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Not lovin' it — McDonald's to increase prices

McDonald's Corp said it would selectively increase menu prices this year to help offset an expected rise in its own grocery bill.
/ Source: Reuters

McDonald's Corp said it would selectively increase menu prices this year to help offset an expected rise in its own grocery bill for the 10 commodities that account for around 75 percent of its food preparation costs.

Food prices are climbing around the globe and the world's biggest restaurant chain said its costs are expected to rise this year 2 percent to 2.5 percent in the United States and 3.5 percent to 4.5 percent in Europe.

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.

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.

McDonald's last year bumped up prices in China to offset a spike in commodity costs there. It also increased prices in Britain to cover a January 1 value-added tax increase.

"They will certainly try to pass on those (higher food) costs," said Peter Jankovskis, co-chief investment officer with OakBrook Investments, which owns shares in McDonald's.

All restaurant operators will be under pressure to raise prices, and analysts said McDonald's size could work to its advantage.

"They're going to attack it two ways," Jankovskis said. "Certainly, 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."

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.

The chain has renovated stores, added value menus and new food items to steal U.S. market share from rivals like No. 2 hamburger chain Burger King, which is now private after its sale to 3G Capital.

McDonald's, also known as the Golden Arches, had a banner year in 2010, with new menu items including espresso drinks and specialty beverages. However, last year's strong results have raised the bar for 2011 and some analysts worry that earnings-per-share growth could slow.

Its shares were up 49 cents, or 0.64 percent, at $75.49 in midday trading on the New York Stock Exchange.

McDonald's also posted weaker-than-expected December sales at established European and U.S. restaurants as poor weather hurt demand, and reported a fourth-quarter profit in line with expectations.

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 had 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 had expected.