In February, U.S. fast-food giant McDonald’s announced its first revenue miss in three years, citing the Israel and Palestine conflicts in the Middle East as the reason for the company’s mixed quarterly sales. In its report for the fourth quarter of 2023, McDonald’s announced that global sales rose by 3.4% compared with 8.8% in the preceding quarter, which was the slowest in three years.
McDonald’s reported growth in other regions, but the company’s overall projection failed to meet the target due to the conflict in the Middle East.
Since October, the U.S. has provided unprecedented support to Israel in the fight against the Hamas terrorist organization. The burger giant is among several U.S. brands that have been targeted by protests and boycott campaigns due to their support for Israel.
At least 30,000 people have died in the Israel-Hamas war, which is still ongoing. In October, Hamas invaded Israel in response to the continued Israeli occupation of the Palestinian territories, the blockade of the Gaza Strip, and the expansion of illegal Israeli settlements.
Direct sales began to significantly decline in the conflict-affected countries when McDonald’s announced that its franchise restaurants would give free meals to the Israeli military officers actively involved in the war. This led to further boycotts and protests against McDonald’s.
But franchises in Saudi Arabia, Oman, Kuwait, the United Arab Emirates, Jordan, Bahrain, and Turkey issued statements denying involvement in the free-food campaign and collectively pledged aid worth $3M to Gaza.
McDonald’s Malaysia filed a $1.3M lawsuit against the pro-Palestine BDS movement for making “false allegations” that were harming the restaurant’s revenues.
McDonald’s CEO Chris Kempczinski blamed a “meaningful business impact” in the chain’s Middle East market due to the war and the drop in demand in Muslim countries such as Saudi Arabia and Iraq.
“So long as this war is going on… we’re not expecting to see any significant improvement (in these markets). The ongoing impact of the war on these franchisees’ local business is disheartening and ill-founded,” Kempczinski told analysts on the company’s conference call. “It’s a human tragedy, what’s going on, and I think that does weigh on brands like ours.”
According to the London Stock Exchange Group (LESG), comparable sales in McDonald’s International Developmental Licensed Markets segment rose 0.7% in the fourth quarter, widely missing estimates of 5.5% growth. The business accounted for 10% of McDonald’s total revenue in 2023.
“The effects (of the war) on earnings durability would be our biggest concern,” said Brian Mulberry, client portfolio manager at Zacks Investment Management, which holds McDonald’s shares. ”It looks like this is going to be an issue that persists past the next quarter or maybe even two.”
How the war affects U.S. brands, global economy
Besides McDonald’s, other U.S. brands operating in the Middle East have also been feeling the impact of the war on their businesses, raising concerns for U.S. brands.
In late January 2024, coffee chain Starbucks slashed its annual sales forecast. The company now expects full-year sales – globally and in the U.S. – to grow from 4 percent to 6 percent, down from its previous range of 5 percent to 7 percent.
Starbucks CEO Laxman Narasimhan said that Starbucks saw a “significant impact on traffic and sales” in the Middle East due to the war between Israel and Palestine. Sales also slightly slowed in the U.S., where protesters campaigned against Starbucks, calling for it to take a stand against Israel.
Starbucks’ troubles started after Starbucks Workers United, composed of thousands of baristas across more than 360 U.S. cafes, showed support for Palestinians in a post on X platform days after the Gaza war broke out.
Shares of McDonald’s fell nearly 4% on Monday after it reported that a sales slowdown in the Middle East contributed to its fourth-quarter revenue miss. Starbucks’ stock has fallen roughly 2% when the company reported that the war dented its U.S. sales in the final three months of the year.
The International Monetary Fund (IMF) said the war in Gaza and Israel is causing immense human suffering and affecting the Middle East economy. Economic activity in the region slowed, falling from 5.6 percent in 2022 to 2 percent in 2023.
Both McDonald’s and Starbucks don’t expect their revenues to recover until the war ends and the boycotts stop.
In March, Starbucks announced that its Middle East franchisee had cut 2,000 workers amid Gaza war boycotts.
The Kuwait-based family business Alshaya Group told Reuters: “As a result of the continually challenging trading conditions over the last six months, we have taken the very sad and very difficult decision to reduce the number of colleagues.”
Some activists have also called for boycotts of Domino’s Pizza, Papa John’s, Restaurant Brands International’s Burger King, and Yum Brands’ Pizza Hut. Yum Brands also reported quarterly earnings and revenue that missed analysts’ expectations as KFC, Taco Bell, and Pizza Hut all posted weaker-than-expected sales.
