McDonald's worried by rising commodity prices‎

McDonald's worried by rising commodity prices‎

SM*SH -MCDONALD'S, which posted an 11 per cent rise in first-quarter earnings thanks to strong global sales, warned commodity costs continue to be a growing concern, so much a concern that the fast-food giant doubled the expected jump in its US commodity costs for the year.
Even with its massive pricing power, McDonald's now projects it will spend 4 per cent to 4.5 per cent more in the US and in Europe for commodities, compared with previous estimates of a 2 per cent to 2.5 per cent increase in the US and 3.5 per cent to 4.5 per cent rise in Europe.
Investors honed in on the commodity news, pushing shares down 2 per cent to $US76.86 in recent trading despite second-quarter global same-store sales on track to meet or beat the first quarter's 4.2 per cent rise.
McDonald's isn't alone in fighting higher commodity costs. This week several other restaurant chains like Yum Brands and Chipotle Mexican Grill noted rising commodity pressures during their earnings reports.

"We believe our supply chain continues to be a competitive advantage for the McDonald's system," said McDonald's chief financial officer Peter Bensen on a conference call. "We have successfully managed this in the past and are confident we can do so again."
McDonald's is raising prices to help margins. The company typically opts for implementing smaller menu price increases over the course of the year, rather than a large increase in one fell swoop, to avoid sticker shock for customers. In the US and Europe, it raised menu prices 1 per cent in the first quarter, not including value-added-tax-related increases.
"Our pricing elasticity in the brand moves up and down based on inflation, consumer spending and consumer confidence," said chief executive Jim Skinner.
"And we're not worried. We have the capability to take price over this next number of months in the US...It's a matter of timing and when it makes sense for us."
The company hopes to avoid passing on the entirety of its costs increases to consumers directly. During the downturn, McDonald's competitive pricing was part of what helped it outperform much of the industry.
Internationally, McDonald's and Yum have been in a battle for fast food business in China. McDonald's same-store sales there, up 6.5 per cent in the first quarter, pale in comparison to Yum's impressive 13 per cent gain.
McDonald's says its sales increase is meaningful in that it's not just from raising menu prices, but "tremendous guest count growth," driven by breakfast and lunch value promotions, said chief operating officer Don Thompson.
McDonald's US same-store sales for the first quarter were up 2.9 per cent, outshining its competitor Yum's 1 per cent domestic decrease.
In the product pipeline, it has new smoothie flavours, chicken promotions and salads on the short-term horizon. It's in early testing phases to potentially bring spicy chicken sandwiches and McBites snacking items from overseas to the US.
Same-store sales increased 5.7 per cent in Europe as it focused on everyday value and classic core menu offerings.
Growth in Australia and China drove a 3.2 per cent increase in the Asia Pacific, Middle East and Africa division with limited-time offers, delivery and extended hours contributing to the growth.
McDonald's posted a profit of $US1.21 billion ($1.13bn), or $US1.15 a share, from $US1.09bn, or $US1 a share, a year earlier. In the latest period, the results had a US3-cent boost per share from foreign exchange and bottom-line growth was increased by 3 percentage points because of costs last year related to Japan restaurant closings.
Revenue increased 8.9 per cent to $US6.11bn. Excluding currency fluctuations, the increase was 7 per cent.
Additional reporting: Joan E. Solsman
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