Will pricier Big Macs equal fewer U.S. customers at McDonald's?

·2 min read
FILE PHOTO: The McDonald's company logo stands on a sign outside a restaurant in Bretigny-sur-Orge, near Paris

By Hilary Russ and Uday Sampath Kumar

(Reuters) - Soaring menu prices could be slowing U.S. customer visits to McDonald's, which reports fourth quarter earnings on Thursday, as Americans face rampant inflation and restaurants struggle with staffing shortages amid the spread of the Omicron variant.

U.S. restaurant prices broadly rose 6% over the past 12 months – driven by wage increases and higher costs for everything from meat to kitchen equipment – leading analysts to caution that weary customers may begin to trim fast-food spending.

Franchisees can set their own prices, which vary by region, with a Big Mac, soft drink and large fries costing nearly $10 in New York City.

McDonald's Corp, among the first major restaurant chains to report fourth quarter results, is expected to report a 6.9% increase in U.S. comparable sales growth, down slightly from estimates of 7% two weeks ago. It reported 9.6% growth in the third quarter.

The chain's U.S. menu prices have increased 2.7% over the last three months, according to Gordon Haskett analysts. Some McDonald's franchisees now say more expensive sandwiches are hurting foot traffic and sales, according to independent analyst Mark Kalinowski's survey of operators, published Monday.

"Is there an inflection point at which customers start deciding it's not worth paying $9.50 for a burrito, it's not worth paying $7 for a hamburger?" said Morningstar analyst Sean Dunlop.

Weekly visits to many fast-food restaurants have been falling in recent weeks, according to Placer.ai, which tracks cell phone location data. McDonald's visits started dropping in mid-December and fell 12.6% in the week ended Jan. 10 versus 2019 levels, the analytics firm said.

And fast-food menu prices could increase another 6% to 8% in 2022, according to Wedbush Securities.

To be sure, consumers have had pent-up spending power after saving money at the start of the pandemic and later getting cash injections from government rescue aid. Several chains including Chipotle Mexican Grill Inc and Popeyes' parent company Restaurant Brands International Inc have so far reported little resistence to higher menu prices.

"We haven't seen much pushback yet on the price taken in 2021," Restaurant Brands CEO Jose Cil said during an investor conference on Monday. "The key is not to get too far ahead of the consumer."

Restaurants face multiple pressures including COVID-related staffing shortages, limited seating and reduced hours on top of bad winter weather and normally slow January sales.

McDonald's is expected to use its new digital rewards program to grab market share from smaller rivals, including Restaurant Brands' Burger King.

McDonald's huge scale lets it "defray the costs of really heavy investments in technology across an enormous sales base and swallow those costs better than a lot of smaller peers," Dunlop said.

(Reporting by Hilary Russ in New York and Uday Sampath Kumar in Bangalore)

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting