McDonald’s outgoing CFO Kevin Ozan foresees U.S. food and paper inflation of roughly 12%-14% for the full year, with the level rising “a little higher” in the third quarter after which he expects it to “moderate some” in the fourth quarter, according to comments he made on the company’s second quarter earnings call Tuesday.
While the company’s global comparable sales increased by 9.7% globally in the second quarter compared to the year-earlier period, the fast-food giant sees inflation internationally on the higher end of the 12%-14% range, but does not expect it to moderate, he said.
“Europe is getting hit harder on the inflation, certainly on food and paper,” Ozan said during the call, noting that the impact varies, partly in relation to each country’s exposure to Russian oil and other issues. “But in general, the international side will get hit a little bit harder than the U.S. and it will last a little bit longer later in the year than the U.S. right now.”
Ozan’s expectations of a potential moderation of the food and paper inflation metric — or any sign that price increases could ultimately ease later this year — signal a relatively rare and likely welcome note of optimism for financial executives who are under pressure to offset soaring food and labor costs. It comes amid a rising chorus of debate around whether or when the U.S. economy will tip into a recession: Fannie Mae economists have said it could happen during the first quarter of 2023.
The Chicago-based fast-food chain itself has leaned on price increases as part of its current strategy. It reported a 4% increase in comparable U.S. sales and a higher average check size driven mainly by price increases as guest counts were relatively flat in the second quarter compared with the year-earlier period, the company said. Year-over-year Ozan said menu prices were up in the high single digits where the company expects them to stay for the full year.
This year “we’re taking smaller, more frequent price increases, because it gives us the flexibility to be able to see how consumers are reacting and then adjust if or when necessary,” he said. At the same time, he said the company has to balance cost pressures with making sure customers see its offerings as providing “good value.”
Ozan also estimated that the company was probably seeing labor inflation at a little over 10%, partly due to strategic wage rate increases at company-operated restaurants last year. Asked whether technology investments could help address the company’s labor needs, McDonald’s CEO Chris Kempczinski said he did not see robots and automation being a “broad-based solution anytime soon” although the company has spent a lot of time and money looking into it.
The earnings call marks Ozan’s last before he steps down after roughly seven years in the finance chief seat. The 25-year company veteran will serve as McDonald’s senior executive vice president, strategic initiatives ahead of retiring in mid-2023. Last month the company announced that Ian Borden, who is also a McDonald’s veteran currently serving as its president, international, will succeed Ozan in September. The move follows a round of executive swaps and departures.
Kempczinski credited Ozan with leading the company’s financial turnaround taking the CFO seat in early 2015 when comparable sales and guest counts were declining globally. During Ozan’s tenure the company increased system-wide sales by over 25% to more than $100 billion and saw the restaurant count grow to nearly 40,000, or by more than 10%, Kempczinski said, adding that it had also navigated the pandemic and exited a major market during the period. “Kevin has seen it all,” he said.
In the quarter the company reported that its consolidated operating income fell 36%, or 30% in constant currencies, including $1.2 billion in charges related to the sale of the company’s business in Russia and a $271 million gain related to its sale of its Dynamic Yield business. Excluding current year net charges and prior year net gains the consolidated operating income was flat, and up 7% in constant currencies.
McDonald’s shares rose 2.51% to $256.67 in afternoon trading.