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McDonald's Corp. feels pressures of rising commodity and labor costs.

McDonald’s feels pressure of rising labor, commodity prices

Food and paper costs rose about 4% in the U.S. during 2021, CFO Kevin Ozan says

McDonald’s Corp. said pressures from increased labor and commodity costs are pressing operators as the burger system returns 99% of its units to full hours, the company said Thursday.

Executives at Chicago-based McDonald’s, which released its earnings for the fourth quarter ended Dec. 31, said that, despite COVID impacts, the system reached a record $112 billion in global systemwide sales for 2021 and annual same-store sales growth of 13.8% in the United States.

Commodity pressures were expected to continue into 2022, said Kevin Ozan, McDonald’s chief financial officer, on an earnings call.

“In 2021, in the U.S., our food and paper costs were up about 4% for the year,” Ozan said. “If we look forward to 2022, our expectation is that will be about double or in high single digits increases for 2022. Those food and paper costs were up 3% internationally, he added.

“More of that pressure will be in the first half of the year, and as the year progresses, we expect that to ease somewhat,” Ozan said.

While the omicron COVID variant led to as much as 10% of the U.S. McDonald's system limiting hours in December, executives said that surge's impact was easing and only about 1% of the brand's 13,500 U.S. stores were experiencing labor impact in late January.

And despite commodity cost pressures, McDonald’s and its franchisees saw positive same-store sales growth in 2021.

“We saw positive comps across all dayparts, which are still benefiting from average check growth, driven primarily by strategic menu price increases,” Ozan said. “Our MCD pillars continue to drive U.S. comps, as strong marketing efforts behind McRib and the Crispy Chicken Sandwich were complemented with digital adoption by our customers. Digital growth remains a key driver of success in the U.S.”

Chris Kempczinski, McDonald’s CEO, said the company’s investments in technology and digital were paying off.

“Our top six markets saw more than a quarter of their systemwide sales, or $18 billion come from digital channels in 2021, a 60% increase over 2020,” Kempczinski said. McDonald’s loyalty program was the biggest driver of digital adoption, he added.

“We now have loyalty programs in more than 40 markets, including the US, Germany and Canada, each of which launched in 2021,” Kempczinski said. “In the first half of 2022, we're excited to bring MyMcDonald's Rewards to consumer in UK and Australia. We're well on our way to building the world's largest loyalty program.

McDonald’s expanded the rewards program nationally in the United States in July. “After just six months in the U.S., there are over 30 million loyalty members enrolled and 21 million active members earning rewards,” Kempczinski said.

Kempczinski did say McDonald’s was seeing a higher percentage of sales in the drive-thru compared to pre-pandemic levels.

“While average drive-thru service times have improved since 2019 across our top markets, service times slowed in 2021 in the U.S. and many markets compared to 2020,” he said. “With industry-wide labor availability challenges, our market teams are focused on the foundational elements to maximize throughput, from staffing and positioning to new technology.”

Marketing has recently been aimed at promoting existing products in new combinations, as with the upcoming Jan. 31 promotion of TikTok influencer menu hacks, such as a Hashbrown McMuffin or Land, Air & Sea.

“What I love about the hacks, what I've loved about the Famous Orders [promotion], we're finding ways to create news without adding complexity into the restaurant,” Kempczinski said. “I think you're going to see us continuing to do that as kind of a primary focus area. That doesn't mean that there aren't going to be innovations that we do with new menu items, limited-time offers.

“Those are certainly part of what keep the consumer excited and can help drive frequency,” he said. “But I think we need to stay focused on driving core menu and creative ideas like the hacks ideas is just one way to go about doing that.”

For the fourth quarter ended Dec. 31, McDonald’s posted net income of $1.638 billion, or $2.18 a share, up from $1.377 billion, or $1.84 a share, in the same period last year. Revenues increased 13.1% to $6.009 billion from $5.313 billion in the prior-year period.

Fourth quarter same-store sales systemwide globally were up 12.3% in the quarter, with increases of 7.5% in the U.S., 16.8% in international operated markets and 14.2% in international developmental licensed markets and corporate.

“Comparable sales benefited from strong average check growth driven by strategic menu price increases,” the company said of U.S. sales in a press release. “Strong menu and marketing promotions, such as the McRib and Crispy Chicken Sandwich, and growth in digital channels, driven by the company's loyalty program, also contributed to the comparable sales growth. Comparable sales increased 13.4% on a 2-year basis.”

McDonald's has more than 40,000 locations in over 100 countries. About 13,500 of those are in the United States.

Contact Ron Ruggless at [email protected]

Follow him on Twitter: @RonRuggless


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