Are We Now witnessing the end of McDonald's As We Know It in America that's right everyone McDonald's is having big big issues most notably related to how much they have increased the prices of their food I just went into this McDonald's here where a Big Mac meal cost 1179 before taxes and is now at a price where people simply can't afford to come to McDonald's anymore with McDonald's CEO now reporting that those making less than $45,000 a year have stopped coming to the store after all the price of a Big Mac Across America it's gone up by 280% over the last two decades with the most expensive Big Macs occurring here in States like New York as well as in Connecticut where there's an $18 Big Mac meal in Southwest Connecticut because I think a lot of us grew up going to McDonald's with much more affordable prices um back in the 1990s a Big Mac meal cost less than $3 everyone if you take a look at this advertisement from a mid 1990s McDonald's you could get a Big Mac meal for less than $3 you can get chicken nuggets for less than $2 and even back in the mid 2000s McDonald's had the dollar menu where you can order a whole bunch of stuff for a dollar that's also gone now as well and this crazy fast food inflation is going to have far-reaching implications on the US economy in 2024 and Beyond because it's a signal of how Americans can no longer afford the basics with the Wall Street Journal reporting that it's been 30 years since food ate up this much of your income with consumers now spending over 11% of their disposable income on food that is now up to a three decade high with a particular surge in the cost of dining out as a result Denny's Wendy's and other restaurant chains are telling investors that their guest counts are falling compared to last year and so folks this is an industrywide problem the cost of food has gone up everywhere due to an increase in commodity prices as well as an increase in the cost of labor for instance the cost of the cattle and the cows used to make the burgers at McDonald's has nearly doubled since the start of the pandemic while at the same time a variety of different states are aggressively increasing minimum wage regulations particularly California who's now established $20 an hour minimum for fast food workers but folks here's what's crazy is that in the midst of all of this upheaval in the fast food industry with skyrocketing menu prices and reduced guest counts and frustrated franchise owners we're actually seeing the stock price of companies like McDonald's continue to Surge with McDonald's stock NOW trading at $298 a share a price which is three times higher than what it was 8 years ago and you can see just over the last couple years the price of McDonald's stock continues to go up and so if there's going to be imminent disaster and decline in the fast food industry and the amount of people visiting McDonald's is plummeting with traffic at their Us stores down 133% year-over-year then why are they still doing so well from a corporate angle well well that has everything to do with the fact that McDonald's is actually not a fast food company McDonald's is a real estate company everyone and this is what actually shocked me in doing the research for this video and something I think you guys really need to just understand for your own curiosity sake and so you can also understand how this economy works and how the big corporations in America continue to get ahead while the small business owners and the consumers continue to suffer and McDonald's is a perfect example of this they have franchised 93% of their 40,000 restaurants meaning that they have around 40,000 restaurants worldwide but 38,000 of those are owned by franchisees who pay McDonald's royalties fees meanwhile McDonald's only owns 2,000 of their restaurants outright that's a very important fact to know because when you understand that you realize that McDonald's actually doesn't really control the menu prices and they don't really actually care about what the expenses and the incomes are from the properties because the way they make money is by charging crazy franchise and rent fees to their owners for instance the typical McDonald's store in America owned by a franchisee makes $3.2 million in sales and revenue per year and of that 3.2 million the first thing the franchise owner is going to do is pay 20% of that to McDonald's corporate based on a 4% royalty fee a 4% marketing fee and 12% ground rate R fee and it's those fees paid by the franchise owner of the McDonald's the McDonald's corporate that comprises a majority of McDonald's revenue and here's what's actually so crazy about that is McDonald's earns those fees on sales they earn those fees on sales not on income and so if the cost of beef goes up for the franchise owner if their cost of Labor goes up McDonald's doesn't really care they're earning their money on the top line and so when we go back to looking at this Prof Forma for the typical franchise owner we can see after they pay 20% to McDonald's they're then having to pay 30% for the cost of the food and the paper as well as 38% for the cost of the labor a typical McDonald's that makes 3.2 million is probably paying