The $18 McDonald's Meal

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  • McDonald’s Corp. (NYSE: MCD) finds itself caught between increasing costs and consumers unhappy about rising prices.

McDonald’s Corp. (NYSE: MCD) has a problem. Earlier this year, its CEO Chris Kempczinski told investors that customers were “weary” of high prices. The company faced increases in food prices and the cost of fuel to bring that food to its locations. It created a dilemma for company management.

Just how expensive is too expensive? A few months ago, a study of menu prices found that along I-95 in the northeast, a Big Mac meal cost almost $18. The Big Mac by itself costs $8.28. At other local McDonald’s locations, prices were lower, but not by a significant amount. Looked at another way, meals for four could be almost $70. Even at $50, McDonald’s is no longer a cheap fast-food provider.

The latest consumer price index figures showed that “food away from home” prices rose 4.1% year over year in April, compared to 3.4% for the entire index. This “food” number was one of the components that rose the most.

McDonald’s has a dilemma that will not go away quickly. While food prices may come down some, diesel prices have stayed fairly high at $4 a gallon. Transportation is a major part of the supply chain that affects McDonald’s margins.

McDonald’s also has to contend with increases in minimum wages. While the figure is a very low $7.25 in some states, in other states it has topped $12. For many hourly workers in California, it has topped $20.

If Kempczinski is correct, McDonald’s cannot improve profits via higher prices. With rising costs to operate, that creates a major challenge.

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