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Business

Stocks making the biggest moves premarket: McDonald’s, UPS and more

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Nathan Stirk | Getty Images News | Getty Images

Check out the companies making headlines before the bell.

McDonald’s — Shares dipped more than 1% after McDonald’s reported its latest quarterly results. The fast food giant topped earnings and revenue estimates, saying customers are increasingly visiting its restaurants. Still, McDonald’s CEO Chris Kempczinski said he expects “short-term inflationary pressures to continue in 2023.”

General Motors — Shares of the automaker rose more than 5% in premarket trading after GM beat estimates on the top and bottom lines for its fourth quarter, even as its profit margin narrowed. The company reported an adjusted $2.12 per share on $43.11 billion in revenue. Analysts surveyed by Refinitiv were looking for $1.69 in earnings per share on $40.65 billion in revenue. GM said it expected earnings to fall in 2023, but guidance was still above analyst estimates.

Ford — Shares of Ford rose 2% after the company announced Monday it would lower the price of the Mach-E, its electric pickup truck. The company reports earnings later in the week.

United Parcel Service – Shares of UPS rose 1.9% after the company reported earnings that beat analyst expectations. The company posted adjusted earnings per share of $3.62 on $27.08 billion in revenue. Analysts had forecast earnings of $3.59 per share and $28.09 billion in revenue, per Refinitiv.

Exxon Mobil — The oil giant was under pressure despite reporting upbeat financial results for the latest quarter. The company, whose stock price rallied more than 80% last year, saw a tightening in supplies as economies began recovering, CEO Darren Woods said in a statement. Shares fell more than 1%.

Caterpillar — Caterpillar shares fell more than 2% after the industrial giant posted a disappointing quarterly profit. The company reported earnings of $3.86 per share, well below a Refinitiv consensus estimate of $4.06 per share. Caterpillar said its bottom line was impacted by an “unfavorable ME&T foreign currency impact in other income (expense) of $0.41 per share.”

Pfizer – Shares of the vaccine maker fell more than 2% after the company reported mixed quarterly results and issued earnings and revenue guidance for the full year that came in below analysts’ expectations, according to StreetAccount. Pfizer said it expects revenues from its Comirnaty and Paxlovid drugs to fall 64% and 58%, respectively, from actual 2022 results.

International Paper – The packaging and paper products company reported fourth-quarter adjusted operating earnings of 87 cents per diluted share, exceeding StreetAccount’s estimate of 69 cents per diluted share. However, the company reported a net earnings loss of $318 million for the quarter. International Paper nearly 6% in the premarket.

Lucid – Shares of Lucid slipped 4.4%, further cooling off after a monster options fueled rally on Friday.

PulteGroup – Shares of the homebuilder rose more than 1% in premarket trading after PulteGroup reported a better-than-expected fourth quarter. The company reported $3.63 in adjusted earnings per share on $5.17 billion of revenue. Wall Street analysts were expected $2.93 in earnings per share on $4.58 billion of revenue, according to StreetAccount. PulteGroup’s homebuilding gross margin rose year over year.

— CNBC’s Fred Imbert, Jesse Pound, Tanaya Macheel, Sarah Min, Carmen Reinicke and Michelle Fox contributed reporting

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Business

McDonald’s, In-N-Out, and Chipotle are spending millions to block raises for their workers

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New York
CNN
 — 

California voters will decide next year on a referendum that could overturn a landmark new state law setting worker conditions and minimum wages up to $22 an hour for fast-food employees in the nation’s largest state.

Chipotle, Starbucks, Chick-fil-A, McDonald’s, In-N-Out Burger and KFC-owner Yum! Brands each donated $1 million to Save Local Restaurants, a coalition opposing the law. Other top fast-food companies, business groups, franchise owners, and many small restaurants also have criticized the legislation and spent millions of dollars opposing it.

The measure, known as the FAST Act, was signed last year by California Gov. Gavin Newsom and was set to go into effect on January 1. On Tuesday, California’s secretary of state announced that a petition to stop the law’s implementation had gathered enough signatures to quality for a vote on the state’s 2024 general election ballot.

The closely-watched initiative could transform the fast-food industry in California and serve as a bellwether for similar policies in other parts of the country, proponents and critics of the measure argued.

The law is the first of its kind in the United States, and authorized the formation of a 10-member Fast Food Council comprised of labor, employer and government representatives to oversee standards for workers in the state’s fast-food industry.

