McDonald’s needed to win Americans back. Then came an E. coli outbreak
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CNN
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Even for a brand as gargantuan as McDonald's, the last few months have been… a lot.
Before an E. coli outbreak was revealed last week, the burger chain had already become an unwitting character in competing political narratives and a target of scorn from customers who felt the golden arches had lost their shimmer. Even the "Grimace effect", the New York Mets' winning streak embodied by McDonald's goofy purple mascot, petered out in the playoffs, depriving the world of a Subway Series.
All of that (minus the Grimace thing, in fairness) will be weighing on McDonald's when it reports third-quarter earnings early Tuesday and gives investors a better sense of how it plans to address food safety concerns for a brand that is known for its usually stringent food safety guidelines.
"Given the volume of food that they go through, how infrequently this happens to McDonald's is a testament to the effort that they take," Chris Gaulke, a professor of food and beverage management at Cornell University's Nolan School of Hotel Administration, told the Associated Press last week.
The timing of the outbreak is especially challenging for McDonald's as it has been trying to win back customers who've been put off by higher prices.
CEO Chris Kempczinski told analysts a year ago that even as McDonald's was jacking up prices, "the consumer is tolerating it well." That tolerance didn't last long, though.
Signs for a McDonald's fast food restaurant and a Starbucks cafe are seen in Loma Linda, California in this February 28, 2010 file photo. McDonald's Corp reported on April 21, 2010, a better-than-expected quarterly profit as its coffee business boosted U.S. sales, and the hamburger chain said its global sales momentum was continuing into April. In the United States, where same-store sales rose 1.5 percent during the quarter and 4.2 percent in March, McDonald's results got a boost from its McCafe coffees and other beverages. The fast food chain encroached further into Starbucks Corp territory this quarter by introducing lower-priced frappes designed to compete with Frappuccinos. Picture taken February 28, 2010. REUTERS/Lisa Baertlein/Files (UNITED STATES - Tags: BUSINESS FOOD)
Lisa Baertlein/Reuters/File
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At the end of July, McDonald's reported second-quarter sales fell 0.7% in the US compared with a year earlier, while some rivals gained, a sign that McDonald's had become too expensive for lower-income customers and not compelling enough for folks who could still afford to dine out. Competitors in the restaurant industry, including Applebee's and Chili's, leaned into that discontent to try win new customers, they might as well come on in, sit down and enjoy a nice meal in a restaurant, with service, if McDonald's was going to be a similar price anyway.
Over the summer McDonald's did an about face to try to win people back. By most accounts, it seemed to be working.
The company extended its popular $5 value meal promotion through the end of the year, helping boost traffic. It also had some hugely successful limited-time specials, including a Crocs partnership and a series of nostalgia-heavy collector's cups.
"They've been outperforming the the category, from the visitation standpoint, the last several months," RJ Hottovy, an analyst at Placer.ai, told me. "It had been a pretty strong quarter."
And absent the E. coli outbreak, Tuesday's earnings call might have been all about the value menu and the Crocs.
But its stock took a 7% wallop last week after the E. coli news came out, and McDonald's executives have been on a media blitz, assuring customers that any contaminated products have been pulled from the kitchen and the rest of the menu is safe.
Federal agencies are investigating an E. coli outbreak that has been linked to McDonald's Quarter Pounders.
Charles Rex Arbogast/AP
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E. coli cases linked to McDonald's Quarter Pounders rises to 75, federal agencies say
While it's too early to say definitely that the outbreak is hurting sales, "these things tend to have an impact on consumers, given the coverage," Hottovy said, while noting "McDonald's has been pretty proactive in addressing it."
Much will depend on whether new cases continue to spring up or level off. McDonald's said Sunday it will resume selling Quarter Pounders in all restaurants in the coming week after the Colorado Department of Agriculture said the company's beef patties used for the Quarter Pounder tested negative for E. coli.
On Friday, US health officials said the number of illnesses linked to McDonald's Quarter Pounders had risen to 75, up from the initial report of 49, including one death. Those numbers could go up again, as it can take weeks for officials to determine whether an illness is part of an outbreak.
McDonald's didn't immediately respond to CNN's request for comment.
The length and severity of the outbreak is now a wild card for analysts as they assess McDonald's financial future.
"We've seen the impact of foodborne illness outbreaks on demand really run the gamut, everything from multiple years of dragging and weighing on consumer perceptions… to almost undetectable," Sara Senatore, senior restaurants analyst for Bank of America, says.
Take Chipotle in 2015 versus Wendy's in 2022.
When Chipotle was linked to outbreaks of E. coli and norovirus that sickened hundreds of customers, it took more than two years and required a thorough management shakeup, including a new CEO, to repair the brand's image and pull its stock out of the gutter.
"As long as cases keep emerging, then it stays in the news cycle, and that was the challenge that Chipotle faced in 2015 and beyond," Senatore says. "For two years, a person couldn't sneeze near Chipotle without it making news."
On the other hand, Wendy's had an E. coli outbreak in August of 2022 that seemed to come and go in a week.
"No analyst even asked about it," Senatore says. "If you hadn't known that that news had hit that week, you wouldn't have seen anything outside of the realm of a normal week-to-week variability."
For McDonald's, a lot will depend on how quickly it can get itself out of the news cycle.
