Higher Food Costs Will Eat Into McDonald's Profit Margins

McDonald's (MCD) expects food costs to rise between 4% and 4.5% 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 business, with about a 19% share. In its primary operations, it competes with Wendy's (WEN), Subway, Burger King, and Yum! Brands (YUM), and, in its recent move into the specialty coffee market, it's going up against Starbucks (SBUX).

We currently maintain a $82.53 price estimate for McDonald's stock, roughly in line with market price.

McDonald's plans to offset some, but not all, of its higher food costs through small price increases throughout the year. Although it has a size advantage in the fast food market, McDonald's is still finding it difficult to pass on its rising wholesale costs to customers.

Boosting what it charges for food could repel customers 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, such as its premium burgers and McCafe drinks, which appeal to higher-end customers.

According to CFO Pete Bensen, the company intends to sacrifice some short-term profit 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% 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 its increased wholesale costs on to its customers, average spend per customer visit and annual customers per McDonald's restaurant could be adversely affected.

See our full analysis for McDonald's stock here

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Mickey markoff

Oh boy, there go the "Happy Meals"! Sadly, we'll no doubt be paying an arm and a leg for a humble loaf of bread in the next year. have you seen the price of milk? Yikes!

June 01 2011 at 3:15 PM Report abuse rate up rate down Reply

Rich or poor McDonalds customers will always be faithful to this provider.. They try to give the most bang for the buck.. Have kept costs down while the quality remained high.. Not to mention kept very clean. I was not surprised the other day when I saw a Bentley, a Jaguar, and a Mizzarati in the McDonalds Parking lot .. Good food is more important than snobbery.. IN addition their coupon promotions are great deals, twofers

May 31 2011 at 4:30 PM Report abuse rate up rate down Reply

Mcdonald's is cool.

May 31 2011 at 3:45 PM Report abuse rate up rate down Reply

good mcdonalds isn't real food anyway, **** doesnt even rot.

May 31 2011 at 11:48 AM Report abuse rate up rate down Reply

McDonald's sold over 57 Billion burgers. . . . Now they have to kill another cow.

May 31 2011 at 10:31 AM Report abuse rate up rate down Reply

Prices are going up??? And this is a news flash? Really? I do love a junior whopper at BK, though, I'll pay an extra few cents. And at Wendy's or Arby's. Haven't set food in McD's in years.

May 31 2011 at 10:15 AM Report abuse +1 rate up rate down Reply

i love my mac

May 31 2011 at 9:56 AM Report abuse rate up rate down Reply

..........mmmmmmmmmM - Makes me hungry for a big mac and fries

May 31 2011 at 9:49 AM Report abuse rate up rate down Reply

This is all more B.S. they are after the almighty buck just like everyone else....our whole system is going to be raising prices on everything from gas to burgers...and the sad thing is Nobody is gonna do a fracken thing about it cause Americans have lost there b-lls......we just sit back and complain....If people would just stop going to these places for a month they would see a price decline Im sure of it.....same with the gas prices...car-pool for a month.

May 31 2011 at 9:05 AM Report abuse +1 rate up rate down Reply

I was surprised to see that they let Ronald Mac Donald out of jail remember he got busted sticking his Big Mac in Wendy's Hot-N-Juicy.

May 31 2011 at 8:12 AM Report abuse rate up rate down Reply