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McDonald's Dollar Menu threatened

Posted Jul 24 2008, 01:07 PM by Anthony Mirhaydari
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Rising food and energy prices are forcing McDonald's to take aim at its popular Dollar Menu. "In this current environment, we've got to make sure we're pricing smart, not just pricing low," COO Ralph Alvarez said as the chain reported better-than-expected quarterly results.

For hurried moms, nocturnal teens, lunch-run dads, and anyone who appreciated the food-inflation hedge of one dollar double cheeseburgers, the news comes as a super-sized disappointment.

Investors should be worried too. Unless the company refocuses on its premium, more healthful lineup -- giving the target demographic of its premium beverages a complementary meal option while providing a nice boost to profitability -- shareholders are in for a rude awakening.

Although the Dollar Menu only generates 14% of the company's total sales, it's a big driver of store visits and a key piece of the company's low-cost image. Just two months ago, CEO Jim Skinner proclaimed that passing costs on to consumers wasn't a good idea for just this reason. "They have long memories," Skinner said of McDonald's patrons.

The company hoped that vigorous use of derivative contracts on key inputs like beef, as well as strong overseas results, would allow the company to absorb some of the margin pressure while preserving store traffic. My guess is that they also expected the much-touted, high-margin specialty coffee rollout to compensate as well -- which is part of a wider beverage initiative that includes smoothies, energy drinks, and bottled items. Word on Wall Street is that its lattes and cappuccinos aren't meeting sales expectations.

McDonald’s had no choice but to surrender to the forces of inflation because ranchers are setting the stage for big-time increases in meat prices by cutting down herd sizes in response to unaffordable feed costs. Also contributing is Russia's recent ban on beef from Latin America, further increasing demand for U.S. beef exports due to a weak dollar.

Management is looking for beef prices to increase upwards of 9% this year, with chicken prices up 6% and cheese prices moving 21% higher. Back in April, the expectation was for beef prices to remain flat though the rest of 2008. Beef is the company's largest cost of goods sold expense, standing at 15% of total.

This is all quite unfortunate, since McDonald's steadfast resistance to major price hikes helped capture cost-sensitive business from casual restaurants and drive share performance during trying economic times. But margin contraction has individual franchise owners screaming for relief: Locations in Georgia have bumped the price of some items to $1.09 in response.

To make matter worse, political pressure continues to build against McDonald's and other fast food restaurants for their contribution to rising obesity rates. A Los Angeles city-council woman proposes a ban on the construction of new quick-service restaurants within a 32-square mile section of the city.

McDonald's shares reflect too much optimism for Deutsche Bank analyst Jason West, who downgraded the stock as "risks to the downside are building." Bank of America's Joseph Buckley notes that the company looks increasingly vulnerable to U.S. macroeconomic pressure, and sees elements of investor complacency.

(Disclosure: I don’t own shares in any of the companies mentioned)

Related reading:

Insiders bail as McDonald's brews trouble

Casual restaurants burned by inflation

Comments

 

As someone in the business myself, I know that McD's has no choice but to raise prices. The dollar menu is there to drive traffic, but not to lose money. No sector of foodservice is immune from this pressure. Consumers have to face up to higher costs for food going forward, whether at the store, or at any food service outlet; mom and pop or corporate. The end is at least a year away.

dump the dollar menu and have better monthly specials, like 2 big macs for 3 bucks.  the menu is to cluttered anyway.  I'd much rather spend 4 bucks on a better double cheese burger than risk breaking a tooth on the bits of bone that fill the burger meat in the cheap sandwich.

Raising the prices of the dollar menu would lead to McDonald's bankruptcy as many people would stop going there.

Why does it cost a $1.40 more at Subway to remove the bread and put the sandwich in a bowl and call it a "salad?"

I agree with Marlene, us low income people should be able to treat our kids and family to a fun night out to once in awhile.  Plus you have college kids on budgets. Single people working, and going to school trying to make ends meet. KEEP THE DOLLAR MENUE.  My guys go for the double cheeseburger too!   I am a grandma with 2 grandkids  living with me, and 3rd loves to go to MicD's she calls it.  So try to keep up the good work.

Let them raise prices. Yes, by all means. Let them raise prices until a "demand destruct" happens. Just like gas prices, prices go higher so demand drops which makes prices go back lower....or....they can leave the price the same and just take the hit for the American people instead of passing the buck!

themike doesn't understand the franchising of McDonald's.  Most stores are independently owned and operated; however, McDonald's Corporation gets 30% of sales BEFORE the owner/operator even pays his/her bills to include salaries.  I have a family member who owns 2 stores and they pay their "crew" (mostly young kids) 10-20% more than minimum wage and if they work hard, show up when they are supposed to, they give them raises at periodic increments.  The managers are paid extremely well and get full benefits, but in order to offer salaries that will attract workers who will work and stay, plus allow them to pay their bills, some price increases are necessary and most are not outrageous and come in-line with their cost of doing business.  Be advised that things like menu choices, store set ups (2 drive through windows), etc  are not the option of the owner/operators but of the corporation.  We all work to make a living - stop complaining that their prices are too high.  The Corporation itself is probably more in-tune with the average American than most companies, but their bread and butter is a successful owner/operator!

How spoiled we've become!  We want our fatty food often and cheap!  I know times are tough...and they are also tough for McDonalds with meat, grain and dairy costs going out of sight.  Thanks ethanol!  If McDonalds raises prices from $1.00 to say $1.09 or $1.19, is that really going to keep people away?  They aren't in the business to loose money.  An earlier poster said, "My kids are big fans of the Double Cheeseburger.  If the price goes up they will have to stop going, that is the only thing they go for."  They will have to stop going?  Are they demanding you take them there?  How often are you taking them to McDonalds?  That kind of food should be considered a treat and not consumed numerous times a week...or more.  Again, I know times are tough for a lot of people, but is 10 or 15 cents per item once or twice a week really going to be a killer?  If it is, you are eating there way too much.

I don't know why people expect mcD to keep the $1 menu when everything else has gone up.  you still buy your gas, and it's doubled!  You can't expect them to stay in business if the $1 menu makes them lose money.    They aren't isolated from the same economic stress everyone else is, therefore must change prices, as well!

Well now, along with the sloppy presentation of thier food in most of thier stores, the ridiculouse wait times just to get a simple burge in th e lobby or dirve thru's, now the price of thier food is going up. Needless to say they have the  most taistless of all fastfood burgers,but it was the price that keep me going there, now i guess i can stop going thier all together. Honestly now people correct me if i am wrong. Who has never received one of thier burgerss withe the condiments all over the place, or had to wait ten minutes for a value meal in the drive thru. ten thousand stores globaly and they can't keep the price of a burger down. Please.

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