McDonald's Justifies Its Latest Price Increases

07/10/2016
Summary
-Elimination of the dollar menu has significantly raised prices.
-Who you talk to within McDonald's dictates why prices were raised.
-This is the wrong competitive environment to be raising prices in.

I last wrote about McDonald's (NYSE:MCD) in a bullish article I penned on April 24, 2016. In that article I highlighted the stronger than expected 5.4% increase in U.S. comparable store sales as the catalyst for future expected share growth. Unfortunately, things have changed, and not for the better. According to the company's most recent SEC filing for the quarter ended June 30, 2016, (Q2 2016) U.S. comparable store sales increased by only 1.8%.
Granted, the ills of the fast food industry are not just hitting the bottom line of McDonald's. In this well-written article by Daniel B. Kline he highlights some of the headwinds the fast food chains face. Some of the highlights cited by Mr. Kline and others in the article were:

• People are eating out less
• Fast-casual traffic was flat in Q1 compared to same quarter a year ago, down 3% in Q2. You can blame a lot of that on Chipotle's food-safety woes, but even taking the Mexican chain out of the equation only puts Q2 growth at 2%, down from 11% growth in 2015.
• "Contributing to the stalled visit growth are consumers' uncertainties about current and future economic conditions," says Bonnie Riggs, NPD Group's restaurant industry analyst in a press release:

These uncertainties have put a damper on overall consumer spending. Compounding the situation for the restaurant industry is the decline in food at home inflation while at the same time restaurant operators have been increasing menu prices.

Not mentioned in the article were the effects of the increasing minimum wage experience in various parts of the country. Nowhere is that more evident than in my home town of Seattle. This year saw the minimum wage increase from $11 an hour to $13 an hour. Everyone was curious to see what the minimum wage increase would do to prices. Well, I can tell you from personal experience exactly what it has done. This past month I had my car battery die and I decided to walk a block to McDonald's while waiting for the battery to be replaced. Being short on money (and hating to use my credit card for small purchases) I walked in and ordered a hamburger small fries and a small coke. I took my last $10 bill from my wallet and was promptly provided with $5.10 in change. Yup, the price was $4.90 after tax. Keep in mind that with the dollar menu that price would have only been $3.30 after tax last year. I do not know if it was the price increase or the fact that my fries were only half filled that bothered me more, but when I was home that night I decided to "comment" about my visit via the McDonald's website via email.

The next morning, I received an email from McDonald's

Hello Xxxxxx:

Thank you for taking the time to share your recent experience at the McDonald's in Seattle, WA with me.
I am sorry for your dissatisfaction with the portion size of the French fries you received and for your dissatisfaction with the prices charged by the franchisee of the restaurant you visited. I want you to know that we have already taken action on your feedback, by notifying our local franchisee of your experience and requesting he or she follows-up with you directly to address this issue.
As our customer, you should always have a great experience when visiting McDonald's. Your feedback is very important to us, as it lets us to know how we can improve our service to you. Our regional McDonald's staff regularly reviews customer feedback as part of our ongoing review of our restaurant's operations.
Again, we are sorry we disappointed you. We appreciate your business and thank you for sharing your feedback.
True to its word, I did indeed receive a response. The franchisee (who owns seven stores) called me the next day. Her response was that it needed to raise its prices at all its stores due to the increase in Seattle's minimum wage increase. After a discussion pertaining to the size of the price increase we decided that we were going to simply agree to disagree on the need for such a steep increase. Regarding the half filled French fries I was told a few coupons would be in the mail for me. I thought that is where the story would end. But then a few days later I received the following email from the Area Supervisor for that franchisee:

Hello Mr. Xxxxxx:

Thank you for your comments regarding prices at our restaurant.
As you know, McDonald's is a franchised business. As individual owners there are a number of variables that we take into consideration when determining the restaurant's prices. Beside the recommendation of our Corporate Office, we also look at unique operating costs, such as the location of the restaurant. This is why prices may vary from one McDonald's restaurant to another.
The prices for our products are comprehensive and include all the condiments on our products as well as a standard number of accompanying condiments such as sauces and dressings. For this reason, there may be an additional charge for extra condiments, if requested.
We are sorry for any dissatisfaction you may be feeling as a result of our prices. Overall, we work very hard to consistently offer menu items that can be offered at a good value.
Again, thank you for your feedback. We appreciate your business and hope to have the opportunity of serving you in the future.
Now THIS is the email that got me wondering. Did this Area Supervisor not talk to the franchisee before penning the email? Nowhere in the article is the minimum wage issue mentioned. Nowhere is the half filled French Fries mentioned. Also, the reasons provided are simply boiler plate responses. I never talked about an additional charge for extra condiments, sauces or dressings. I would have expected more from an Area Manager in its response. So I penned a response:

Mxxxxx,

Thank you for taking the time to reply. Unfortunately, your response does not address the reason supplied by the franchisee when I spoke to her. She claimed that the elimination of the Dollar menu was attributed to Seattle raising the minimum wage from $11 to $13 an hour. By eliminating to Dollar menu, the price for a hamburger, small fries and small drink increased roughly 50% despite the minimum wage only increasing 22%. Given the franchisees response a logical person can surmise that when the minimum wage increases to $15 hour next year from the current $13 (a 15% increase) we will see another increase in prices. Will that increase also outpace the minimum wage increase?
The purpose of the minimum wage increase is to give Americans more purchasing power. This McDonald's franchisee has demonstrated that profits are more important than the long term well being of their customers.
I write financial articles distributed nationally. Earlier this year I wrote a positive piece on McDonald's. I think it is now time for a follow up article. Would you (or anyone else at McDonald's) have any comments that you would like included in the article regarding the egregious price increases being implemented at some McDonald's stores?
Thank you for your time in this matter. I look forward to your response.
The email was sent on September 22, 2016, and I still have no reply from anyone at McDonald's.
Putting aside the lack of a full French fries for a minute, let's focus on the price increase as I discussed in the email:
Seattle's minimum wage increase from $11 to $13 an hour is 22%
McDonald's price increase (from $3.30 to $4.90) PER THE FRANCHISEES RESPONSE was 48%.
Will Seattle see another price increase of 48% in 2017 when the Seattle minimum wage increases to $15 an hour?
McDonald's is in a terribly competitive environment. In Seattle, Wendy's (NYSE:WEN) has a 4 for $4 promotion consisting of a hamburger, fries, drink and a cookie. So why is it that Wendy's can have a dollar menu and still be profitable, but McDonald's not only eliminates it but replaces it with a price increase that is TWICE the percentage of the wage increases it is faced with? Burger King, Chipotle (NYSE:CMG), Jack in the Box (NASDAQ:JACK), Taco Bell, Arby's, Subways and Popeye's (NASDAQ:PLKI) are just a few of the other fast food alternatives in the area. Jack in the Box is now offering breakfast. Taco Bell and Chipotle now have new menu offerings.
Interestingly, many other chains still offer forms of a dollar menu. Yes, some of the prices may be $1.19 or $1.29, but they are a far cry from the $1.89 for a small French fries offered at McDonald's.

And I never received the coupons that were promised to me.

Conclusion

The 5.4% growth of earlier this year is now a distant image in the rear view mirror. Based on the ever increasing competition and my recent experiences I now view McDonald's as an underperform for the next twelve months.
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Disclaimer: Investing in stocks such as McDonald's can be risky. There is no guarantee that your investment will be safe. There is also a possibility that you may lose some or all of your investment. Please do your own due diligence before investing in McDonald's or any other investment. Information provided in this article is informational and should not be the sole guide to determine if investing in the company is appropriate for you. The above are my opinions and should not be the sole purpose for initiating a trade. Always do your own due diligence prior to investing. Also remember to only initiate trades that are within your pre-defined risk parameters.

Fonte:http://seekingalpha.com/article/4010728-mcdonalds-justifies-latest-price-increases

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