around 1.2 million in labor cost and you can see after all of this a McDonald's franchise owner only makes 290,000 in profit off 3.2 million in revenue and so McDonald's uses these franchise owners to enrich themselves while these franchise owners end up getting a fairly low return for all their hard work and effort and the way that McDonald's justifies this is because they actually own the land under many McDonald's approximately 45% of McDonald's franchise locations McDonald's owns the land under the McDonald's which is often located in a central business district or a highly desirable part of town with a lot of traffic so McDonald's will actually buy the land at a fixed price with fixed debt financing and then they'll enter into a 20-year franchise agreement with someone who wants to run the McDonald's who will then pay them rent based off their sales which is actually an ingenious business model because the sales will go up with inflation while McDonald's cost for owning the property stay the same and in total McDonald's actually owns over 40 billion in real estate across the world this is their secret business Empire that no one knows about their original CFO Harry sorn famously said in the 1960s that McDonald's is not technically in the food business we are in the real estate business the only reason we sell 15-cent hamburgers back in the day is because they are the the greatest producer of revenue from which our tenants can pay us our rent of course is a business model that's worked out great over the last 50 years for both McDonald's and its franchisees because the costs at these fast food restaurants were fairly low the demand was good there was a lot of growth but now we're entering an environment where people are now priced out of eating at McDonald's with the lower income segment in America those making 50,000 or less the ones who are dropping out the the most with McDonald's CEO Chris Kinski recently saying that we're seeing pressure with the US consumer in that lower income segment call it 45,000 and under from an industry standpoint actually we're seeing a decrease in the most recent quarter of visits he thinks that they're eating at home as that has become more affordable so you got to ask yourself like who is actually the main demand segment for McDonald's and Wendy's and other fast food restaurants if it's not lower income households and consumers I mean the value proposition for fast food restaurants for so long was that you could go there and you could get a meal for five bucks or six bucks and feel full now you have to pay 12 to $15 at a fast food restaurant to feel full that means McDonald's and their franchise owners are going to have to rely more and more on middle and higher income segments to support their business but I'm personally skeptical and I have to wonder are those segments actually going to start going more to fast food restaurants probably not especially when you can go to Chipotle or Shake Shack and get a higher quality meal at a comparable price and again folks just to get a sense of this throughout time this graph is showing the price of a Big Mac burger not the meal just the burger over the last 40 or so years and what you can see is that back in 1986 a Big Mac burger cost 160 was extremely cheap 160 then it went up to 230 and stayed there for a long time even an 05 a Big Mac burger was $250 now it's skyrocketed all the way up to 560 and of course the meal is way higher than that and in total that means the price of a Big Mac has gone up 249 over the last 40 years which is significantly outstripped wage growth and so I'm left wondering could we just be seeing kind of the end of this fast food growth Bonanza in America will we see more of these McDonald's franchise owners really begin to struggle as their cost of buying food as their cost of Labor goes up and more of their customers drop out I think we could see something happened over the next 5 to 10 years where a lot of McDonald's franchise owners decide to sell their McDonald's and really isn't a buyer to take their place which is going to push the value of McDonald's down and ultimately hurt corporate McDonald's brand in the long run however there is also another option everyone for these fast food restaurants to stop increasing their prices and maybe decrease their prices and one option uh I think unfortunately that we're going to see is a reduction in workers and reduction in labor this is something that's been coming over the last 5 to 10 years with an increase in automation more and more when you go to a fast food restaurant you see there's fewer and fewer workers there and actually last year out in Fort Worth Texas McDonald's just launched their first fully automated restaurant with no human contact with McDonald's now taking the initiative to make the lives of their customers easier and more convenient by introducing technology driven Solutions I mean that's one way to think about it with McDonald's now opening its first fully functional based technology restaurant making it possible for North Texas residents to access their meals without having to interact with a person only with a robot and I'm not sure how you guys