by Cynthia Wilson | April 22, 2011 8:55 am
Americans already are feeling the impact of higher gas prices. But the next time they have a Big Mac attack, consumers may have to suffer the same sticker shock they now get when they pull up to the pump.
That’s because McDonalds Corp.’s (NYSE: MCD) is seeing inflation push up the cost of ingredients like Big Mac beef, cheeseburger cheese McCafe coffee beans and all things in between.
As a result, the world’s largest fast food chain said it will raise prices to keep up with food inflation, that includes rising beef and dairy prices.
The price increases won’t be steep, at least not in the United States. Sensitive to the higher prices Americans are facing at the gasoline pump, grocery store and everywhere else they have to open their wallets, McDonalds said it will absorb some of the initial costs by gradually raising prices to recoup the 4% to 4.5% cost of food increases.
Nonetheless, the price hikes come on top of a 1% increase McDonalds added in March in the United States and Europe and it has the king of fast food worried customers might decide to make their own burgers. In announcing the price increase, McDonald’s Chief Executive Jim Skinner noted that customers are “pinched everywhere. They should not suffer the same fate at McDonald’s.”
The Golden Arches isn’t alone grappling with higher food prices. Chipotle Mexican Grill (NYSE: CMG) saw higher food costs eat into margins. McDonald’s admits that its strategy to gradually raise prices will sacrifice some margin growth in the short term, but believes it will preserve revenue growth in the long term.
McDonalds has had an edge on other fast food restaurants when it comes to raising prices because it attracts a higher income customer. That has helped the chain post seven years of positive comparable sales growth in every part of the world in which it operates. But the newest test will come during the summer when gasoline prices are expected to average around $4.00 a gallon nationwide.
While no one is looking forward to paying more for a Big Mac or McCafe, Americans will still fare better than Asian consumers. Soaring food prices have forced families to cut back on meat and vegetables, and is eating up to one-half of the household income of some poor families in Indonesia, India and China.
Americans, however, won’t be thinking of that when they decide whether or not to drive through or drive by McDonalds’ drive-thru.
As of this writing, Cynthia Wilson did not own a position in any of the stocks named here.
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