McDonald’s (NYSE:MCD) expects food costs to rise between 4 and 4.5 percent in the United States and Europe this year, a situation that would put pressure on the company’s profit margins. McDonald’s is the market leader in the fast food market with about 19% share. It competes with Wendy’s (NYSE:WEN), Subway, Burger King, and Yum! Brands (NYSE:YUM). In the specialty coffee market, it competes with Starbucks (NASDAQ:SBUX).
McDonald’s plans to offset some, but not all, of its higher food costs through small price increases throughout the year. Although the company is a market leader in fast food, McDonald’s is still finding it difficult to pass on these increased prices to customers. Higher prices for its food offerings could repel customers since they are already facing a pinch in their pockets due to higher inflation. However, we believe McDonald’s has an edge because it can raise prices on its premium offerings including premium burgers and McCafe drinks that appeal to high end customers.
According to CFO Pete Bensen the company would sacrifice some short-term margin to protect long-term growth. McDonald’s CEO Jim Skinner said “Customers are getting pinched everywhere. They should not suffer the same fate at McDonald’s.”
In March, McDonald’s put through a 1 percent menu price increase in the U.S., where it plans additional increases. Prices in Europe are up by the same amount and increases are also planned for China.
If McDonald’s does pass the increased food cost to its customers, average spend per customer visit and annual customers per McDonald’s restaurant could be adversely affected.
We currently maintain a $82.53 price estimate for McDonald’s stock, roughly in line with market price.
See our full analysis for McDonald’s stock here