The council had the authority to set sector-wide minimum standards for wages, health and safety protections, time-off policies, and worker retaliation remedies at fast-food restaurants with more than 100 locations nationally.

The council could raise the fast-food industry minimum wage as high as $22 an hour, versus a $15.50 minimum for the rest of the state. From there, that minimum would rise annually based on inflation.

California’s fast-food industry has more than 550,000 workers. Nearly 80% are people of color and around 65% are women, according to the Service Employees International Union, which has backed the law and the Fight for $15 movement.

Advocates of the law, including unions and labor groups, see this as a breakthrough model to improve pay and conditions for fast-food workers and overcome obstacles unionizing workers in the industry. They argue that success in California may lead other labor-friendly cities and states to adopt similar councils regulating fast-food and other service industries. Less than 4% of restaurant workers nationwide are unionized.

Labor law in the United States is structured around unions that organize and bargain at an individual store or plant. This makes it nearly impossible to organize workers at fast-food and retail chains with thousands of stores.

California’s law would bring the state closer to sectoral bargaining, a form of collective bargaining where labor and employers negotiate wages and standards across an entire industry.

Opponents of the law say it’s a radical measure that would have damaging effects. They argue it unfairly targets the fast-food industry and will increase prices and force businesses to lay off workers, citing an analysis by economists at UC Riverside which found that if restaurant worker compensation increases by 20%, restaurant prices would increase by approximately 7%. If restaurant worker compensation increased by 60%, limited-service restaurant prices would jump by up to 22%, the study also found.

“This law creates a food tax on consumers, kills jobs, and pushes restaurants out of local communities,” said the Save Local Restaurants coalition.

On Wednesday, McDonald’s US President Joe Erlinger blasted the law as one driven by struggling unions that would lead to “an unelected council of political insiders, not local business owners and their teams,” making key business decisions.

Opponents have turned to a similar strategy used by Uber, Lyft and gig companies that sought to overturn a 2020 California law that would have required them to reclassify drivers as employees, and not “independent contractors,” which would provide them with benefits such as a minimum wage, overtime, and paid sick leave.

In 2020, Uber, Lyft, DoorDash, Instacart and others spent more than $200 million to successfully persuade California voters to pass Proposition 22, a ballot measure that exempted the companies from reclassifying their workers as employees.

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Business

McDonald’s hopes discounts, contests boost mobile sales

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Last holiday season, McDonald’s leaned on singer Mariah Carey’s starpower and discounts to drive customers to their mobile app.

This year, the Chicago-based restaurant giant is going further, giving customers the chance to win free McDonald’s for life for themselves and three of their friends with every mobile order. The chain is also offering exclusive access to branded merch releases and deals on food, like a 50-cent double cheeseburger.

The three-week-long promotion, which began Monday, is part of the company’s broader digital strategy to drive traffic to its mobile app through seasonal promotions and create recurring revenue without sacrificing profitability.

In recent years, restaurant companies have turned to loyalty programs to drive downloads of their mobile app and convince customers to keep coming back. McDonald’s CEO Chris Kempczinski said in late October that roughly two-thirds of U.S. customers who used the app in the last year had been active on it in the previous 90 days.

Tariq Hassan, chief marketing and customer experience officer for McDonald’s U.S. division, told CNBC that app users are “more meaningful and more profitable” than other customers.

A little more than a year after its U.S. launch, McDonald’s loyalty program has 25 million members who had been active on the company’s mobile app over the prior 90 days, as of Sept. 30.

For comparison, Starbucks, which has had a loyalty program for more than a decade, reported 28.7 million active U.S. members during its latest quarter. Chipotle Mexican Grill’s three-year-old rewards program has 30 million members, although the chain doesn’t disclose how many have been active over the last three months.

‘Boring’ creativity

Hassan, who joined McDonald’s more than a year ago after a stint at Petco, said that roughly 40% of digital customers start using its app thanks to marketing and paid media. The fast-food giant has been getting creative, pushing beyond advertising and discounts to attract new app users, particularly through promotions pegged to the time of year.

For example, the company held “Camp McDonald’s” for four weeks this summer. The program included discounts on its menu items, virtual concerts and limited-edition merch collaborations for mobile app users.

