Consumers Hit Their Limit with Fast Food Prices: There appears to be a cap on what consumers are willing to pay for a fast food burger. McDonald's released its second-quarter earnings this week, revealing the first decline in sales since 2020. This drop is due to both reduced foot traffic and consumers opting for lower-priced options. Notably, this trend is not unique to McDonald's, as similar patterns have been observed among its peers. It seems that consumers are eating out less frequently due to rising costs and are more selective when they do. The value proposition that once made fast food appealing has eroded. While many people enjoy McDonald's, Burger King, Wendy's, and similar chains for their affordability, inflation has forced these companies to raise prices, challenging the notion that fast food is price-insensitive. With the national average price for a Big Mac Meal now at $9.29, it's clear that consumers are sensitive to fast food prices. McDonald's executives have acknowledged this, noting the success of their $5 value meal promotion as an indication of the need to realign with their value proposition. Consumers are still spending, but they are more discerning. For example, Chipotle continues to post record sales, consistently exceeding expectations, demonstrating that in a softer economic environment, consumers are indeed more price-sensitive and (perceived) value-conscious.
Dominos Falling for Budget Carriers: Just a couple of weeks ago, we wrote about the difficult challenges plaguing the airline industry, as rising costs are making it difficult for airlines to thrive despite record travel demand. This is especially challenging for budget airlines due to their higher cost sensitivity, given they don't have as many premium, higher-margin offerings for travelers. We suggested there could be significant changes happening with budget carriers—and now we're seeing the initial waves. Within weeks of its dismal earnings, Southwest announced it is eliminating its iconic random seat assignment model in favor of assigned seats with several premium purchase offerings. Spirit Airlines also introduced new premium bundles, offering travelers free checked bags, WiFi, and unlimited drinks—something unthinkable not long ago.
As these changes unfold, it becomes clear that the further down this path these carriers go, the more they lose their competitive advantage and begin to resemble every other airline. This highlights the harsh reality of the airline business: carriers are prisoners to the industry's extremely high variable cost structure and overall economic cyclicality. There is no telling if the models working now will succeed a year from now. It will be interesting to see if the budget carriers can sustain themselves and what will happen if they cannot. The high barriers to entry in this industry suggest that acquisitions or bankruptcies could lead to larger players becoming even more dominant, raising antitrust concerns. How would the government handle a situation where all the smaller carriers face bankruptcy? It's an interesting scenario, though not one anyone would want to see unfold.
Most Feared Position in Corporate America has been Filled: Boeing concluded its CEO search this week by appointing industry veteran Robert “Kelly” Ortberg to the position. Ortberg, 64, brings extensive aerospace experience, having previously led Rockwell Collins, now part of industry giant RTX. He is highly respected for his leadership through major acquisitions and his ability to cultivate key industry relationships, including with Boeing. This hire targets two main qualities: bringing in an outsider and finding someone with extensive experience. Both should reassure regulators by avoiding the appearance of conflicts of interest and legacy relationships. Hiring an industry veteran from outside could also bolster Boeing’s recruiting efforts as the company seeks fresh talent amid ongoing restructuring. Ortberg faces monumental challenges ahead as Boeing works to overcome regulatory issues and restore its public image. However, his appointment removes some uncertainty hanging over the company and its stock. Ortberg will start in early August, replacing David Calhoun, who gave his final quarterly earnings update as CEO this week.
Tech Was Out, Now it’s Back In: Tech shares have been underperforming in recent weeks as Wall Street decided to shift focus to other sectors following a period of strong performance and minimal new information (i.e., they had nothing better to do). However, this week brought fresh developments that reignited interest in the tech sector. Microsoft and Meta (parent of Facebook and Instagram) provided updates highlighting that AI is continuing its rapid growth and that their massive infrastructure investments are starting to pay off. This news sent major AI tech stocks, including Nvidia, soaring. Additionally, dovish comments from the Fed regarding potential interest rate cuts further boosted enthusiasm for tech stocks. As a result, tech is now back in favor with investors. Not an overly loyal bunch.
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