Price hikes affect the value of McDonald’s shares

Big Mac at McDonald's

Rising food and paper costs may have you paying more for your Big Mac. / Image: pointnshoot/Flickr/CC BY

McDonald’s is the world’s leader in the fast food market, garnering about 19 percent of that niche. However, faced with the rising costs of food and paper, the company has announced that it plans to implement more small price increases throughout the year in order to offset this trend somewhat.

Earlier estimates proved inadequate

McDonald’s estimates that food costs will rise between 4 percent and 4.5 percent in the U.S. and Europe this year. This is an increase from earlier estimates, which projected only 2 to 2.5 percent increases in the U.S. and 3.5 to 4.5 in Europe. Paper costs were also cited in the projected price hikes. McDonald’s claims that food and paper costs ate up 33.6 percent of the company’s sales in the first quarter of 2011. Those costs were up from 32.9 percent in the same quarter a year ago.

A bad time to raise prices

Consumers who struggle daily with the rising costs for housing, fuel and the other staples, may just stay home to eat if prices increase too significantly.  Steve West, an analyst for securities-related financial services company Stifel Nicolaus, said, “It’s very hard to pass through price increase[s] right now.”

Stock prices fall

After the company announced that it planned to raise prices, shares fell 1.5 percent in midday trading on the New York Stock Exchange.

The company’s CFO Pete Bensen says the company intends to sacrifice some short term profits in favor of long term growth.

Prices up by 1 percent

In March, McDonald’s implemented a 1 percent menu price increase in the U.S. and Europe. Other increases are planned throughout the year. Price increases are also planned for its stores in China.

McDonald’s continues to lead competition

McDonald’s continues to outperform its competition. Peter Jankovskis, an officer at Oakbrook Investments, claims, “The bottom line is they’re still doing a great job of growing revenue.”  The total first-quarter revenue for the corporation rose 9 percent, to $6.1 billion.  Sales in the European stores were especially significant.




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