Coca-Cola Just Agreed With Pepsi and McDonald’s About the Economy. Here’s What It Could Mean for Investors.
Last month, fast-food giant McDonald’s (NYSE: MCD) started combating slumping sales with the launch of a $5 value meal. And the plan appears to be working.
For context, in the first quarter of 2024, same-store sales for McDonald’s were up less than 2% year over year. But the company had raised prices, which helped to boost the nominal sales figures. In contrast, management noted declining traffic across the entire quick-service restaurant space.
People are looking for value, according to McDonald’s, which is why it came out with its limited-time $5 meal last month. But 93% of the company’s restaurant locations just voted to keep the bargain offer going, according to CNBC.
McDonald’s isn’t the only company with its finger on the macro-economic pulse. Other enormous food companies such as PepsiCo (NASDAQ: PEP) agree with the assessment from management. The Coca-Cola Company (NYSE: KO) just added its supporting commentary as well. Here’s what I believe it all means for investors.
What’s going on with American consumers?
On July 23, Coca-Cola reported financial results for its second quarter of 2024, showing a modest increase in product volume. In other words, revenue was up not only because its prices were a little higher; people also bought more products. This was encouraging.
However, Coca-Cola’s unit case volume was up everywhere except in North America, where volume fell 1% year over year. And Pepsi agrees that there are headwinds in North America and specifically in the U.S. market. In the earnings call to discuss financial results for Q2 2024, CEO Ramon Laguarta said: “In the U.S., there is clearly a consumer that…want[s] more value to stay with our brands.”
Laguarta went on to say: “This need for value or more value consciousness, I think, is impacting every household in the U.S.” McDonald’s CEO Chris Kempczinski agreed by saying: “All income cohorts are seeking value.” In other words, everyone is feeling the pinch and wanting to save some money.
Therefore, it appears that after years of prices climbing higher and higher, American consumers are finally pushing back, looking for bargains instead of accepting the rising sticker prices.
Pushing back against higher prices
For more mature businesses, true growth is generally hard to come by. In recent years, the top-line numbers for companies such as McDonald’s, Coca-Cola, and Pepsi have benefited from higher prices due to inflation. But it’s also possible that some businesses got a little greedy — profit margins have surged, suggesting prices went up more than expenses.
Take Chipotle Mexican Grill (NYSE: CMG) as an example. In 2019 (the final full year before the pandemic and subsequent inflation), the company had a respectable profit margin of 6.3%. In 2023, it had a profit margin of 12.5% — almost a clean doubling. It would appear that it responded to inflation by raising menu prices far more than it needed to, boosting profits. Chipotle isn’t the only example of this, but it’s perhaps one of the clearest examples.
Consumers aren’t the only ones pushing back. European grocery chain Carrefour pulled Pepsi products from its shelves earlier this year, complaining about the higher prices.
Now that they’re facing pushback, some businesses are accepting the reality that prices need to come down. This is a risk to both revenue and profit margins.
The $5 deal from McDonald’s is an example here. Some investors likely believe it’s a profitable venture, since 93% of restaurants just voted to keep the deal going. But that’s only partly true. It’s likely that the economics of the deal aren’t great. But Coca-Cola is pitching in to make it more economically viable.
In Q2, Coca-Cola’s CEO James Quincey said: “We’re partnering with foodservice customers to market food and drink combo meals to drive traffic and beverage incidents.” The beverage giant is doing this for the same reason as McDonald’s: It would rather lower prices than risk losing sales. But these sales could come at more normalized profit margins.
What it means for investors now
In recent years, investors have favored large, “safe” stocks such as Coca-Cola or McDonald’s. And they’ve been rewarded. These companies have raised prices, boosting revenues. In some cases, they’ve raised prices to the point of boosting profit margins.
However, it seems that people have reached their limit, which could motivate these businesses to lower prices or at least keep prices in place for a while. This could affect revenue and profit margins, and these so-called safe stocks might be stuck in neutral in coming years.
In my opinion, finding companies that have true long-term growth prospects and profit-margin expansion is as important now as ever. Coca-Cola and McDonald’s likely can’t deliver on those things for investors today. Pepsi’s growth will likely be modest, but it does have room to grow profits thanks to the greater scale of certain business segments in international markets, specifically its snacking business in Latin America.
Therefore, Pepsi is likely a better buy from here compared to Coca-Cola or McDonald’s. But the takeaway is that investors should be looking for opportunities with growth and profits, recognizing that those two things will be harder to come by for many mature, established businesses.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Coca-Cola Just Agreed With Pepsi and McDonald’s About the Economy. Here’s What It Could Mean for Investors. was originally published by The Motley Fool
