The First Casualty Of An "Improving" Economy: The Fast Food Dollar Menu, As McDonalds Considers Hiking Prices

Tyler Durden's picture

As the fallacy that an economy is improving if the stock market is higher percolates, accompanied by the all too real surge in input costs (yes, oil really is on the verge of breaking $91 first, and then $100), the margin contraction we have been discussing for over 2 months is becoming increasingly acute: for a good recent example nowhere is it more evident than in the latest Philly Fed reading. Yet what is true for manufactured products, is far more applicable for food products, whose input costs are determined by the daily vagaries of millions of speculators. Which means that as the catch 22 of an "improvement" for some courtesy of 3 year highs in the Nasdaq is perceived by the speculators as an actual improvement for all (which would be the case if stocks were owned uniformly by every layer of society, which is certainly not the case), prices will eventually hit the tipping point where retailers will be forced to start passing on cost increases to consumers. Enter McDonalds whos executives according to AGWeb, were quoted as saying that "menu prices could rise if the economy improves." And since after listening to the endless barrage of brainwashing from the mainstream media, one can't not be left with the impression that the economy is doing anything but improving, conveniently ignoring the fact that the Fed is stimulating it coincidentally via QE2, the next step for the broad part of the US population for whom there is no improvement in anything, which would be the majority of America, is about to get its next whopper (pun intended) of a Bernanke side effect, namely inflation in the most affordable of food product categories: fast food. But since this is not caught by the core CPI, all shall be well, and the Fed will be able to proclaim, without losing any sleep, that inflation is truly contained, when the only thing that is contained is lending to those who most need it.

As for that critical choice of when and how to pass on food costs, here are additional details of the dilemma gripping food retailers, per AG Web:

The big question: When or even whether to pass along those costs. Sure, charging more could help protect profits --- but it could also startle customers already shocked by the economy.Restaurants' choice of strategy in Atlanta and across the country will influence where Americans eat next year, and how much they spend.

Some operators say they plan to raise prices gradually if consumers give them the go-ahead. Others want to hold prices steady and see what their competitors do.

"We're obviously in a very cost-sensitive industry," said Robby Kukler, partner at Atlanta-based Fifth Group Restaurants. The company has seen prices rise for beef, chicken and, especially, butter. But Fifth Group has held prices down on most meals, such as fried chicken at South City Kitchen Vinings, fajitas at El Taco and baked manicotti at La Tavola in Virginia-Highland.

"We know people are sensitive to it," Kukler said. "We just made a conscious effort, because of the times we're in, to hang steady."

For those concerned that the recent resumption in limit up openings in various commodity classes is a worrying development, all we can say is "you are absolutely right to be concerned." Indeed, Bernanke's Gusher of Endless Liquidity gusher (GELTM) is starting to make its way to asset classes far beyond stocks.

Restaurants are not the only companies weighing whether passing along higher prices risks alienating customers. Big food brands such as Dean Foods, Del Monte, Dole and Chiquita Brands are among those at the greatest risk from coming price increases, according to Consumer Edge Research. With agricultural commodities up about 50 percent in the six months leading to November, price increases or smaller profits seem inevitable, according to the Connecticut-based research group.

And herein lies the rub: those very same surging S&P EPS that are supposed to form the bedrock of the number to which some multiple is applied to get a 1,550 year end estimate if one is David Bianco, are about to plunge as profit margins are hit, while fixed costs refuse to be reduced.

Historically, restaurants have not immediately passed on the full extent of cost inflation to their customers, analyst Sara Senatore of Sanford C. Bernstein said. Typically that means meal prices lag for several quarters, squeezing profit margins in the short term.

Profits are defended zealously in the restaurant industry. Profit margins at Wendy's restaurants are 15.4 percent this year and 11.6 percent at Arby's, for example. Coca-Cola's, by contrast, are nearly 30 percent.

What this means specifically is that pretty soon America can kiss the various iterations of the dollar menu goodbye.

