McDonald's likely to raise prices in 2011

McDonald's Corp plans to raise prices this year to help offset an expected rise in its grocery bill for the 10 commodities that account for around 75 percent of its food preparation costs.
Food prices are rising around the globe and the comments from the world's biggest restaurant chain overshadowed weaker-than-expected December sales at established European and U.S. restaurants, as poor weather hurt demand, and a reported fourth-quarter profit that was in line with expectations.

McDonald's expects its costs to rise 2 percent to 2.5 percent this year in the United States and 3.5 percent to 4.5 percent in Europe.

Beef, chicken, pork, bread and milk products, paper, cola, ketchup and other sauces, and fruits and vegetables top McDonald's U.S. shopping list.

Chief Financial Officer Pete Bensen said McDonald's would "raise prices where it makes sense" to offset some, but not all, of the cost increases. McDonald's did not give a commodity forecast for Asia and its other markets.

Diners around the world remain cautious with their spending on food away from home and McDonald's will be very careful not to turn customers off with higher prices, Bensen said.

When asked why costs are going up more in Europe, analysts noted commodity prices fell more in the United States last year than in Europe, a fragmented purchasing market where foreign exchange fluctuations play a big role.

"The U.S. is a more efficient, more homogenous market" for sourcing commodities, said RBC Capital Markets analyst Larry Miller.

McDonald's bumped up prices last year in China to offset a spike in commodity costs there. It also increased prices in Britain to cover a Jan. 1 value-added tax increase.
Its shares closed up 37 cents, or 0.49 percent, at $75.38 on the New York Stock Exchange.

INSENSITIVE TO COMMODITIES?

Every U.S. restaurant chain faces pressure to raise menu prices. Analysts expect McDonald's to make smaller increases than many rivals because it uses its size to its advantage.

"They're large enough to put some pressure on their suppliers and they also will, through direct price increases or perhaps changing portion sizes, try to pass some of it on to consumers," said Peter Jankovskis, co-chief investment officer with OakBrook Investments, which owns McDonald's shares.

McDonald's historically has been a strong performer in times of inflation and J.P. Morgan analyst John Ivankoe said in a client note that McDonald's is "the most insensitive to commodities" from an earnings-per-share perspective. (For a graphic, see https://r.reuters.com/rum67r)

The company also known as the Golden Arches had a banner year in 2010, when it hit a record market share of 11.8 percent.

Renovated stores, expanded value menus and new food items such as lattes and smoothies appealed to diners and helped it steal business from U.S. rivals such as No. 2 hamburger chain Burger King, which is now private after its sale to 3G Capital.

However, last year's results have raised the bar for 2011 and some analysts worry earnings-per-share growth could slow.
While a slowly improving global economy, menu price increases and new restaurant openings should increase sales, austerity measures in Europe McDonald's biggest market for sales -- remain a concern.

COLD WINTER

McDonald's said global sales at restaurants open at least 13 months rose 3.7 percent overall in December. They gained 2.6 percent in the United States, slid 0.5 percent in Europe and rose 8.9 percent for Asia-Pacific, Middle East and Africa.

Wall Street expected December same-restaurant sales to be 3.9 percent higher in the United States, up 3.4 percent in Europe and gain 5.7 percent in APMEA, according to Janney Capital Markets analyst Mark Kalinowski.

In November, McDonald's same-restaurant sales rose less than expected in the United States and Japan.

Europe accounts for around 40 percent of McDonald's revenue, while the U.S. market contributes about 35 percent.

For January, the company expects global same-restaurant sales to increase 4 percent to 5 percent.
Net income in the fourth quarter rose to $1.24 billion, or $1.16 a share, compared with $1.22 billion, or $1.11 a share, in the year-earlier quarter. The profit matched what analysts polled Thomson Reuters I/B/E/S had expected.

Total revenue, including sales from company-owned restaurants plus royalties from franchisees and other fees, rose 4 percent to $6.21 billion, above the $6.20 billion analysts expected.

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