Hassan said the company had a goal of adding 2 million app users during the virtual camp but didn’t share how many members it actually added. (The promotion also angered some customers when issues with the third-party site resulted in hours-long virtual queues to buy a Grimace-themed pool float that sold out.)

Still, McDonald’s digital strategy isn’t mean to be flashy. Hassan said he’s told his team to be comfortable being “boring.”

“You don’t change your strategy just to change it, to do the new and exciting thing,” he said.

One way that McDonald’s has gotten comfortable being boring is through its menu. In the early days of the pandemic, like so many other restaurant chains, McDonald’s scaled back its offerings, eliminating items like parfaits and salads, to focus on classic items like the Big Mac and McNuggets. The move away from limited-time menu items proved successful, fueling U.S. sales growth even as lockdowns lifted and consumers resumed their old routines.

McDonald’s digital promotions have also leaned on core menu items. Celebrity meals in 2020 and 2021 put a spotlight on the favorite orders of musicians such as rapper Saweetie, featuring classic menu items like French fries and cheeseburgers.

“When you have that kind of strategic consistency, it gives you more time to wrap those windows with really interesting, exciting and unexpected experiences,” Hassan said.

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Business

As prices soar, consumers turn to McDonald’s

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New York
CNN Business
 — 

Inflation is relentlessly high and food prices in particular are soaring. In this environment, customers are turning to McDonald’s — even as the burger chain raises its own prices.

In the third quarter, McDonald’s US prices were up about 10% year-over-year on average. Even so, the brand is gaining traction among its less affluent customers, noted CFO Ian Borden during an analyst call Thursday.

“We’re gaining share right now among low-income consumers,” he said.

As food companies raise prices, they are finding other ways to make consumers feel like they’re getting a good deal. Packaged food and beverage makers such as PepsiCo

(PEP) and Coca-Cola

(KO) are offering more serving sizes, hoping that shoppers will shell out for smaller packages because of the lower price tags. Restaurants are focusing on value, hoping that customers will feel they’re getting more bang for their buck even as prices rise.

McDonald’s is “positioned as the leading brand in terms of value for money and affordability,” said Borden. He noted that some cash-strapped customers are shifting from buying meals to purchasing value items.

Some might also be trading down to McDonald’s from more expensive chains or restaurants as menu prices increase at a slower clip than prices in grocery stores. For the year through September, not adjusted for seasonal swings, grocery prices increased 13%, according to the Bureau of Labor Statistics. In that same period, restaurant prices jumped 8.5%.

“We feel very good about … McDonald’s value proposition,” said CEO Chris Kempczinski during the call. “It’s allowed us to push through some of this pricing.”

In the third quarter, sales at McDonald’s

(MCD) US stores open at least 13 months popped 6.1%, thanks in part to the higher prices. Shares rose about 3% on Thursday following the release of the chain’s third-quarter results.

Kempczinski said that McDonald’s is weighing a number of different potential economic situations, but that it is expecting “a mild to moderate recession in the US,” as a base case. “McDonald’s has proven to be successful in just about any business environment,” he noted.

The brand has a history of resilience during periods of economic distress.

“Our business performed well in that last downturn,” Borden said, referring to the financial crisis of 2008 and 2009. “Our expectation is that we are going to perform well in this environment, certainly on a relative basis to our competitors,” he added.

But Borden acknowledged there are differences between the current situation and 14 years ago.

During the financial crisis McDonald’s had a dollar menu and ramped up its McCafe line. Now, though, the chain is facing higher costs for food, packaging and labor. Consumer behavior also has changed — today’s customers are far more interested in delivery.

And even McDonald’s is not immune from the macroeconomic situation. In the third quarter, consolidated revenues fell 5%. The company said that the results were “negatively impacted by foreign currency translation,” pointing to the strong US dollar to explain the decline. In constant currencies, McDonald said consolidated revenues were up 2%.

In addition to higher prices, McDonald’s said that advertising its core menu items has helped boost sales.

Recently, the burger chain has been using promotions such as celebrity meals and adult Happy Meals to create buzz without adding new menu items that can complicate orders.

The adult Happy Meals promotion “re-engaged our fans to our core food, including Big Macs and Chicken McNuggets,” said Kempczinski.

The company has also been creating buzz around its McRib sandwich, positioning its return for a limited time starting October 31 as part of a “farewell tour.” But that doesn’t mean the product is going away forever.

