McDonald’s is losing its low-income customers. Economists call this a sign of a tighter distribution of wealth

In the early 2000s, after a severe recession, McDonald’s instituted a major turnaround by introducing the dollar menu.

The menu, where all items cost $1, highlights how important it was to market to low-income consumers – who want more value for their money.

Coming as flagging growth, stockpiling and the company’s first quarterly loss report were released, the dollar menu reversed the fast-food giant’s bad luck. That led to three years of sales growth in stores open at least one year and increased revenue by 33%, news reports at the time reported.

But not anymore.

Prices at the popular fast-food chain have risen so much that traffic from its core customer base, low-income families, has dropped by double digits, McDonald’s Chief Executive Officer Christopher Kempczynski told investors last week. At the same time, he said, the traffic of high-income earners has almost increased.

The struggles of the Golden Arches—long synonymous with affordable food for the masses—reflect a larger trend toward a growing consumer economy and making “value” a hot policy topic.

McDonald’s executives say the higher costs of restaurant necessities such as meat and higher wages have driven up food prices and alienated low-income customers who are already being hit by the rising cost of food, clothing, rent and child care.

With prices rising for everything, consumer companies that are concerned about the pressures on low-income Americans include food, auto and airline companies, among others, analyst Adam Josephson said. “The list goes on,” he said.

“A happy meal at McDonald’s is too expensive for some people, because there’s a lot of inflation,” Josephson said.

Josephson and other economists say that the influx of low-income consumers is a major tendency for Americans to diversify their spending, flexing the purchasing power of affluent consumers and driving away low-income consumers — what some call the “K-shaped economy.”

Delta’s latest earnings report offers yet another example. While Delta’s main-cabin revenue fell 5% in the June quarter from a year ago, premium ticket sales rose 5%, highlighting the divide between affluent customers and those who are more economical.

In hotel chains, luxury brands are preferred over low-budget options. Revenue at brands including the Four Seasons, Ritz-Carlton and St. Regis rose 2.9% so far this year, while economy hotels saw a 3.1% decline for the same period, according to industry tracker CoStar.

“There are examples everywhere you look,” Josephson said.

Consumer credit delinquency rates show just how vulnerable low-income households are, with households making less than $45,000 a year seeing “significant year-over-year increases,” even as delinquency rates for upper- and middle-income households have declined and stabilized, said Rickard Bandbo, Vicon’s chief strategy officer and CEO of Ecoistre.

After the stimulus programs related to COVID-19 ended, these families were the first to experience a dramatic increase in crime rates, and since 2022, there has been no reduction in crime, according to data from VantageScore. 2022, people are still struggling with relatively high prices and “astronomical” rent increases, Bandbo said.

A report published this year by researchers with the Joint Center for Housing Studies at Harvard University found that half of all renters, 22.6 million people, will be cost-burdened in 2023, meaning they will spend more than 30% of their income on housing and utilities, up 3.2 percentage points from 2019 and even 901% from 2019. Heavy burden on renters who spend more than 50% of their income on housing.

As rents have risen, the amount households are left with after paying for housing and utilities has fallen to record lows. By 2023, renters with an annual household income of less than $30,000 would have just $250 a month left over to spend on other necessities, an amount that has dropped 55% since 2001, according to a Harvard study, with the largest drop since the pandemic.

“It’s getting harder and harder every month for low-income families,” Bandbo said.

Prices at limited-service restaurants, which include fast-food restaurants, rose 3.2% year-over-year, outpacing inflation “and it’s rising,” said Marissa DeNatal, an economist at Moody’s Analytics.

Moreover, price increases due to tariffs disproportionately affect low-income households, as they spend a larger portion of their incomes on goods rather than services, which are not directly affected by tariffs. Wages are also more stagnant for these families than for high- and middle-income families, Dentel said.

“It’s always been the case that very good people have done well. But many economic and policy failures disproportionately affect low-income families, and [McDonald’s losing low-income customers] It’s a reflection of that,” Dentel said.

This then means that any price increase will hit these consumers hard.

According to a corporate fact sheet, from 2019 to 2024, the average cost of a McDonald’s menu item will increase by 40%. The average price of a Big Mac in 2019, for example, was $4.39, rising to $5.29 in 2024, according to the company. A 10-piece McNuggets Meal increased from $7.19 to $9.19 at the same time.

