Over the past year, Starbucks Corp. (NASDAQ: SBUX) stock has decreased 17% and shares of McDonald’s Corp. (NYSE: MCD) have dropped 6%. The S&P 500 is up 27% over the same period. Since these two companies dominate the fast-food industry, what do the sell-offs mean? The answer is probably inflation.
Starbucks and McDonald’s cannot suddenly diversify their entire menus, and the costs of ingredients of many menu items have risen sharply. Among the best examples is coffee. The price fell back from a surge in 2021 and 2022. Yet, it is on a run-up again, from $154 per pound in January of this year to $213. According to the Federal Reserve of St. Louis, beef prices have also surged. The cost per pound at the start of 2021 was $4.00. It is $5.15 today. (See which coffee brands to never buy.)
Most expenses at McDonald’s and Starbucks are fixed. Minimum wages for hourly workers in much of the United States are rising. New rules in California are an example. NBC San Diego says fast-food workers make at least $16.60 an hour. The state has raised that to $20.00. However, NBC points out, “The new $20 minimum wage is just a starting point. The law creates a Fast Food Council that has the power to increase that wage each year through 2029 by 3.5% or the change in averages for the U.S. Consumer Price Index for urban wage earners and clerical workers, whichever is lower.”
Why are Starbucks and McDonald’s unattractive investments? It is not revenue. It is costs, now and in the future.
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