“The McRib is the GOAT of sandwiches on our menu,” Kempczinski said Thursday. Like “Michael Jordan, Tom Brady and others, you’re never sure if they’re fully retired or not.”

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Business

McDonald’s to sell Krispy Kreme doughnuts in latest menu experiment

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Scott Olson | Getty Images

McDonald’s will sell Krispy Kreme doughnuts in select restaurants later this month for the first time.

Starting Oct. 26, the fast-food giant will sell Krispy Kreme doughnuts at nine locations in the Louisville, Kentucky, area as part of a test. McDonald’s said the test will help it learn more about how teaming up with Krispy Kreme would affect its operations.

McDonald’s customers will be able to order the original glazed, chocolate iced with sprinkles and raspberry filled doughnuts, either individually or in packs of six. Participating McDonald’s locations will sell the doughnuts all day, but the treats won’t be available for delivery.

Krispy Kreme will deliver fresh doughnuts daily to the McDonald’s restaurants, according to McDonald’s. The doughnut chain uses a “hub and spoke” model that lets it make and distribute its treats efficiently. Production hubs, which are either stores or doughnut factories, send off freshly made doughnuts every day to retail locations such as grocery stores and gas stations.

The test comes as consumers have been cutting back on restaurant visits as soaring inflation pressures budgets. To get customers back into restaurants, chains have been experimenting with new menu items and promotions.

In the first half of the year, McDonald’s said that lower-income consumers in the U.S. were spending less at its restaurants. Krispy Kreme CEO Mike Tattersfield, on the other hand, has said his chain has strong pricing power because customers are willing to splurge on affordable treats like fresh doughnuts.

In the second quarter, Krispy Kreme reported 7.5% revenue growth for its U.S. and Canada division. But it trimmed its full-year forecast for earnings and revenue, citing a stronger dollar and weaker performance from U.S. production hubs that don’t deliver to other locations.

It’s not the first time that fast-food chains have leaned on doughnuts to draw customers. In 2020, KFC launched a “Fried Chicken and Donut” sandwich nationwide after tests of the item grabbed attention on social media.

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US

San Antonio police chief says officer shooting of 17-year-old at McDonald’s not justified and charges are coming

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CNN
 — 

[Breaking news update, published at 8:57 p.m. ET]

The San Antonio police officer who shot an unarmed 17-year-old eating in his car at a McDonald’s parking lot last week was charged Tuesday with two counts of aggravated assault by a public servant, the police department said.

The officer, identified as James Brennand, was fired following the October 2 shooting. He has been described by the department as a probationary officer with seven months’ experience.

[Original story, published at 10:13 a.m. ET]

The police shooting of an unarmed 17-year-old eating in his car at a McDonald’s parking lot last week was “not justified” and authorities expect to file criminal charges against the officer by the end of the week, San Antonio Police Chief William McManus said Tuesday.

“The video was horrific,” the chief told CNN’s Brianna Keilar. “There is no question in anybody’s mind looking at that video that the shooting is not justified.”

McManus said he recognized an issue immediately upon arriving to the scene of the October 2 shooting, based on the location of the bullet holes.

“We have a policy that prohibits officers from shooting at vehicles, moving vehicles, except if their life is in immediate – their life or someone else’s life – is in immediate danger,” he said.

“When I saw it, the location of the bullet holes, I had an issue with it right away. You can tell by looking at the vehicles, which way the vehicle is moving when the shots are fired, and this vehicle, it was very telling to me, that this vehicle was moving away from the officer, and moving parallel with the officer, so it was pretty clear to me at that point that we were going to have an issue.”

He said he expects the officer to be charged with two counts of aggravated assault by the end of the week, charges that could rise to homicide if the 17-year-old does not survive.

Bexar County District Attorney Joe Gonzales said late last week there was the possibility of charging Brennand with a crime.

Attempts to reach Brennand have not been successful.

The police chief’s comments come a week after James Brennand, a probationary officer with seven months of experience, shot 17-year-old Erik Cantu as the teenager sat in his car eating fast food.

According to police, Brennand was handling an unrelated disturbance call at the McDonald’s on October 2 when he saw a car he believed had evaded police the previous day and called for backup.

Before backup officers arrived, body camera video released by police shows the officer walk up to the driver’s side of the car, open the door, and order the driver out. The visibly startled teen, who was in the driver’s seat eating, put the car in reverse and started backing up.

