Soaring Ground Beef Prices Leave McDonald's in a Pickle
The price of ground beef has risen nearly 23 percent over the past year, according to the latest data out of the Bureau of Labor Statistics. It cost a record $4.154 for a pound of 100 percent ground beef in October, up sharply from the $3.389 a pound that it was fetching a year earlier. The cost has nearly doubled over the past five years.
Most chains would respond to spiraling input costs with corresponding menu increases or by promoting other proteins, but McDonald's isn't as fortunate. Given the popularity of its Dollar Menu and its burger specialty, it doesn't have the kind of pricing elasticity that other restaurateurs may have. After decades of being known for its cheap burgers, it's hard to push patrons into new categories. That's bad news for McDonald's, and it's even more bad news for its franchisees.
The Golden Arch-less
Chipotle Mexican Grill (CMG) -- the popular burrito-roller that at one time was majority-owned by McDonald's -- pushed through a price increase earlier this year. Food costs were going up, so the cult fave decided to roll out its first substantial menu-price increase in more than three years. Consumers didn't flinch. Chipotle's comparable-restaurant sales have posted accelerating double-digit percentage gains every quarter this year.
McDonald's isn't as fortunate. It's been suffering through a rough patch in which monthly comps have posted year-over-year declines in 11 of the past 12 months. Store-level performance has been choppy for two years, and one reason given by the company itself is that customers feel that it has strayed from the value message that served it well for generations. Something as simple as renaming its iconic Dollar Menu -- changing it to "Dollar Menu & More" to offer items for prices just north of the buck mark -- has alienated some customers.
The chain's signature Quarter Pounder was never on that menu. With a pound of ground beef fetching more than $4, the burger would be a loss leader on meat alone. However, it's hard to stick to the smaller $1 burgers when beef prices keep rising.
Hold the Lettuce
Some chains can offset the sting of one item. If bacon prices move higher, they simply stop promoting burger toppings. Subway can use monthly promotions to push sandwich deals featuring the right ingredients. Even a cheapskate-magnet like Taco Bell can offset the spike in ground beef by pushing new chicken and steak offerings.
McDonald's can't do that. It has certainly been successful in pushing salads alongside chicken wraps and sandwiches, but it flopped when it tried to enter the chicken wings market last year. Even the pork-based McRib has been relegated to a regional seasonal rollout.
Customers associate McDonald's with burgers, and cheap burgers at that.
Things won't get any easier for McDonald's and its beefy crisis. Forecasts are calling for another 10 percent increase in the cost of ground beef next year. Unless it can succeed in pushing its higher-priced gourmet burger offerings, it's going to be another rough year for the chain and its franchisees, which will already be dealing with escalating labor costs in 2015.
McDonald's may want to bring back the "You deserve a break today" tagline. It could certainly use one itself these days.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. For a list of high-yielding dividend stocks to complement your portfolio, check out our free report.