Executives at McDonald's said menu prices could rise if the economy improves. The Ohio-based chain has said its commodity costs will increase by only about 2 percent in the fourth quarter.

Cheryl Bachelder, chief executive of Atlanta-based Popeyes Louisiana Kitchen, said she expects costs to rise next year. But with the U.S. unemployment rate at 9.8 percent, she doubts that fast-food companies can raise prices much.

Dallas-based Brinker International Inc., which controls Chili's Grill & Bar and Maggiano's Little Italy, enjoyed better prices for meat, seafood and poultry in the quarter ending Sept. 29. In the current quarter, about 90 percent of Brinker's "food basket" is under contract, meaning costs don't depend on fluctuations in the open market. But much of that protection expires later in 2011. That could put pressure on steak prices.

Executives at Atlanta-based Wendy's/Arby's Group say some Wendy's restaurants will raise prices on selected products this month. The increases will be tailored to places recommended by a software program that crunches data from transactions.

Denver-based Chipotle Mexican Grill is prepared to raise prices if necessary, Chief Financial Officer John Hartung said on a recent conference call. But first it wants to see how customers respond to competitors' price increases.

Elsewhere, fast food price hikes have already taken place.... even with 9.8% unemployment.

Some increases have come already. Some Wendy's franchisees bumped the Junior Bacon Cheeseburger to $1.29 after the company switched to a more expensive type of bacon. "We think it was the right thing to do," Smith said.

Wendy's/Arby's, one of the largest fast-food chains in the country, said its commodity costs are 2 to 3 percent higher this year than in 2009. The first half of 2011 is not expected to bring much relief from high beef and pork costs.

Darden Restaurants Inc., the parent company of Olive Garden, Red Lobster and LongHorn Steakhouse, has raised prices about 2 percent this year. It's important to raise prices steadily and consistently instead of delaying them for years, said Andrew Madsen, Darden's president and chief operating officer. Sudden price increases can shock guests, he said.

And so forth. Those interested in the full story can read it here. The bottom line is obvious. As the surge in the stock market continus to be equated, totally incorrectly, with an improving economy, prices will increase inevitably, immediately nullifying any benefit brought from the recent tax extension, and pushing all profits to commodity goods speculators, while taking away purchasing power from end consumers. Keep in mind this is the Fed's plan, which no longer fights disinflation, but is in the inflation creation business. Luckily, Bernanke is 100% certain he can contain this process. It is then too bad it has already started, and is about to get a whole lot worse.

h/t Dan

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tmosley's picture

Is this the "first" casualty?  Really, we haven't had any casualties before this?

Damn, I might just jump on the Happy Train with Harry, Robo, and associated fuckfaces!

Sorry, just tired of all these "So it begins" type posts.  It's already started.  We are transitioning from the end of the beginning to the middle of this crisis.  The transition will be complete when the Euro crisis hits the core with defaults.

Internet Tough Guy's picture

Agree. Oil at a 2 year high and dollar menu inflation are signs of the same event.

Cheesy Bastard's picture

1/8th pounder with cheese, anyone?

DaveyJones's picture

as long as the taste doesn't improve

duo's picture

What are the price increases for the 5 basic food groups?

Salt

MSG

high-fructose corn syrup

textured vegetable protein

partially hydrogenated vegetable oil (can be one of the following: palm, soybean, canola, sunflower)

hedgeless_horseman's picture

Worried about the price or availability of basics and have a woman in your life?  Buy her 2 dozen of these:

http://www.naturallycozy.com/washable-feminine-napkins.html

duo's picture

good luck getting through airport security with one of those.

Armchair Bear's picture

thanks! my 10 year old daughter's future career...making saddles for riding the cotton pony...i'll be stocking up on flannel and terrycloth!