The police officer then opened fire five times on the car, according to the video. As the driver shifted the vehicle to move forward, body camera video showed the officer opening fire an additional five times as the car drove away.

Cantu was shot multiple times and is in critical condition and on a life support system, his family said Monday. A passenger in the vehicle was unhurt.

Brennand was fired in the wake of the shooting for violating the agency’s tactics, training and procedures, police said.

“It took us a couple of days to terminate Brennand, but he was gone pretty quickly,” McManus told CNN.

SAPD’s deadly force policy is explicit: “An officer in the path of an approaching vehicle shall attempt to move to a position of safety rather than discharging a firearm at the vehicle or any of the occupants of the vehicle.”

The policy further states that “officers should not shoot at any part of a vehicle in an attempt to disable the vehicle.”

While in the hospital, Cantu was initially charged with evading detention in a vehicle and assaulting the officer, who had claimed he was struck by the door of the car as the teen backed up.

However, his defense attorney Brian Powers said the Bexar County District Attorney’s Office notified him prosecutors would not be moving forward with charges. A spokesperson for the District Attorney’s office referred CNN to the county’s online court record system, which indicates both charges have been dismissed and the case closed.

“While Sunday’s shooting of an unarmed teenager by a then-San Antonio Police officer remains under investigation, the facts and evidence we have received so far led us to reject the charges against Erik Cantu for further investigation,” Gonzales’ office said in a statement.

“Once SAPD completes its investigation into the actions of former Officer James Brennand and submits the case to our office, our Civil Rights Division will fully review the filing. As we do with all officer-involved shootings that result in death or serious injury, we will submit the case to a Grand Jury for their consideration. Until that happens, we can make no further comment on this matter.”

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Business

These fast food restaurants have the best drive-thrus, study says

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New York
CNN
 — 

Every second counts in drive-thru lanes for fast food chains. A recent study showed Chick-fil-A had the slowest one — but only because it’s so popular and there are so many cars in line.

Taco Bell led the pack in speed of service, with an average time of about 221 seconds, followed by Dunkin’ Donuts, KFC and Arby’s. But this metric doesn’t factor the number of cars in line. In that category, Chick-fil-A is the clear leader, with 16% of its lines surveyed counting ten or more cars. McDonald’s, which was in second place, only had 2% with that many customers.

Based on the total time cars spent in line, Chick-fil-A came out on top, with an average of about 107 seconds. McDonald’s came in second at 118 seconds, followed by Taco Bell and Arby’s.

QSR and Intouch Insight published its annual Drive-Thru Report, surveying more than 1,000 consumers who ranked ten industry leaders: Wendy’s, Burger King, Chick-fil-A, Dunkin’, McDonald’s, Arby’s, Carl’s Jr., Hardee’s, Taco Bell, and KFC.

Drive-thrus got bogged down last year mostly because of a shortage of restaurant workers, as thousands left the industry. The pandemic surge of drive-thru and pickup and delivery orders only exacerbated the issue

But luckily for customers, drive-thrus have gotten nearly 10 seconds faster compared to last year — and that can be a big advantage in this highly competitive industry.

“Mere seconds can be a make-it or break-it in terms of where a consumer decides to order,” Amanda Topper, a research director at Mintel, said to CNN Business last year.

However, the current average is still about 45 seconds slower than the 2019 pace. The study said pre-sell menu boards, order accuracy and friendliness helped decrease the wait times at drive-thrus this year.

During peak Covid, Chick-fil-A was one of the first brands to close its dining rooms, focusing its attention on bringing hospitality to the drive-thru outside.

“We believe that looking eye-to-eye with the customer allows for a connection that happens at the beginning of the drive-thru,” Matt Abercrombie, Chick-fil-A’s senior director of service and hospitality, said in the study.

The researchers found that Chick-fil-A had fine tuned the “check-point system,” which keeps customers engaged through different interactions with employees.

And that’s clear in consumer sentiment too — 88% of respondents said Chick-fil-A had friendly service, placing it at the top of the industry. Only 1.7% said the service was “not friendly.”

But when it comes to customer satisfaction, respondents said Arby’s had the most accurate orders filled, at 89.6%. McDonald’s and Burger King closely followed.

