McDonald's US president Joe Erlinger this week denied “inaccurate” reports that the company had more than doubled the prices of some items over the past decade, but his rebuttal wasn't exactly reassuring: The average price of a Big Mac is now 21 percent higher than it was in 2019.
Erlinger's rebuttal highlights the tough situation some companies find themselves in as the media, politicians and consumers focus on steadily rising prices. Whether the continuing price increases are the result of price gouging or simply the companies' own rising costs is a subject of fierce debate. Either way, one thing is clear: consumers are starting to have enough.
McDonald's first-quarter profit fell short of analysts' sales estimates as “consumers continue to spend more carefully,” the chain's chief executive officer, Chris Kempczinski, said. Starbucks, Target and Yum! Brands, the parent company of Pizza Hut and KFC, also reported weaker-than-expected profits, all blaming increasingly cautious customers as well as factors such as the war in the Middle East.
Consumer spending has held up surprisingly well in the face of stubbornly fast inflation, but now savings from the coronavirus pandemic are drying up, economic growth is slowing and many businesses are working to dispel the perception that prices are out of control.
As one banker told DealBook: “The consumer was a fat pig, and now they have nothing left. They have to feed the pig again.”
The message: Consumers have reached their limits. In times of rapid inflation, companies tend to explore how far they can raise prices. “We are making smaller, more frequent price increases because it gives us flexibility to see how consumers respond and adjust as needed,” McDonald's Chief Financial Officer Kevin Ozan told analysts in 2022.
But now some businesses, especially those that serve low- and moderate-income customers, are facing backlash against those price increases, according to the Federal Reserve's Beige Book, a summary of economic activity in 12 districts released Wednesday. Consumer resistance to price increases “has led to lower profit margins as input prices have risen, on average,” the report said.
If retailers and restaurants can't raise prices and make a profit, they need to attract more customers to their stores.
A new round of discount wars begins. In recent weeks, McDonald's, Burger King and Wendy's have rolled out new deals, while Target, Walmart, Walgreens and Amazon Fresh have announced price cuts on thousands of items. Other companies are getting more inventive: Domino's is offering a $3 coupon to customers who tip their driver at least $3, and in February Applebee's launched a “Date Night Pass” that lets couples dine on $1,500 worth of food for $200.
“They've lost some customers, and this is an attempt to get them back,” said Jeremy Hopdahl, an assistant professor of economics at the University of Central Arkansas, adding, “Part of the reason is, if their competitors are doing it, they have no choice but to do it.”
For some businesses, it's already paying off: Applebee's parent Dine Brands said 28% of its restaurant sales this quarter came from limited-time promotions, up from 19% the previous quarter.
Will the discount continue? Many are simply aimed at getting consumers to buy products with higher profit margins, and companies will ultimately choose what best serves their own profits.
“Companies are experimenting with this metric to see where the breaking points and sensitivities are for consumers,” said Bear Team, a director at S&P Global Ratings who leads a team covering consumer goods and durable goods companies.
But the battle for customers continues do That could lead to a widespread price war with long-term implications. The battle between Walmart and Albertsons helped set in motion an era of widespread grocery deflation that began in 2016. Grocery prices are already falling. The average price of a grocery item, which rose about 11% to its peak in 2022, fell in April.
Some retailers have chosen to go in the opposite direction. Cracker Barrel's CEO recently said restaurant chains are no longer as important as they once were. Raise Sales fall, followed by a drop in prices in certain areas. — Lauren Hirsch and Sarah Kessler
In case you missed it
Donald Trump was convicted on all charges in the hush money trial. Trump, the first former and sitting president to be convicted in a criminal trial, was found guilty of falsifying business records to hide payments made to porn star Stormy Daniels after an affair. Wall Street and Silicon Valley executives continued to donate to his reelection campaign despite the conviction.
ConocoPhillips acquires Marathon Oil for $22.5 billion. The deal between the Texas energy companies marks the latest in a wave of M&A in the sector as the U.S. becomes the world's largest oil producer. Hess shareholders also backed a $53 billion acquisition by Chevron Corp this week.
Elon Musk called on shareholders to support Tesla's compensation deal. In a post on X, the electric-car maker's CEO gave a personal tour of the company's Austin, Texas, factory and urged investors to vote in favor of his $46.5 billion compensation package. Institutional Shareholder Services, a leading proxy advisory firm, recommended investors reject the plan, calling it excessive and “too big to start with.”
