The Golden Arches might soon be home to Golden Prices.
The world’s largest restaurant chain, as measured by revenues, will shortly begin hiking prices across its vast fast-food menu as a result of surging commodities since last summer. Everything from sugar to live cattle has risen sharply over the past 6-12 months, forcing restaurant chains to consider raising prices to protect profit margins.
McDonald’s (NYSE-MCD), which reported earnings on Monday, is expected to digest a 2% to 2.5% hike in food costs this year in the United States. In Europe, MCD will see prices climb 3.5% to 4.5%.
Unlike most other fast-food restaurants, which struggle to raise prices in a highly competitive environment, McDonald’s is a rare breed; when it raises prices, it not only protects margins but doesn’t see a decline in gross revenues. No other fast-food chain has a higher degree of consumer brand loyalty.
In 2008, amid a worldwide crash in most assets, MCD’s shares actually rose 10% the only Dow stock to post a gain. An initial investment of 100 shares in 1965 when MCD went public would now be worth 74,360 shares, including 12 stock-splits and dividends. That’s a sweet $4.6 million dollars 45 years later.
Over the past 12 months, important ingredients that comprise the composition of MCD’s menus have indeed climbed higher. In some cases, much higher.
For example, meat prices have surged 31%, sugar is up 18%, ham is up 12%, cheddar up 8.7%, milk prices have gained 23.4% and coffee is up 34.4%. And don’t forget about those buns – wheat prices have soared 81% over the past 12 months.
To be sure, MCD’s is still the King of fast-food and shall probably continue to protect its margins. But I’m not so sure commodity inflation will be forgiving to other businesses. Not every company can pass on rising costs and some industries will suffer margin compression over the next quarter or two, if commodities remain firm.
Corporate America and the rest of the world have already cut labor and other expenses since the onset of the financial crisis. Now it’s time to boost margins the old-fashioned way or through higher prices. I’m not so sure this environment will allow most businesses to pass along rising costs.