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The First Casualty Of An "Improving" Economy: The Fast Food Dollar Menu, As McDonalds Considers Hiking Prices
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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I keep waiting for the Tripe Quarter-Pounder and the Liver McNuggets, so far in vain.
I'm sure this will be next
http://www.realcajunrecipes.com/recipes/cajun/fried-brain/799.rcr
Mmmm...
Once in a while, I get in the mood for a Carl's Jr Super Star. It's an artery-killer. We used to call it the "Abortion Burger".
It's getting pretty comical to read comments here that the "shit's about to hit the fan" for the 1,000th time, while the market perfectly creeps higher and higher.
A burger at $1.15 is no different than a burger at $1.05. People will pay. Again, unless the cost is $3.00 for the burger, no one will care.
Uhhh, Harry, the burgers DO cost more than $3.
And for the last fucking time THE MARKET IS NOT THE ECONOMY.
He must have been talking about the burgers minus the meat. But when you have a booming home decor business like Mr. Wanger it's hard to pay attention to such trivialities like the price of food.
He may not be aware that TSHTF already because apparently his doesn't stink.
http://1.bp.blogspot.com/_yFeC-Omt3c8/SK6Z1ZDjz2I/AAAAAAAAAao/IjytkOstgx...
It's getting pretty comical to read HarryWanger's (oops, I mean James Kostohryz') comments here that "everything is fine and getting better" for the 1000th time, while (unsustainable) federal spending and the (unpayable) federal debt creeps higher and higher --- and while the dollar, and the average American standard of living, creeps lower and lower.
is fanning the shit the inverse of hitting the fan?
It's pretty comical to read that a rising stock market is based on fundamentals but rising energy and food prices are not significant.
Go away already, your schtick is tired.
I like MCD's coffee - much, much better than SBUX. I was starving today and bought 2 MCDoubles. The food upset my stomach and was very salty. I vowed not to eat there again - I was looking, some of the sandwich meals are like $6 or $8... shit, I can eat homemade steak, salad and baked potato for that... and you can keep the 44 ounce cola - you look at the number of people walking outta there with a 1/3rd gallon of soda with & "SWEET tea" with their meals and all you can say is "Diabetes"... that is ALOT of sugar
Harry, this is a serious question - I have several unemployed friends and relatives, and it sounds like your business is kickin ass, so how would these people contact you about employment opportunities? Relocation probably not a problem since some are likely to lose their homes anyways. What's your business URL?
Doesn't appear that those "inflationary input costs" are hurting BBBY at all. They put up great earnings once again. Here's a sector, home discretionary, that continues to do extremely well. What have I been telling you for the past 6 months about consumer home discretionary purchases?? You just don't want to listen do you?
Yeah when you live in a home and don't have to pay your mortgage you have discretionary cash to blow on shit like that.
Hey James Kostohryz, haven't you elicited enough heated and acrimonious responses for your study on the psychology of "utopian permabears" from all your absurd trolling in this forum YET?
For realz brosef,
do you just get a kick out of it or are you really a true believer? Or is it something else?
More and more I wonder who or what "Harry" and his ilk are? Obviously trying to anger the mob, say the ridiculous, inflame the masses. But I wonder if this isn't more than just a fool who wants attention?
I wonder about FBI's recent cases w/ "terrorists" in the US whereby they tried to more or less entrap marginal players. Or likewise for child porn.
I'm just saying, we really aren't sure who our "friends" are anymore...be careful.
At least in the case of "HarryWanger", he was long ago outed by several people here as the economic blogger and writer James Kostohryz, who was (and still is, apparently) trolling anti-establishment forums such as this one, purposely eliciting hostile responses, as part of a self-styled "study of the psychology of utopian permabears", i.e., most of us here on ZeroHedge, who dare to condemn and oppose the corruption, criminality, and unsustainability of the financial, monetary and political status-quo.
http://www.minyanville.com/businessmarkets/articles/AAPL-apple-gm-psycho...
Check out this bit of hilarity: http://www.minyanville.com/businessmarkets/articles/james-kostohryz-quan...
What a moron.
If you read the comments you'll feel like you just got your leg humped too
I did read on, and kept waiting for Harry, er, James to trot out the ultimate in the insane deflationists' argument, that paragon of inerrant statistical "proof", Core CPI. To his credit, he did not mention it once, which surprised me. But regarding the ongoing dramatic rise in ALL commodities this year, and the corresponding rises in food prices (or alternately, the shrinkage in food packaging) that all of us in the REAL world are seeing, well, "Nothing to see here folks --- move along, move along."
This piece is eighteen months old. Is Kostohryz no longer affiliated with Hoofy and Boo ?
Hmmmm, makes me wonder about a couple other posters out here - Ponzi, is that you?
Agreed, hambone. At best, Harry is adding excitement to the discourse / debate ... at worst he is looking to entrap the marginal players ... see who is throwing sand into the oiled up bits.
Please see my post below. As I said, and I think it would be helpful for this forum, Tyler can easily verify that I am indeed a small business owner selling what would be considered consumer discretionary home decor.
Why is this important? Well, when you have a window into the consumer such as I do and am willing to post it on this forum, it does add some credibility as to what we're seeing and hearing from those in the business.
Harry
please tell me are you a retailer of wholesaler. I have been in home furnishing for 15 years and show at 2 major markets Dallas and Atlanta. You are full of sheet and show us some product.
Sure. I don't want to list my business name here for several reasons. It's a small business and it's best if I don't name the company.