Conservative controversial efforts to undermine government
It's unclear how Trump's conviction this week will affect the presidential election, but a $22 million conservative effort to map out a possible second term for Trump is well underway and organizers are gathering resumes.
Project 2025, an initiative of the Heritage Foundation that includes more than 100 right-wing groups, is recruiting “an army of conservatives” from “across the fruit-rich plains” to develop and implement a policy agenda, project director Paul Dans told Dealbook. The think tank wants to institutionalize Trumpism.
While Trump and his campaign have not publicly endorsed Project 2025, it fits with his plans for a possible second term to eviscerate the government and root out what he and Republicans call the “deep state.” The former president has vowed to reinstate an executive order known as Schedule F, which reclassifies some civil servants to make them easier to fire and could allow him to replace about 50,000 government employees.
Project 2025 aims to line up and prepare a successor who is ideologically aligned. “Personnel is policy,” said Danz, who served as chief of staff for the Office of Personnel Management in the final days of the Trump administration.
Here's a snapshot of the traction it's gained:
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As of May, 10,000 resumes had been submitted to the Project 2025 database. The candidates are “vetted for their alliances” with the project, trained on government procedures and mechanisms and “educated on the battle plan,” Dans said. He added that the group includes “professionals, mothers and thousands of people between the ages of 18 and 80.” He also noted that with Trump having only been in office for four years, many of his predecessors are hesitant to return.
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The Heritage Foundation's “A Call to Leadership” was downloaded by 855,000 people. Dans said the 887-page plan, which sets out conservative goals, had been “hit millions of times” online and sold about 2,000 hard copies.
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The project released 26 training videos. The group's website lists four certificate programs that include multiple courses teaching conservative governance, policy drafting and deregulation methods.
Dans claims the project's hiring arm will create opportunities for many Americans who want to be part of restructuring our government, and that the effort serves “the forgotten people” rather than the interests of “big tech companies and big law firms.”
Critics say it's simply a publicity stunt: A new report from nonprofit watchdog Accountable, first shared with DealBook, claims that its “authors include a wide range of lobbyists and private consultants who are using the MAGA movement as a cover to push unprecedented deregulatory policies.”
Why employee happiness is as important as productivity
While researching workplace flexibility, Debbie Lovich, a managing partner at BCG, noticed that the debate over returning to the office was driven by broader factors: “Most people were comfortable coming into the office,” she says. “What they were concerned about was a lack of trust. Suddenly they were being told what to do and how to do it.”
She pivoted her research to focus on why people enjoy their work and why leaders should care. DealBook spoke with Lovich about setting employee delight as a business goal. The interview has been edited and condensed.
A recent survey found that people who say they enjoy their work are also less likely to say they want to quit. Can you elaborate on this?
That may not be very insightful. If you enjoy your work, you are less likely to quit. half They're also less likely to quit, which is a very powerful value lever in a labor-constrained market.
What I'm trying to do is help organizations really embrace this fun and joy and elevate it to the same level as efficiency and effectiveness in their overall goals.
Do you get a lot of pushback from management? What would you say to change their mind?
Sometimes people are a little surprised when they hear the word “joy.” They say, “Oh, that's a boring word.”
I ask which departments in their organizations have the highest turnover, how much they are losing due to that turnover, and how much it would be worth to cut it in half. I had a client who had thousands of open positions and was paying $100 million a year in overtime to stay in business.
What's the best way for employers to create more fun in the workplace?
It's not about yoga or ping pong, it's about what happens every day at work.
Leaders need to apply the same skills they use to understand their customers (segmenting them, coming up with value propositions, design thinking and A/B testing) to their employees. What brings joy to one employee may be different from what brings joy to another.
Are you thinking about joy in terms of how AI is changing work?
I worry that organisations will adopt AI solely for productivity purposes and end up making things worse.
I once heard a story about a call center that handed all of their quick and simple calls over to generative AI, reducing staffing and keeping their best customer service agents. And guess what? All the agents started quitting. They didn't want to be yelled at by customers all day. So they had to change their technology to get some of the quick calls through.
This isn't necessarily a trade-off: make your employees enjoy their work more, or be more productive.
Art is looking for a double word score.
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