McDonald's Reveals Pricing Strategy

OAK BROOK, Ill. -- McDonald's, the largest restaurant chain, revealed it is increasing menu prices bit by bit throughout the year to offset rising commodity costs, Nation's Restaurant News reported.

Facing a new outlook on commodity inflation, which doubles food cost expectations for its U.S. market, McDonald's said it took a 1-percent menu price increase in March. The fast-food chain said it will keep taking small, additional menu price increases -- at levels below the food-away-from-home inflation rate -- to keep its margins in check and traffic strong.

"Since January, the global commodity markets have experienced significant increases," Pete Bensen, McDonald's Corp. chief financial officer, said during a conference call with investors this week. "As a result, we expect additional pressure as we move throughout the year."

McDonald's now expects its annual domestic commodity costs to increase between 4 percent and 4.5 percent from last year, with the heaviest pressure felt in the second and third quarters. At the outset of 2011, McDonald's had said it expected U.S. commodity costs to rise between 2 percent and 2.5 percent.

Bensen said global events -- from floods in Australia and unrest in the Middle East, to a weak U.S. dollar -- significantly altered pricing expectations for every item in the McDonald's commodity basket. The higher cost for beef is accounting for one-third of its increased costs expectations, the company said.

"We believe we have some pricing elasticity," Bensen said. "We expect to offset some, not all, of the increase, with price increases."

McDonald's executives provided a glimpse into how far they're willing to go, by highlighting that the chain would not raise prices above the food-away-from-home inflation rate, which on a trailing 12-month basis through February was at about 1.5 percent, and which projections say will rise between 3 percent and 4 percent for the year, NRN stated.

"We find that getting ahead of food away from home is bad for traffic," Bensen said, "but staying at or just below is the optimal place … still, this is really more an art than a science."

Other than price, McDonald's said it would battle increasing commodity costs with new menu items. In the pipeline are frozen strawberry lemonade, pineapple-mango smoothies, revamped chicken sandwiches and nugget offerings, spicy chicken and a return of the Asian Salad.