However, if Tyler wants to verify my authenticity of the owner of the small business that sells home decor, I will direct him to our website. He/she/them can then verify to anyone here, I am who I say I am without listing my business name.
Nice try, James, but anyone who has been in this forum since earlier this year knows just exactly who you are, and why you continue to troll here. Finish your fucking study and get the hell out of here already!
Harry, this is a serious question - I have several unemployed friends and relatives, and it sounds like your business is kickin ass, so how would these people contact you about employment opportunities? Relocation probably not a problem since some are likely to lose their homes anyways. What's your business URL?
apropo:
http://www.naturalnews.com/030808_food_safety_bill_American_farmers.html
thanks for the link. The Food Patriot Act. I've been hearing this was coming. This together with Monsanto's seedless patent crops. Been thinking about getting additional seed supply. Also lots of perennial crops.
Although I don't think that too many people would be deterred by a 1.02 menu replacing a dollar menu, I do find it funny how a lot of these companies are admitting 2% inflation despite calls that there has been no inflation in the past 2 years. Way to work together guys!
http://economix.blogs.nytimes.com/2010/09/13/2010-a-year-of-falling-prices/
Tastes good going down, fills you up . . . cheap and ubiquitous. And pay the piper much, much later. A perfect fare for the American Untermenschen. They are fools for eating that crap.
Yes, I have been short (2) days and not in a good mood. Time for some raw carrots.
McDonald's is based in Ohio? Wendy's, maybe.
Alpo will be the new normal, high in protein at least. Prime cuts select.
Every other week I order the same thing from the local sweet and sour cat/dog/roadkill restaurant....prices have been going up and this week crossed the $50 mark (4 boys over 6 foot)...What the fuck?! I remember a year ago $35.99
Four boys to feed? Ouch. Long ago, cxl9's first three jobs (beginning at age 15) were at restaurants. Back then you got one free meal per shift. (I have no idea how they do it today). That must have saved my father a considerable amount of money on food.
Shot and butchered 2 deer this week. Buyin a grinder to make it go a little furthur. If things get bad, I wonder how many can actually do this kinda thing. Ain't for the squeamish or weak. I have a quart bag of teriyaki jerky to go with my beer. At a store the same in beef would cost a $100.
big john williams of shadow stats isn't gonna be pleased with this headline...
he's been warning about a calamity like this for some time now. it appears he's plenty stocked up aforehand though.
Yes, everyone should stock up on McCheese burgers now! Hell, there's so many chemicals in the damn things you won't have to worry about the m going bad!
Is McDonald's really considered food?
Don't want to sound snotty but spent a long weekend in Montreal last week - the food was awesome. Thursday I was tired after travelling so did the hotel dining thing. Friday was Portuguese resto for lunch and Koren bbq for dinner. Saturday I splurged for an amazing bistro experience with appropriate wines. It was one of the best dinners I have had for a few years.
And there is always Montreal bagels.
Good food doesn't mean it always has to be expensive. I've created some amazing dishes based on a small slice of lamb, lentils, rice and yougurt plus some spices.
Question for me would be why aren't people/kids given information that will allow them to make intelligent choices regarding food.
If some vast and nefarious psychopathic cabal conspired worldwide to inflict the maximum amount of nutritional damage upon an ignorant and uncaring population over a period of decades, the end result of all their evil plans would have to strongly resemble the McDonald's menu and worldwide franchise, if not be identical to it.
margin compression is a bitch. The effects of high input energy costs will matriculate throughout the entire economy. People are buying more $1 menu and other loss leader products.
To the Fed and the CPI computations, this is a hedonic "substitution" adjustment that shows no inflation. However, now that McD's isn't making money they have to jack up the cost of the popular products.
you mean they couldn't keep burger prices at 29 cents forever like when i was a kid?
it's about time somebody told me ... i was so totally in the dark all these years since i went vegan
so global larging is due to Mco2 ???
Raise the price of McShit and television. The revolution can't come soon enough for me.
I go to McDonald's drive through a couple times a week. I get a large Diet Coke for $1 and usually one or two chicken wraps (grilled, not fried) for $1.50 each. The wraps are bland but hit the spot, and low fat. So I pay between $2.50 and $3.50 for lunch.
I like the 1/3 pound Angus Burger with cheese and mushrooms (hold the mayo), for $3.59 if I need to sedate myself.
No, Morgan Spurlock, I don't buy/eat the fries (too old for that).
I'll pluck a chicken sandwitch off the dollar menu every so often but it's just a nibble.
I just laugh with incredulity when liberal types state as fact that poor people are fat because they can't afford protein and insted gorge themselves on fat and carbohydrates. I work with poor people and they are fat because they eat way too much, and they inhale soda loaded with sugar, and fatty fried foods. They have and spend plenty of moneyfor food.
Please be aware that the foods you listed here is exposing you to chemicals that will substantially increase your risk of several types of cancer. I would suggest at minimum cutting out the diet Coke. Even the meat you're eating will cause serious hormonal imbalances.
Pretty fun though, how you were talking shit about the "stupid poor". Well done. You may not be fat, but you're likely a walking cancer patient waiting to happen. Because of your irresponsible behavior, I will have to pay more in taxes and insurance. Asshole.
See how that feels?
I've been thinking about cutting out the soda like Diet Coke, and I would in a second if there was a documented health risk. But, the more I think about it, the more I suspect it can't be good for you. My hormones may be a little off; I've been wondering about my rippling 6 pack and 14 inch.....