McDonald's 'set the stage' for menu prices in the industry in Q3: Analyst

Peter Saleh, BTIG Restaurants Analyst, breaks down McDonald's earnings beat and his outlook for the fast food chain.

Video transcript

AKIKO FUJITA: Let's bring in Peter Saleh, BTIG managing director and restaurant analyst. Peter, Ines just walking us through some of those numbers there from McDonald's. The overall growth story certainly a good one, but like so many other competitors, McDonald's also looking at higher labor costs and also commodity prices. How do you see the company balancing those two?

PETER SALEH: Yeah, great. So thanks for having me on. Yeah, no, you're right. I mean, I think the entire industry is dealing with a lot of inflation. Look, this was a good quarter for them. They had-- they beat on the global comp, above 12% global comp. On a two-year stock basis, still double digits. The US number, which is the most important, was up over 9% in the quarter and up over 14% on a two-year stack basis. But that includes about six percentage points of higher menu price.

So I think McDonald's just set the stage for what menu pricing is going to be in the industry, which is around that mid-single digit range. They're seeing commodity inflation. It's ramping up in the fourth quarter substantially, probably in that mid to high single digit range. We know that labor inflation is not going to subside anytime soon. There still continues to be a labor shortage.

This looks like it's going to continue into 2022 with a, call it, mid-single digit commodity inflation and probably something similar on the labor side. So, in our view, I think the menu pricing is likely going to continue going forward in that mid-single digit range. And I think the rest of the industry is likely going to follow with higher menu prices next year.

ZACK GUZMAN: Yeah, and Peter, I mean, when we think about what these restaurants have been doing to get more people excited and back in, there's been menu innovation. Of course, it's going to be tough to top what we saw from Popeyes and their chicken sandwich and what they did to really explode the space. You got Chipotle experimenting with their own brisket.

McDonald's, though, the McPlant with Beyond Meat, another company you track here, in terms of how big that could be. Obviously, you think it could be a big boost for Beyond Meat, seeing about as much as $200 million in terms of sales boost next year potentially if it gets rolled out at all the McDonald's locations. But how important is that maybe in terms of a product piece to get people excited about McDonald's again?

PETER SALEH: So, yeah, no, good question. Look, I think right now, McDonald's is sitting here with about 80% of their dining rooms open. That means 20% of the dining rooms are closed. And they're using only the drive-thru in those locations. So when you just have the drive-thru open, you got to be very thoughtful about what items you put on the menu because you don't want to disturb that throughput and that speed of service.

So I think they got to get that issue resolved in terms of getting dining rooms open, whether that's a labor challenge or COVID or a combination of both. I think they got to get the dining rooms reopened to alleviate some of the pressure off the dining-- off the drive-thru before they launch something more significantly.

Look, I think the Beyond partnership, if they do launch McPlant in the US in 2022, I think it could be a substantial benefit to Beyond in that $200 million range, if it's launched for a full year. I think at this point, it's still suspect in terms of whether it's going to be a full year, whether it will be an LTO or how exactly or when exactly they will launch it. But I do have confidence that, you know, it looks like McDonald's is moving down that path of putting McPlant on the menu in the US.

AKIKO FUJITA: Peter, I want to get back to some of those concerns around cost pressures from McDonald's stemming from the shortage in labor. I mean, you said you expect it to continue, but I wonder how much of this is, you think, is a permanent premium-- I don't know if that's the right word.

But the cost increase that we're seeing, how much of this, do you think, is just transitory, the market that we're seeing right now, as more and more people come back to the workforce? How much of it do you think is more long term, just given what McDonald's and other fast food restaurants are having to do to compete with those that are out?

PETER SALEH: Yeah, there's really no evidence that the labor inflation or the labor shortage is really at all transitory. I do believe that the commodity inflation will prove to be somewhat transitory, but I think once wages rise and, you know, McDonald's is committed to raising wages, so is Chipotle, so is Starbucks. So is almost every restaurant operator in the industry. I think once those wages go up, they're not coming back down.

I think what we could be seeing is continued inflation and labor, more limited operating hours And it looks like many of the restaurants are cutting it mostly on late night. So I don't think you're going to see labor deflation, maybe a moderation in the pace of inflation going forward. But I do think you could see at some point-- it doesn't sound like it's going to be in 2022, at least not the first half, maybe in the second half. But maybe you'll see some commodities start to level off a little bit in the second half of '22.

AKIKO FUJITA: Peter Saleh, always appreciate your insight, BTIG managing director and restaurant analyst.