Wendy’s founder Dave Thomas named the first modern drive-thru in 1970, coining the term “Pick-Up Window.” And though the company this year announced a makeover that places an “emphasis on convenience, speed and accuracy,” it has lagged behind its competitors in the survey.

The chain plans to redesign its interiors and implement new pick-up windows and a more technologically advanced kitchen.

The pandemic has opened up a new consumer demand for the drive-thru, pressuring fast food companies to upgrade signage, sanitation and technology.

In the survey, Wendy’s came in 7th for speed of service and was also the lowest for order accuracy, at 79.4%. CNN Business has reached out to Wendy’s for comment.

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Business

McDonald’s rejects franchise owners’ request to delay big changes, letter says

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A customer places an order September 24, 2022 at a McDonald’s Restaurant along the New York State Thruway in Hannacroix, New York.

Robert Nickelsberg | Getty Images News | Getty Images

A group representing McDonald’s owners said the company rejected its request to delay changes to franchising policies, including updated standards and adjustments to how the company evaluates potential new restaurant operators, according to a letter seen by CNBC.

The National Franchisee Leadership Alliance said in a letter to owners Wednesday that McDonald’s denied its request to make the changes in June 2023 instead of Jan. 1.

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The leadership group represents McDonald’s owners across the country. As of the end of last year, according to the company, there there were more than 2,400 franchise owners. Franchisees run some 95% of McDonald’s locations.

The company declined to comment on the changes or the NFLA’s letter and its request to delay the adjustments.

McDonald’s unveiled new policy changes during the summer, sparking tensions between some operators and the company. Several owners unhappy with these changes expressed a lack of confidence in the company’s CEO, Chris Kempczinski and its U.S. president, Joe Erlinger, in a poll taken by a separate group, the National Owners Association.

The NFLA is seeking more clarity and education from the company on what it calls “McDonald’s Values,” as it pushes to hold franchise owners accountable for how they represent the brand online and in person. McDonald’s says its values are: “Serve, Inclusion, Integrity, Community and Family,” and the update is meant to reflect how these should be incorporated into owner and operator standards, according to a previous document obtained by CNBC.

The new policies also call for evaluating potential new operators equally, instead of giving preferential treatment to spouses and children of current franchisees.

McDonald’s is also separating how it renews leases, which are given in 20-year terms, from assessments of whether owners can operate additional restaurants – meaning, a lease renewal would not automatically make an owner eligible to operate additional locations. In a previous message to owners about the changes that was viewed by CNBC, the company said: “This change is in keeping with the principle that receiving a new franchise term is earned, not given.”

The company has been actively working to recruit new and more diverse owners, underscored in a message to franchisees from Erlinger that was viewed by CNBC earlier this summer.

“We’ve been doing a lot of thinking about how we continue to attract and retain the industry’s best owner/operators – individuals who represent the diverse communities we serve, bring a growth mindset and focus on executional excellence, while cultivating a positive work environment for restaurant teams,” he said.

In December, McDonald’s pledged to recruit more franchisees from diverse backgrounds, committing $250 million over the next five years to help those candidates finance a franchise. The company has yet to reveal how its recruitment effort is going.

“Several of these internal changes in my opinion may further limit the marketplace, reduce demand and strain the financial capability for sales between owners beyond the external factors that presently exist today,” NFLA chair Mark Salebra wrote in the letter.

It goes on to underscore other challenges facing operators today including legislative changes at the state level, likely alluding to a newly signed law, A.B. 257 in California, which would regulate the fast food industry’s pay and conditions. The law was championed by the AFL-CIO, the biggest federation of unions in the United States, and condemned as “radical” by the U.S. Chamber of Commerce, the nation’s largest business advocacy group.

McDonald’s is also rolling out a new grading system for restaurants in 2023.

Owners said they were concerned about alienating workers as employers fight to lure and retain employees. The letter said that given all of these factors, “a consideration to delay (not change or renegotiate) the implementation felt appropriate and warranted.” It added that the company has provided more than 20 documents on the changes and educational sessions are forthcoming for further clarity.

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Business

Burger King $400 million plan to revive U.S. sales with remodels, advertising

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CASCAIS, PORTUGAL – Burger King signs are seen at the local fast food restaurant.

Horacio Villalobos | Corbis News | Getty Images

Burger King on Friday said it plans to spend $400 million over the next two years on advertising and renovating its restaurants as part of a broader strategy to revive lagging U.S. sales.

