McDonald’s hasn’t been immune to the global impact of the ongoing Israel-Palestine conflict.
The chain’s International Developmental Licensed Markets (IDL) segment experienced positive same-store sales in all geographic regions except for the Middle East, which dragged it to an overall 0.7 percent increase in the fourth quarter. Comparatively, U.S. comps increased 4.3 percent and International Operated Markets (IOM) increased 4.4 percent.
For perspective, IDL same-store sales rose 10.5 percent in Q3, 14 percent in Q2, and 12.6 percent in Q1.
“So long as this conflict, this war is going on, we’re not making any plans,” CEO Chris Kempczinski said during McDonald’s Q4 earnings call. “We’re not expecting to see any significant improvement in this. It’s a human tragedy what’s going on. And I think that does weigh on brands like ours.”
In an SEC filing, the company said it is “monitoring the evolving situation, which it expects to continue to have a negative impact on Systemwide sales and revenue as long as the war continues.” The restaurant also reminded investors that it usually doesn’t invest capital under a developmental license or affiliate arrangement (the usual format in the Middle East), and it receives a royalty based on a percentage of sales and receives initial fees when a new store opens or a license is granted.
CFO Ian Borden noted that a majority of Middle East franchisees have been part of McDonald’s for 20 years or more, and in that time, the two sides have worked through a variety of challenges. He added that the company will focus on supporting team members in the region and working with the communities with which it does business. Kempczinski described Middle East operators as “very strong” and “very well-capitalized.” However, the CEO noted that McDonald’s has historically supported operators going through difficult periods outside of their control.
Any support will be targeted, temporary, and provided to operators who need it the most. McDonald’s said that in Q4, it “provided an insignificant amount of assistance, including royalty relief and/or deferral of cash collection for certain franchisees impacted by the war in the Middle East in the IDL segment. This assistance may continue and increase as long as the war continues.”
“We believe that working in partnership with our franchisees and doing things together, through good times and bad, is the way that we’ve been successful over time,” Kempczinski said. “It’s going to be very much a situation-by-situation approach that we have in the Middle East.”
The most pronounced impact has been in the Middle East, but the company is also seeing effects in other Muslim countries, like Malaysia and Indonesia. In terms of IOM, it depends on the country. Kempczinski used the example of lower-performing France, which has a larger Muslim population. Other DMAs such as Spain and Italy aren’t seeing an impact.
France is usually one of McDonald’s better markets and has some of the highest customer satisfaction scores and franchising cash flows. While the country has been somewhat affected by the Middle East war, Kempczinski said the company isn’t happy with its performance in the country. To improve sales, McDonald’s implemented a new value program that’s seeing early success and working on operational opportunities alongside franchisees. Borden said there’s a new leadership team in place, one that has a “tremendous amount of McDonald’s business experience.” That gives the company confidence about staging a turnaround in the market.
“I think when you have a market that maybe is a little bit off track, what you look to—have you got the right people with the right experience to drive change? And then do you feel like you have clarity of sight to the kind of underlying, outlying issues that you need to address?” Borden said. “And I think on both of those fronts, we feel good. Obviously, it’s going to take a moment to get momentum going back in the right direction. But I know together with our franchisees in France, we’re going to be aggressive to go after the opportunities.”
McDonald’s didn’t mention any impact on its U.S. business, unlike Starbucks. The beverage company reported last week that boycotts happening domestically contributed to negative traffic in November. The coffee giant attributed this to “misperceptions about our position.”
Despite the war, McDonald’s unit growth aspirations haven’t changed. Last year, the brand opened an average of four restaurants per day in the IDL segment.
The chain finished 2023 with 13,457 U.S. restaurants, a net gain of 13 year-over-year. That’s the second straight year of positive unit growth domestically, after not having done so for nearly a decade. Systemwide, McDonald’s had 41,822 stores, an increase of 1,547 from 2022. It is the largest fast-food chain in the world, followed by Starbucks and Subway.
As a reminder, the brand announced that it wants 50,000 locations by 2027. That’s comprised of 900 openings in the U.S., 1,900 in IOM (Canada, the U.K., Germany, etc.), and 7,000 in IDL (China, Japan, Brazil, etc.).
In 2024, McDonald’s expects capital expenditures to be between $2.5 billion and $2.7 billion, more than half of which will be put toward unit expansion in the U.S. and IOM. The chain projects more than 2,100 gross restaurant openings this year—500 in the U.S. and IOM and more than 1,600 in IDL. On a net basis, the brand predicts 1,600-plus units worldwide.
The store expansion is directly related to McDonald’s skyrocketing loyalty program. MyMcDonald’s Rewards has reached 50 markets and more than $20 billion in annual sales. In 2023, the user base grew to over 150 million users that have been active in the past 90 days. By 2027, McDonald’s is aiming for 250 million active users and 45 billion in annual loyalty systemwide sales.
It’s that type of scale that gives the chain optimism in the face of war in the Middle East.
“Despite this [war], our business model provides stability in our P&L from the negative sales impact in the region,” Borden said. “Among the many strategic advantages of McDonald’s are our size, scale, and geographic diversity. Translating to incredible resilience as a system, we will continue to stay focused on supporting our people and the local communities in which we operate as we work closely with our IDL partners in the region. We are extremely proud of the way our system continues to consistently show up for customers in every corner of the world.”