McDonald’s and Fast Food Stocks Rise Amid Tariff Uncertainty
President Trump’s tariffs are creating significant challenges for the fast-food industry as the sector continues to grapple with rising costs and reduced customer traffic. Investors are seeking out businesses that can cater to budget-conscious diners. On Friday, shares of McDonald’s (MCD) reached a record high, reflecting a 5% rise over the past week despite broader market volatility. Yum Brands’ (YUM), encompassing KFC, Pizza Hut, and Taco Bell, saw its stock increase by 22% year-to-date, while Restaurant Brands International (QSR), holding Burger King, Tim Hortons, and Popeyes, climbed by 6%. The S&P 500 has experienced essentially flat returns throughout the year. Meanwhile, shares of Chipotle (CMG), Cava (CAVA), and Shake Shack (SHAK) decreased by 9%, 11%, and 15%, respectively, reversing prior gains as investors shifted towards the more upscale, fast-casual segment. McDonald’s “value menu is driving positive guest traffic in a slowing environment for almost all other restaurants,” stated Wedbush analyst Nick Setyan to Yahoo Finance. “It’s all about a rotation into the larger players given the uncertain market environment too.”
The long-term outlook for the industry remains uncertain, largely due to the “unpredictable nature” of tariff announcements, impacting franchise owners, manufacturing, and agribusiness, as noted by Food Away From Home Association (IFMA) CEO Phil Kafarakis to Yahoo Finance. On Thursday, President Trump extended a one-month tariff exemption to goods compliant with the United States-Mexico-Canada Agreement (USMCA). Initially announced in February, the 25% tariff on Canada and Mexico was paused twice. Non-compliant goods continue to face the full duty. The exemption expires on April 2, when Trump is expected to announce his reciprocal tariff plan. Despite restaurants sourcing more domestically, GlobalData analyst Neil Saunders told Yahoo Finance that tariffs significantly complicate long-term planning. The Yale Budget Lab predicts that prices for gas, rubber, plastic, processed rice, machinery, vegetables, fruit, sugar, and dairy could increase in the low- to mid-single digits.
A single McDonald’s franchise owner communicated to Yahoo Finance that the potential impact on equipment costs – currently estimated at $25,000 per unit – is “nerve-racking.” Utility prices also influence restaurant costs, even if subjected to reduced duties. “More electricity is sourced from Canadian producers,” which represents an “unwelcome disruption” for chains with a strong presence in the Northeast, according to Morningstar analyst Sean Dunlop. Furthermore, rising prices could hinder the rollout of AI, particularly as companies strive for automation and app ordering. “Equipment is such a big capital spend,” causing owners to prioritize maintenance over investing in nascent technologies, Kafarakis pointed out. At a recent food service equipment trade show, attendees are reportedly “not making the long-term bet” that characterized past investment strategies.
Rising overall prices are impacting consumer purchasing power – a 20% tariff on China impacts everything from iPhones to sneakers. Over the past year, the cost of eating out has consistently outpaced the cost of groceries. The US Bureau of Labor Statistics reported that food at home increased by 1.9% from a year ago (January), while food away from home rose by 3.4%. Value will be a key factor in 2025. Fast food chains may face higher costs in their expansion plans, but those that succeed in the value race could still thrive in the volatile environment. Taco Bell’s investor day revealed plans to increase its value mix from 13% to 18%, driven by CEO Sean Tresvant, who noted that consumers are “pinched” but willing to spend if presented with a compelling reason. The company anticipates 8% growth in same-store sales for the first quarter. BTIG analyst Peter Saleh highlighted that Taco Bell “is clearly winning” with its value strategy.
Yum Brands’ stock surged following a positive fourth-quarter report that exceeded Wall Street’s expectations. KFC’s same-store sales remained flat, and Pizza Hut’s sales declined slightly. The “kicker” was its better-than-expected international sales and the strength of Taco Bell in the US, according to Citi analyst Jon Tower. This contrasted sharply with other players’ stock declines after disappointing earnings and increased competition. Domino’s (DPZ) shares faltered after missing Wall Street’s estimates in its fourth-quarter report. Same-store sales increased by only 0.4%, compared to the 1.72% growth anticipated. McDonald’s, a longstanding leader in value meals, struggled with foot traffic in 2024. Its value mix is 40%, as reported by Saleh, and the company’s new McValue platform offered a slight boost. Despite calls for an economic blackout, foot traffic declined by only 0.8% year-over-year, a smaller drop than in previous weeks. Dunlop believes that Taco Bell’s expansion plans are the “least in danger” among strong brands, unlike weaker brands like Wendy’s. However, international expansion plans could be impacted by a trade war. Saleh warned that if US brands lose favor abroad, governments could slow their approval processes for brands like KFC, McDonald’s, Chipotle, and Starbucks.
