet customer demand.
How the Labor Shortage could change Fast Food beyond recognition
Hence, fast-food is facing a labor shortage. This labor shortage could change the industry beyond recognition.
Some fast-food operators paying uncharacteristically high wages. For example, a Colorado KFC was paying $19.39 an hour for a fast-food attendant on 6 October 2022, Indeed claims. Similarly, a Dunkin’ Donuts was paying $17.36 an hour. Moreover, average wages for fast-food attendants rose to $16.69 an hour in Phoenix and $15.18 per hour on 6 October 2022.
These high wages will cut into operating costs and profits at companies such as McDonald’s (MCD). Notably, 88% of restaurant operators admit their total food and beverage costs were higher than in 2019, the National Restaurant Association estimates. Meanwhile, 94% of restaurant operators admitted their other operating costs were higher than in 2019.
Consequently, 91% of limited service restaurant operators admit they had to increase menu prices during an inflationary period, the National Restaurant Association admits. Similarly, 57% of limited-service operators have and changed menu items and 58% have reduced hours of operation because of high costs. Another 38% of limited service operators are not operating at full capacity and 32% admit they close on days on which they would normally be open.
These figures show some fast-food operators are making less money because they are reducing operations.
Will Unionization Hurt McDonald’s?
Another threat is unionization. To explain, fast-food has resisted unionization because it was easy to replace workers talking union.
Today, some fast-food operators cannot replace those workers, so they have to deal with the union. Many fast-food outlets, including a Chipotle Mexican Grill in Lansing, Michigan, and 230 Starbucks’ (SBUX) stores, have unionized in the past year. However, McDonald’s (MCD) has blocked some unionization efforts, including a settlement that holds the company responsible for franchisees’ labor practices, Reuters reports.
Bigger changes could come in California, where Governor Gavin Newsom (D-San Francisco) signed Assembly Bill 257, which creates a Fast Food Council to regulate working conditions. The Council will set minimum standards for wages, working conditions, benefits, and time off at fast-food restaurants. Fast food workers, franchisees, franchisers, and state officials will sit on the council.
The Service Employees International Union which is trying to organize fast-food workers backed AB 257. AB 257 is the first such bill in the nation, Newsom is a probable presidential candidate for 2024.
Strangely, AB257 benefits McDonald’s because it holds franchisees and not franchisers, such as MCD responsible for working conditions and wages. However, AB 257 could increase McDonald’s operating costs in America’s most populous state.
Some experts think AB 257 could give unions bargaining power at fast-food joints by allowing union leaders to take demands to the Fast Food Council. Franchisees fear AB27 could raise fast food prices.
Can Robots save McDonald’s?
Strangely, robots and artificial intelligence (AI) could save McDonald’s (NYSE: MCD) from the labor shortage.
For example, Miso Robotics claims its Flippy 2 can cook French fries and other fried foods as fast as human fry chefs. Additionally, Miso claims Flippy 2 can increase the volume of fried food cooked by 30%. They are using Flippy 2 at Jack in the Box and White Castle restaurants in the United States and a Wimpy restaurant in the Dubai Mall in the Middle East.
Additionally, the Miso Robotics Flippy 2 Wings model can fry chickens and wings. Hence, McDonald’s could use Flippy 2 Wings to fry Fillet-O-Fish, Chicken McNuggets, and Chicken sandwiches.
Miso claims fast-food operators can install Flippy 2 or Flippy 2 Wings for as little as $3,000 a month. Hence, it could be easy for McDonald’s to automate its stores. Notably, Miso Robotics is developing AI systems that monitor coffee, prepare drinks, and even grill burgers. Miso has demonstrated burger flipping robots in the past.
Interestingly, individuals can invest in Miso Robotics because it is a crowdfunded company with over 20,000 shareholders. Miso claims to have raised almost $90 million through crowdfunding and could seek more in a Series E round. Individuals can learn more about reserving an investment in Miso Robotics here.
However, McDonald’s President and CEO Chris Kempczinski rejected kitchen automation in a 26 July earnings call. Kempczinski thinks kitchen rrobots are impractical. Instead, McDonald’s is concentrating on digital solutions such as voice recognition software and automated ordering.
I think Kempczinski is making a mistake and exposing his company to labor shortages and high labor costs. Moreover, I predict there could soon be a conflict between McDonald’s franchisees who want to use robots and McDonald’s corporate.
One danger McDonald’s faces is that competitors that use robots could undercut its prices in a recession. Those competitors could also prepare better food faster.
How Much Money is McDonald’s Making?
McDonald’s (MCD) makes money from its burgers. For example, it reported a quarterly gross profit of $3.267 billion and a quarterly operating income of $1.712 billion on 30 June 2022.
In contrast, the quarterly operating income fell from $2.691 billion on 30 June 2021. However, the quarterly gross profit rose from $3.205 billion on 30 June 2021.
Conversely, McDonald’s is generating less cash. For example, the quarterly operating cash flow fell from $1.733 billion on 30 June 2021 to $618 million on 30 June 2022. That means McDonald’s quarterly operating cash flow fell by $1.115 billion in a year.
Similarly, the quarterly ending cash flow fell from $29.70 million on 30 June 2021 to -$463.20 billion on 30 June 2022. Thus, McDonald’s is burning cash. Moreover, McDonald’s cash and short-term investments fell from $3.049 billion on 30 June 2021 to $1.873 billion on 30 June 2022.
However, McDonald’s total debt fell from $49.262 billion on 30 June 2021 to $47.586 billion on 30 June 2022. McDonald’s reported a quarterly financing cash flow of -$687 million on 30 June 2022. The quarterly financing cash flow fell from $1.306 billion on 30 June 2021. Thus, McDonald’s pays off an enormous amount of debt.
McDonald’s is losing Value
McDonald’s (MCD) is losing value because of the loss of its Russian restaurants due to the Ukraine War. The Total Assets fell from $51.893 billion on 30 June 2021 to $49.248 billion on 30 June 2022.
Thus, I think Mr. Market overpriced McDonald’s at $243.16 on 14 October 2022. I cannot consider McDonald’s a value investment because it loses cash and value.
However, MacDonald’s is still an attractive dividend stock. McDonald’s has scheduled nine $1.38 quarterly dividends between 15 December 2022 and 13 December 2024. Consequently, McDonald’s offered a $5.52 forward dividend and a 2.37% dividend yield on 14 October 2022.
I think the only attractive thing at McDonald’s is the dividend. I advise investors to avoid McDonald’s because I consider this company a dinosaur that will have a hard time adapting to a changing market and economy.
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