McDonald’s, the world’s largest fast-food restaurant and a bellwether of the consumer economy in the United States, has been increasing prices on many of its offerings for months. If you haven't noticed, you're hardly alone.
Through an artful combination of strategic pricing, deliberate promotional tactics and the benefits afforded to the corporation as a result of its sheer size, McDonald’s has been able to slowly hike prices on some of its most popular items without raising even a peep from detractors.
In its conference call to discuss third-quarter earnings results released Friday, which exceeded analyst expectations and caused the stock to soar, various McDonald’s executives noted improvements in revenues at a global level had at least partly been the result of price adjustments.
What’s more, future hikes are on the way.
“We will continue to evaluate additional price increases in light of this inflationary environment, always balancing our goal of driving traffic and market share gains with managing impact of rising costs,'' said the firms Chief Financial Officer, Peter Bensen. Planned increases would come on top of a reported hike of 2.5 percent so far this year, which the company executed between March and May.
Various experts agreed the price increases are unlikely to bother consumers, who will likely not even notice them.
“They’re very strategic in the area where they raise prices,” said Andy Barish, who covers McDonald’s stock for Jefferies & Co.
The company’s hugely popular “Dollar Menu” which has offered a selection of items for $1 since it was introduced in 2002 and accounts for about 14 percent of all revenues, would likely not be affected.
Barish explained that McDonald’s “very broad menu” afforded them chances to increase prices in other areas where consumers are not so vigilant about price points, including “the incremental items that have been driving sales” like fruit smoothies and coffeehouse-style iced coffees.
“They have multiple tiers of products and price very strategically. [The increases] could be on extra-value meals, they could be on chicken sandwiches,” he added, noting other items outside of McDonald’s traditional core products.
The idea of raising prices mainly on new and fringe menu items is not a new one. A February 2007 Stanford University working paper, which analyzed data from 1999 to 2006, found franchise-owners were only able to charge hike prices on items that did not have good substitutes in the Dollar Menu.
Another restaurant industry expert, David Scott Peters of therestaurantexpert.com, noted McDonald’s could effectively leverage what he describes as “menu-engineering” to surreptitiously “change or enhance the costumer’s buying decisions.”
Such seemingly simple tactics as reconfiguring the look of the electronic board that displays options at most of the chain outlets could nudge consumers towards higher-profit options. Peters also added that “if it’s selling very well, it’s a value at any price.”
Peters, who advises small- and medium-size restaurants on how to achieve profitability, added that McDonald’s sheer market reach -- which allows it to control commodity pricing -- largely helps in making sure price increases are not overtly obvious.
“McDonald’s is the trend-setter. As soon as McDonald’s raises the price, everyone’s going to follow,” Peters said.
McDonald’s has been raising prices in recent quarters to deal with considerable inflation in the price of commodities it uses: the beef, wheat and milk it needs to produce its burgers, buns and cheese slices, for example. Recently, other food industry company’s faced with rising commodity prices, particularly retail food vendors, have opted to provide smaller portions rather than increase prices. Such a route is unlikely for McDonald’s, both Peters and Barish opined.
“It’s very unlikely McDonald’s would do anything like that” said Barish, referring to providing smaller portions, “The costumer realizes very quickly that the value proposition is changing.”