Cost craving

Mcdonald’s is losing its pricing edge to its fancier fast-casual rivals.

CHICAGO • Mike Hiner used to take his grandsons to McDonald’s when they wanted a treat. With higher wage and food costs pushing up prices at the Golden Arches, he’s increasingly taking them to IHOP, Denny’s and Chili’s instead.

“Those meals are the same price,” said Mr. Hiner, a 58-yearold geologist in Houston. “And they’re better.”

The loss of bargain-seeking customers like Mr. Hiner underscores a growing challenge for McDonald’s Corp.: While the company still offers several items for US$1, its menu is getting more expensive. McDonald’s said its prices were up about 3% through the end of June compared with 12 months earlier. That’s more than the 2.5% gain in prices for food Americans purchased away from their homes in the year through August, according to the Bureau of Labor Statistics.

The chain’s diminishing appeal among budget diners — coupled with rising meat costs — are projected to take a bite out of third-quarter earnings due to be reported Tuesday.

McDonald’s famous Dollar Menu now includes items that cost more than US$1, and other items are creeping above US$5. At some McDonald’s locations in Chicago’s Loop, a Double Quarter Pounder with cheese, fries and a drink totals about US$7.50. Chicken Club sandwiches are US$4.45, US$4.99 and US$5.19 at different Chicago McDonald’s restaurants, without sides or a beverage.

McDonald’s hasn’t offered enough discounts and deals to attract diners, which contributed to its four straight months of U.S. same-store sales declines, UBS AG said in a study this month.

Some Americans are extremely price sensitive, and any increases may send them elsewhere, said John Gordon, principal at San Diego-based Pacific Management Consulting Group, an adviser to restaurants and franchisees.

“If you encourage and kind of seed the notion that you can come in for a couple bucks and get some food — and then you can’t do that anymore — there’s bound to be a reaction,” he said.

Restaurants are being pressured into boosting prices because of rising beef, cheese and pork prices, as well as minimum-wage increases. Minnesota, California and Michigan have recently hiked minimum pay levels.

U.S. restaurants plan to boost prices 2% during the next six months, more than the 1.7% average increase from the prior 12 months, according to an October survey by restaurant researcher MillerPulse in Atlanta.

“There’s no other option but to raise prices when commodities and labour are going up,” said Peter Saleh, a New Yorkbased analyst at Telsey Advisory Group. “You can’t sell a lot of items for a US$1 anymore and make any money.”

The foods McDonald’s has kept cheap include McChicken sandwiches and fruit-andyogurt parfaits.

While holding prices for those items at US$1 may have helped prevent the sales declines from being even worse, it’s hurt profitability.