Salinger's picture

you neglected to mention the newly approved additive to french fried potatoes that does not need to be declared

 

yes everyone's favorite Cancer Drug "Elspar" (or Asparaginase ) will now be added to products such as baked goods and french fries, ostensibly to ward off an heretofore unknown carcinogen, "Acrylamide. (actually Acrylamide has been suspected as a carcinogen for decades)

 

http://www.calgaryherald.com/story_print.html?id=2368480&sponsor=

 

(since that article was first published the additive has been approved)

CPL's picture

LOL, had to reread that ...

theXman's picture

Just came back from a Malaysian restaurant. Lots of price hikes on the menu over last week. The new prices are all hand-written -- the owner would not wait for the new menus to be printed or could afford it.

Red Neck Repugnicant's picture

Oil at a 2 year high and dollar menu inflation are signs of the same event.

@internet tough guy

Obviously (and shamefully) you have no knowledge of categorical propositions or syllogisms, and you certainly have never read Prior Analytics by Aristotle or An Enquiry concerning Human Understanding, by David Hume

Embarrassing!  

To suggest that there is a correlation (signs of the same event) between oil prices and business decisions by Ronald McDonald demonstrates a level of ignorance that is typically reserved for tmosely's posts. 

Before you post such knee buckling nonsense, it is advisable that you familiarize yourself with inductive vs. deductive reasoning.    

To start, find the flaw in this inductive example:

1. I believe most/all increases in commodity prices are the result of inflation. 

2. The price of oil has risen

3. Obviously, the rise in the price of oil is caused by inflation. 

 

Cheesy Bastard's picture

Yes, that is a logical fallacy, ie the rooster crows then the sun comes up.  The rooster crowing must cause the sun to come up.  Having said that are you suggesting that shipping and feed costs play no role in product pricing at Mcdonalds or elsewhere?

Red Neck Repugnicant's picture

are you suggesting that shipping and feed costs play no role in product pricing at Mcdonalds or elsewhere?

No. I never said nor suggested that. 


Cheesy Bastard's picture

To suggest that there is a correlation (signs of the same event) between oil prices and business decisions by Ronald McDonald demonstrates a level of ignorance

Sorry.  I thought I saw it right there.

Red Neck Repugnicant's picture

lol.  Nice.  

In general, yes - the price of oil affects all businesses.  That's obvious and well-known. 

Specifically to the point of this discussion though, the recent price of oil and the future of the McDollar menu are NOT correlated, nor are they "signs of the same event."

Even the quote by the executive at McDonald's has nothing to do with inflation or rising cost concerns.  It specifically mentions the prospects of an improving economy.  

 

 

tmosley's picture

I love how you acknowledge that he is right and then claim he is wrong in the same breath.  Doubleplusgood doublethink!

Red Neck Repugnicant's picture

Hey tGilligan

What happened to the McDollar menu when oil crossed $100 and went to $147?

Nothing. 

 

Al Gorerhythm's picture

Fekete,

Rothbard,

Menger,

von Mises,

Hayek.

akak's picture

What happened to the McDollar menu when oil crossed $100 and went to $147?

I wish I could tell you, but since I am not a McSlob and actually care about my health, and have a weird, atavistic habit of consuming real food, I refuse to patronize the McEmpire and eat McShit.

Eally Ucked's picture

Just ask McD for changes in recipe over time span of 20 years, maybe you'll find your answers.

Armchair Bear's picture

double cheeseburger went to $1.19 in my town

tmosley's picture

I see you skipped the first part of the old saying, and skipped straight to the "baffle them with bullshit" stage.

Why do you bother posting here among us neanderthals?  Why don't you go someplace enlightened, like the Obama forums, or Yahoo finance boards?  They seem more your speed.

Sancho Ponzi's picture

I worked closely with the logistics folks at a food manufacturing company. When fuel prices rose they were forced to stop serving smaller customers which led to route consolidation, layoffs, etc.

Anyone with experience in the food manufacting/food service industry knows how critical fuel prices are to their bottom line. You know that 'reefer' on the front of the trailer that keeps the food refrigerated? Yep, that runs on diesel. Did you know each route can service 20-40 customers a day, and that fuel is one of the highest variable costs to deliver product? Did you know that all of the pickles you eat on your McBurger come from the same source, and had to be transported across the country? 

