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McDonald's outlines pricing strategy

As commodity costs continue to escalate, the burger giant will take price bump

The largest restaurant chain has spoken, and it is increasing menu prices bit by bit throughout the year to offset rising commodity costs.

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 company said it would keep taking small, additional menu price increases — at levels below the food-away-from-home inflation rate — to keep margins in check and traffic strong.

“Since January, the global commodity markets have experienced significant increases,” said Pete Bensen, McDonald’s Corp. chief financial officer, during a conference call with investors Thursday. “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.”

In December, nearly 60 percent of survey participants to the NRN a.m. Restaurant Operators Survey said they expect to raise menu prices this year. The survey goes to more than 80,000 subscribers to the NRN a.m. newsletter and more than 100 restaurant executives participated.

Earlier this week, the 1Q NRN a.m. Restaurant Operators Survey also heard from nearly 100 restaurant executives, and showed that 42 percent said they already took increases between 1 percent and 3 percent so far in 2011; 18 percent said they took increases between 4 percent and 6 percent; and 6 percent said they took increases of more than 6 percent. About 34 percent of respondents have yet to raise menu prices.

McDonald’s provided a glimpse into how far it’s willing to go, by highlighting that the chain would not raise prices above the food-away-from-home inflation rate, which on a trailing twelve 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.

“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. Offerings in the pipeline include frozen strawberry lemonade, pineapple-mango smoothies, revamped chicken sandwiches and nugget offerings, a look at spicy chicken and a return of the Asian Salad.

Contact Sarah Lockyer at [email protected].

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