feel about that uh about automation taking jobs in the fast food industry that article seemed to kind of pitch it like it was a good thing however I do think that this is a secular Trend we'll probably see more of in the future because as more of these states Across America dramatically increase the minimum wage there will be an incentive for McDonald's and fast food franchise owners to Simply have less employees cuz remember folks the typical McDonald's franchise owner in America they might be earning 3.2 million in Revenue but they're only drawing 290,000 of that to the bottom line with by far their biggest expense being labor costs and it's these labor costs as well as the cost of food which have gone up significantly in recent years which has prompted them to raise their prices which has led to a big drop in customer traffic now the quickest way to fix this if you're the franchise owner is to lower expenses and of course we know that uh McDonald's is not going to cut the 20% that they're owed so these franchise owners going to be looking to cutting labor making that 1.2 million in labor more like 1 million or 900,000 that would get them more profitability and reduce the need to increase prices as much in the future and one state where we're just seeing this happen really fast right now is California California just announced a new law that goes into effect very soon that establishes a separate minimum wage for fast food workers of $20 an hour which is $4 more than the state minimum wage of $16 an hour so the people in California who make the rules and laws they thought for some reason we need to carve out a second minimum wage if you're a fast food worker not sure why they thought they needed to do that however the initial response and reaction from businesses to this increase has been pretty negative with Pizza Hut now laying off thousands of California delivery drivers in 2024 directly in response to this law that will raise fast food employee wages to $20 an hour thousands of pizza delivery drivers in California are facing layoffs as two major pizza hot franchises are eliminating delivery service the layoffs will affect 12200 workers of restaurants in Orange Los Angeles Riverside San Bernardino and Ventura County as well as 800 workers at Pizza locations in Sacramento and central California with operators blaming a new state law that starts in April that boosts the fast food minimum wage by $4 an hour to $20 an hour meanwhile ABC News out in California recently interviewed the general manager of Chiba Hut a sub shop about what he thinks about the new law so it's kind of causing us to have to increase our menu prices as well as uh find new ways to limit labor um just to stay profitable it's definitely limiting our available out uh labor out yeah so those comments about limiting labor right I mean it's just obvious at a certain point the more that the labor costs go up the more the businesses are going to cut back and so for me I fear that the fast food industry is going to enter uh a destructive cycle and ultimately all of this points to the uh lack of sustainability in the current economy in America right we hear business owners particularly small business owners like restaurant franchisee owners reporting massive massive struggles the costs and expenses they've gone up more than the revenue which is really squeezing lots of businesses in America at a point in time where consumers are just starting to tap out that could potentially end up being a nasty combination not just for McDonald's and the fast food industry but for the economy overall with the small business optimism index in America currently resting near its lowest level in decades with small business earnings Trends flowing now at also the lowest level in decades almost matching the depths of what we saw right before the crash in 2008 more specifically what the graph is showing is that 30% more small businesses have reported lower earnings over the last 3 months than increased earnings so significantly more small businesses are reporting lower earnings with the reasons being reduced sales volume and increased costs and unfortunately in America it's the small business and it's the consumer who Bears the brunt of these issues first while it's the big corporations like McDonald's that can keep making money at times like this which is why we see the stock market doing so well while mainstream America is suffering in the end I hope that restaurant owners and fast food owners are able to find a way to stop increasing prices so much however with government's vastly increasing the minimum wage and commodity prices like cattle still being so high it's going to be difficult for them to do that and ultimately what I fear is going to happen is that there's going to be massive small business bankruptcies and layoffs at some point as a result however we'll have to track the situation over the next several months and over the next year so if you like this video and want to see more of it here on the reventure Consulting YouTube channel hit that subscribe button also make sure to leave a comment about what you think about McDonald's and its crazy menu prices in 2024