The Restaurant Brands International chain unveiled a turnaround plan for its U.S. business in Las Vegas at its annual franchisee convention. The investments are expected to weigh on its adjusted earnings per share for 2022 and 2023 by 10 to 12 cents annually. The company expects the investments to start paying off by 2025.

Wall Street analysts surveyed by Refinitiv expect earnings per share of $3.24 in 2023.

In the second quarter, Burger King reported flat U.S. same-store sales growth, trailing behind rivals McDonald’s and Wendy’s. The burger chain has been reporting lackluster U.S. sales over the last year, causing concern for Restaurant Brands CEO Jose Cil. In his tenure as chief executive, Cil has also spearheaded efforts to revive Canadian demand for Tim Hortons, Burger King’s sister chain.

A year ago, Cil also tapped former Domino’s Pizza executive Tom Curtis as the new president for Burger King’s U.S. and Canadian restaurants. Early changes to Burger King included slimming its menu to speed up drive-thru times and cutting down its paper coupons to push customers to use its mobile app.

Freshening up

Now Burger King is preparing to make even bolder changes. It’s planning to spend $200 million to fund remodels of roughly 800 locations. Another $50 million will go toward upgrading about 3,000 restaurants with technology, kitchen equipment and building enhancements. The company has more than 7,000 Burger King locations in the U.S.

Historically, remodeled restaurants see an average sales increase of 12% in their first year and outperform older locations over time, according to Burger King. The company is hoping that being more selective and strategic with its projects will produce even stronger sales growth, although it could take longer to see results.

“We might see remodels start to hit the market mid-2023 and going forward. It should really be a gradual ramp of the business over the course of the couple of years,” Cil told CNBC.

Burger King will also increase its U.S. advertising fund’s budget by 30% by investing $120 million over the next two years. Those investments will start in the fourth quarter.

“We expect that to start having an impact on sales over the next quarter,” Cil said.

An additional $30 million will be spent through 2024 on improving its mobile app, exceeding the digital fees that franchisees pay to the company for the technology.

Burger King’s menu will also get a facelift. The company said it’s built a multi-year blueprint for menu improvements, which include developing new Whopper flavors, betting on its Royal Chicken Crispy sandwich and investing in more employee training.

Franchisee impact

The strategy has received support from franchisees operating 93% of its U.S. restaurants, according to Burger King. Operators will be chipping in their own money alongside the company for remodels and advertising.

Curtis and his team put together a group of franchisees, representing a range of regions and experience, to come up with the strategy over the last three to six months.

“There were many long nights and plane rides,” Curtis said.

In addition to the money they get from Burger King, franchisees making upgrades to their restaurants are expected to make comparable investments to fund the projects.

The company is also changing its incentive structure to encourage operators to make more extensive remodels, which can be costly and typically require a location to be temporarily shuttered. In the past, Burger King operators who remodeled their restaurants received discounts on their advertising and royalty fees for up to seven years.

The new program will give franchisees cash once the project is completed, and let them choose how much of a discount they get on the royalties they pay to the company.

If profitability targets are met, however, Burger King franchisees will have to pay higher fees toward the advertising fund.

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Business

Premium products take priority as companies battle cost-of-living

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“As we create more premium beverages, it becomes more difficult for customers to replicate it at home and we think that helps with the concept of trade down,” Starbucks CFO Rachel Ruggeri told CNBC’s “Squawk Box” on Aug. 3.

Gary Hershorn / Contributor / Getty Images

Personalized coffees, “prestige” skincare and “elevated” sauces and spreads are just some examples of how companies like Starbucks, Unilever and Kraft Heinz are tilting their focus toward premium products — and consumers appear to be loving it.

But why are companies zooming in on their pricier offerings when consumers are feeling the effects of the biggest inflation shock in decades?

“Customer insight is key for consumer businesses as the cost of living squeeze tightens,” Paul Martin, KPMG’s U.K. Head of Retail, told CNBC.

“Whilst it’s true that some consumers are having to increasingly turn to value products and watch every penny, it is also the case that other consumers are nervous about the economic outlook but still have money to spend and are in essence trading down to premium products,” Martin said.

“For example, swapping meals out for premium meals in. Whilst this group will also look to save money via the value essentials, they won’t be filling the basket solely with them,” he said.

