Less Is Still More For U.S. Restaurant Chains Amid A Weak Economy

by Trefis Team
+9.71%
Upside
93.75
Market
103
Trefis
MCD
McDonald's
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While the country might have avoided the fiscal cliff with lawmakers finally passing the American Taxpayer Relief Act of 2012 (ATRA), it seems the restaurant chains are still not confident about the consumer spending environment going into 2013. A recent survey by nrn.com (Nation’s Restaurant News) found that restaurants are reluctant to raise menu prices despite rising commodity costs. Restaurant chains expect commodity costs to increase 3% on average in 2013 but are hesitant to increase menu prices in the wake of weak comparable sales figures. [1]

Restaurants Go Cheap

McDonald’s (NYSE:MCD) strategy to focus on the more profitable Extra Value meals (such as the 20 Chicken McNuggets for $4.99) did not exactly go as per the management’s plan. The company found itself reporting a near zero comparable sales figure, after which it decided to revert back to the more reliable value meals such as the Dollar menu. The strategy seems to have paid off, at least that’s what the initial results suggest, with November same-store sales rising 2.4%.

To take on McDonald’s, Taco Bell is currently testing a new $1 Cravings menu, which includes items such as spicy chicken mini quesadilla, spicy cheese roll-up and a smaller version of its beefy cheesy burrito. The restaurant chain will soon start marketing its ‘Happier Hour’ menu as well. [2]

See full analysis for McDonald’s Corporation

Meanwhile, the restaurant chains that aren’t rolling out cheaper menus are reluctant to increase prices. Take the case of Chipotle Mexican Grill (NYSE:CMG). Part of the reason why its same-store sales dwindled in the last couple of quarters was because of increased competition from the lower priced Cantina menu (offered by Taco Bell). The company admitted earlier that it might face commodity cost pressures in the fourth quarter of 2012 and early 2013 but will be hesitant and certainly not the first one in the industry to raise prices. It would rather play a waiting game and if its competitors were to raise prices, then it may follow suit.

We have a $93.60 price estimate for McDonald’s, which is about 5% higher than the current market price.

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Notes:
  1. Survey: Restaurants reluctant to raise menu prices, January 9, 2013, nrn.com []
  2. Taco Bell ‘$1 Cravings’ Menu To Compete With McDonald’s Dollar Menu, January 11, 2013, huffingtonpost.com []
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