The company says the increase is in line with the costs of running the restaurant — including higher labor costs and higher prices for meat and other ingredients.

Beef prices skyrocket, U.S. cattle inventory is at lowest in 75 years due to drought and parasite numbers. And beef exports to the U.S. are down because of Trump’s trade war and tariffs. As a result, prices for ground beef sold in supermarkets rose 13% year-on-year in September.

McDonald’s has also blamed the meatpacking industry, accusing it of operating to artificially inflate prices in a lawsuit filed last year against the industry’s “Big Four” companies — Tyson, JBS, Cargill and National Beef Packing Co.

The companies have denied wrongdoing, and have paid tens of millions of dollars to settle several lawsuits alleging price-fixing.

However, McDonald’s chief financial officer Ian Borden said of the latest earnings year that the company was able to keep costs out of control.

“I think the strength of our supply chain means our meat costs are, I think, certainly lower than most,” he said.

McDonald’s did not disclose how the company measures the income levels of its customers, but businesses often analyze the market area they serve by estimating the backgrounds of their customers based on what they shop for and what they buy.

In California, the debate over fast-food prices has focused on labor costs, with a law passed last year that raised the minimum wage for fast-food workers at chains with more than 60 locations across the state.

But more than a year after the fast-food wage hike, the impact is still being debated, with economists divided and the fast-food industry and unions continuing to grapple with its impact.

Fast food restaurant owners as well as trade associations such as the International Franchise Assn. who has led efforts to block minimum wage growth, said businesses have been forced to cut staff hours, hire temporary workers or lay off people to meet the cost of higher wages.

Meanwhile, an analysis by researchers at UC Berkeley’s Center for Wage and Employment Dynamics of nearly 2,000 restaurants found that a $20 wage did not reduce fast-food employment, and that a $4 burger “caused menu prices to rise by at least 8 cents.”

Labor groups have also argued that raising the minimum wage would give workers more purchasing power, helping to stimulate the economy.

McDonald’s said last year that the company’s spending on restaurant staff salaries has grown about 40% since 2019, while costs for food, paper and other materials have risen 35%.

The success of its dollar menu in the early 2000s was notable as it came amid complaints about China’s highly processed, high-calorie and high-fat products, food safety concerns and labor exploitation.

As the company marketed the dollar menu, which included a double cheeseburger, McChicken sandwich, French fries, a hot fudge sundae and a 16-ounce soda, it also added healthier options to the regular menu, including salads and fruit.

But healthy menu items didn’t lead to change. A $1 double cheeseburger brought in more revenue than salads or chicken sandwiches, which ranged in price from $3 to $4.50.

“The dollar menu appeals to low-income and ethnic consumers,” Steve Lavigne, vice president of U.S. business research at McDonald’s, told The New York Times in 2006. These are the people who don’t always have $6 in their pocket.

However, the dollar menu eventually became unstable. With inflation-adjusted prices rising, McDonald’s stores, especially franchise locations, struggled to afford it, and in November 2013, $5 prices were called “Dollar Menus and More”.

Last year, McDonald’s made a mistake in appealing to cash-strapped customers with a $5 deal for a McDouble or McChicken sandwich, small fries, small soft drink and four pieces of McNuggets. And in January it created a deal with a John Cena-starrer ad offering $1 menu items with items purchased for full price, and in early September it launched additional value meals — offering combos that cost 15% less than ordering each item separately.

The marketing didn’t seem to cut it to customers immediately, with McDonald’s reporting in May that US same-store sales in the latest quarter fell 3.6% from a year earlier. However, in its latest third-quarter earnings call, the company reported a 2.4% increase in sales, even as its CEO warned about a growing dual economy.

That other businesses are reliving the deal is a sign of the times. San Francisco-based burger chain Super Duper has been promoting its “recess combo” on social media. For $10, customers get rice, a drink and a “Recession Burger” at one of the chain’s 19 California locations.

What is clear is that companies are wary of passing on higher costs to customers, said Moody’s Analytics Danatel.

“A lot of businesses are saying, ‘We don’t think customers are going to stand for it,'” Denatel said. “[Consumers] It’s been years of high prices, and there’s very little tolerance for high prices.”