‘An offering that’s worth paying for’

Starbucks reported record customer counts and sales in the last quarter, beating Wall Street expectations. The results appear to reaffirm the view that some customers aren’t trading down or reducing their spending despite the increasing cost of living.

Designing bespoke products is key to upping customer engagement even when money is tight, Starbucks CFO Rachel Ruggeri told CNBC’s “Squawk Box” on Aug. 3.

“As we create more premium beverages, that’s more difficult for customers to replicate at home and we think that helps with the concept of trade down,” Ruggeri said. “It may mean that maybe a customer doesn’t come as frequently, but we want to ensure that we have reasons for the customers to come into the stores and interact with us.”

Giving customers more flexibility also helped to sell more expensive products and pass on higher costs, Ruggeri said. 

“We’ve been able to do that through our personalization, which is a choice, and what we’ve seen so far is our demand is strong. And that tells us that we have an offering that’s worth paying for,” she said.

The focus on premium products isn’t unique to the largest coffee chain in the U.S.

Kraft Heinz is getting in on the luxury market with the launch of its HEINZ 57 Collection in July. The “chef-inspired” condiments are “designed to add magic to the culinary experience,” according to the company.

This came as the company lifted prices by more than 12% in response to higher transportation, labor and ingredients costs amid rising inflation.

The introduction of more premium products is in addition to redesigns of classic products, according to the company’s U.S. president Carlos Abrams-Rivera.

“One focus is how do we optimise formulas to bring in ingredients that are cheaper,” Abrams-Rivera told CNBC’s “Squawk Box” on July 28. “And how do we customise our products to the different consumers so they can access different products at different price points.”

Treading a similar path is Mondelez. The company announced in June a deal to acquire organic-focussed Clif Bar & Company, while all the company’s 2021 acquisitions — Hu Master Holdings, Lion/Gemstone Topco and Gourmet Food Holdings — were described as “premium” in its second-quarter earnings report.

‘Value faces a boom and so does premium’

Unsurprisingly, consumers are also reliant on cheaper products, which companies are also sensitive to.

McDonald’s, for example, attributed some of its growth in the U.S. to its value products in its Q2 2022 earnings report.

Other companies are looking to attract both ends of the market by focussing on higher and lower-priced products.

Nestle CEO Mark Schneider told investors in the company’s half-year results earnings call that the approach has been used before.

“What we’re seeing with the current situation is similar to what happened in previous economic slowdowns and downturns,” Schneider said. “We pay attention to premium products but we also pay attention to affordable products. By covering both ends of this spectrum we’re doing well and we’re serving those needs.”

Appealing to the widest possible customer base is key to maintaining and growing profits in the current economic climate, according to KPMG’s Martin.

“In this landscape, value faces a boom and so does premium. Supermarkets recognize it, including the discounters, who are expanding their core value ranges, but also beefing up their premium proposition. Their aim is to capture and retain all of the trade-down audiences,” Martin said.

Driving desirability and sales

Unilever CEO Alan Jope told CNBC’s “Squawk Box” that the company was seeing a mixture of customers trading up and trading down.

“The premium ranges in our portfolio are actually doing very well … We are seeing some downtrading – that’s on pack size, where people are moving to more affordable formats,” he said on July 26.

In 2014, Unilever launched Prestige, a luxury arm of the conglomerate that now includes Dermalogica, Tatcha and Paula’s Choice.

Described as “a string of pearls” by Executive VP and Group CEO Vasiliki Petrou in December, the model relies on “a certain level of scarcity” to drive desirability and sales.

So far, it appears to have worked. Beauty & Personal Care grew 7.5% in the last quarter, driven by “strong growth” in Prestige Beauty and Health & Wellbeing, according to the company’s Q2 2022 results announcement.

A focus on premium products can also be a more palatable means of tackling inflation costs compared to reducing items or packaging sizes, according to EY global consumer leader Kristina Rogers.

“There is a limit to these actions and considering that input costs continue to rise, companies are looking at how to expand the value of their products,” Rogers told CNBC.

“The only way to grow is therefore to go the premium and added value route. Companies need to demonstrate the added value of their brands and give consumers a good reason to buy higher-priced products,” Rogers said.

“Companies are focusing on increasing the features of their product to extend consumers’ willingness to pay. These features include brand building, higher quality products, sustainability, or health features, to help validate a higher premium to be charged,” she added.

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