McDonald's Shaken by E. coli Crisis Spread... "Lawsuit Wave Begins" [Business & Issues]

Class Action Lawsuits Intensify... Expansion of Damage Cases
Q3 Sales Decline, Stock Price Continues to Fall
Middle East Boycott Persists... Will It Spread to Southeast Asia?

[Image source=Reuters Yonhap News]

The U.S. headquarters of McDonald's is facing a class-action lawsuit over an E. coli infection incident linked to its hamburgers, causing its stock price to fluctuate significantly. Onions used in the hamburgers have been identified as the main cause of the E. coli infection, leading to a swift resumption of hamburger sales after removing onions. However, as the number of reported cases continues to rise, the impact on sales is expected to be inevitable. Amid ongoing boycotts of stores in the Middle East, the E. coli outbreak has raised concerns that the sales decline could become prolonged.

Class-action lawsuit filed in Chicago court... Customers stop visiting McDonald's

[Image source=Getty Images Yonhap News]

According to The New York Times (NYT), on the 29th of last month, consumers who contracted E. coli after eating McDonald's Quarter Pounder burgers filed a lawsuit in the U.S. District Court in Chicago. The estimated damages claimed in the lawsuits filed so far amount to approximately $5 million (about 6.9 billion KRW). As the number of E. coli cases continues to increase, related lawsuits are expected to expand significantly in the future.

Earlier, the U.S. Centers for Disease Control and Prevention (CDC) announced that there have been 90 cases of E. coli infection across 13 states linked to McDonald's Quarter Pounder burgers, with 29 people hospitalized and one death reported. Epidemiological investigations led by the CDC and other U.S. health authorities identified onions in the hamburgers as the primary cause of the E. coli infections. Subsequently, McDonald's resumed selling the burgers after removing the implicated onions.

McDonald's has focused on minimizing the fallout from the E. coli infections, but trust in food safety has already been shaken, leading to a decline in customer visits to McDonald's locations across the U.S. According to a survey by market research firm Gordon Haskett Research Advisors, the number of pedestrians visiting McDonald's in the U.S. during the weekend of October 26-27 dropped by 9.5% compared to the previous year. Notably, Colorado and Wyoming, states heavily affected by the infections, saw decreases of 33% and 26%, respectively.

Q3 earnings worsen... Stock price fails to rebound

McDonald's stock price has also struggled. After the CDC announced on the 22nd of last month that E. coli was detected in the Quarter Pounder burger, the stock price fell 7.36%, from $314.69 to $291.52 by the 30th of last month. The third-quarter earnings, which did not fully reflect the E. coli issue, also showed weak performance, preventing the stock price from recovering from its downward trend.

McDonald's reported third-quarter revenue of $6.87 billion, a 2.7% increase from the previous year. However, same-store sales (stores operating for more than one year), excluding revenue from new stores, declined by 1.5% year-over-year, a steeper drop than the market's initial forecast of a 0.6% decrease. Operating income fell 0.6% to $3.19 billion. Earnings per share (EPS) also declined by 1.3% to $3.13 compared to the previous year.

McDonald's attributes the sales slump primarily to the sharp rise in grocery prices caused by global inflation, including in the U.S. Chris Kempczinski, McDonald's CEO, stated, "Due to inflation in grocery prices over recent years, the prices of hamburgers, fries, and beverages have increased, leading customers to reduce their spending." He added, "McDonald's has long maintained its position as the industry leader offering reasonably priced food, but the gap with competitors is gradually narrowing."

Middle East boycott continues... Concerns over prolonged sales decline

[Image source=AP Yonhap News]

Alongside reduced demand due to inflation, another factor pressuring sales is the ongoing boycott in the Middle East. Since the outbreak of hostilities between Israel and Hamas, Islamic countries have continued boycotting McDonald's.

According to CNBC, McDonald's third-quarter revenue from its International Development License (IDL) business segment, which receives royalties from local partner companies, decreased by 3.5% year-over-year, largely due to weak sales in the Middle East. The decline in Middle East sales has persisted since October last year, when Alonyal, the operator of McDonald's chains in Israel, announced it would provide free meals to the Israeli military.

To stem the decline in Middle East sales, McDonald's headquarters announced in April that it would acquire all 225 McDonald's outlets operated by Alonyal in Israel and agreed to retain employment for 5,000 local staff as part of the acquisition deal. However, image recovery in the Middle East has been limited, and there are concerns that if the Middle East conflict prolongs, the boycott could spread to other Islamic countries in Southeast Asia, such as Indonesia.