Red Neck Repugnicant's picture

Anyone with experience in the food manufacting/food service industry knows how critical fuel prices are to their bottom line.

No one is debating that, and we certainly don't care where the pickles come from.  

Everyone wants to suggest that inflation (and specifically, Bernanke) is to blame for the rise in anything/everything. If oil goes up, then obviously it's Bernanke's fault, not demand pulls from China.  Right?  Or if McDonald's wants to adjust their McDollar menu, then it must be cost-inflation creeping into the economy.  Right?

Wrong.  

akak's picture

But why are you going to such lengths to seemingly deny the obvious: that the dollar IS depreciating, and that this IS at least contributing to food price increases, even if the ongoing and never-ending depreciation of our faith-based fiat currency may not be responsible for ALL such increases at all times?

EscapeKey's picture

Why is AmericanPatriot posting his lies on Marketwatch?

tmosley's picture

I see.  The Chinese are consuming more in the face of massive inflation and stagnant wages.

How can a human being be as stupid as you, yet still manage to operate a computer?   That's right, you're not actually stupid, you just base your worldview 100% on being the opposite of what people you don't like think.  That just makes you LOOK like an utter moron.  Of course, it certainly means you don't think for yourself, and instead let your enemies determine what you should think.

Well, how about this?  I think you should definitely stick around, and you should definitely not castrate yourself, so you can be certain to spread your defective genes to the four winds.

Red Neck Repugnicant's picture

The Chinese are consuming more in the face of massive inflation and stagnant wages

So...you're being sarcastic? 

For the sake clarity, do you think Chinese demand for oil is affecting oil prices, especially in the past 12 months? 

Al Gorerhythm's picture

Do you think that China's release of $ reserves into the commodity markets is affecting oil (and every other good) prices?

 

Rahm's picture

You are BY FAR the DUMBEST person on this website.

akak's picture

Actually, he probably is not --- but may very well be one of the most disingenuous and antagonistic members of this forum.

Rahm's picture

Fair enough.  Second DUMBEST on this site ;)

tmosley's picture

Screw the Chinese, how about the whole world?  Oil use was down 2% between 2008 and 2009, the latest time frame for which data is available (http://www.enerdata.net/enerdatauk/publications/world-energy-statistics-...).  With everything everywhere continuing to look like shit, there is no reason to think it will do anything else will happen this year.

Red Neck Repugnicant's picture

You didn't answer the question, and I suspect it is due to you - once again - having absolutely no idea what you're talking about.  

Secondly, WTF does this mean:

there is no reason to think it will do anything else will happen this year.



tmosley's picture

China's use of oil and energy in general is going up, but the world price is dictated by world supply and world demand.  World demand is down.

That means the decline in energy use that started last year will continue this year.

You sure do seem to have a lot of trouble understanding what people are saying.

EscapeKey's picture

All BRIC countries experience rapid rise in terms of oil use. I wouldn't automatically assume use is down worldwide.

Sean7k's picture

Red,

The chinese are consuming more because their currency is buying less and as they see inflation rising- it behooves them to spend it now. 

So, nothing to do tonight? Thought you'd see if you could rile people up? 

Monday1929's picture

You mean it all comes from one, big, pickle? :)

Al Gorerhythm's picture

Your intellectual capacity based on your insights is breathtaking. 

duo's picture

What are the price increases for the 5 basic food groups?

Salt

MSG

high-fructose corn syrup

textured vegetable protein

partially hydrogenated vegetable oil (can be one of the following: palm, soybean, canola, sunflower)

Kaiser Sousa's picture

dont fret...its the Star Wars approach to chronicling a unfolding catastrophe...

MonsterZero's picture

When I was growing up they had $1 double cheeseburgers instead of the $1 MCdoubles today that only have one slice of cheese... oh the good ole days...