August 30, 2008 by admin · Leave a Comment 

We recently reported on the rising prices across the nation for a variety of goods and services.  Another one is coming….

The National Restaurant Association reports a 4.1 percent increase in menu prices thus-far for 2008.  Fast food menu prices are up 4.3 percent and even higher prices are expected given announcements by the country’s largest burger chains.  All these price hikes are still currently in line with the U.S. Department of Agriculture’s projection of total menu price increase for 2008 of 3.5-4.5 percent, but there is still the last quarter to go, and one wonders if prices will go higher before 2009.

On July 23rd McDonald’s (MCD) corporate COO Ralph Alvarez announced that the chain’s “Dollar Menu” will be seeing some changes.  Industry experts expect that similar changes will be seen at other fast food joints around the country.  Possible changes include changing recipes, lowering quantity, and/or raising prices.  All changes would be aimed at making value meals more profitable for McDonald’s to offer.

It will be interesting to see how the nation’s No. 2 burger chain, Burger King (BKC), and No. 3 Wendy’s (WEN) react to price/quality changes on the McDonald’s value meals.

Wendy’s already announced earlier this year expectations to increase overall menu prices by 3-4 percent over the course of 2008 with the goal of offsetting rising costs.  It is unclear how much prices have already risen and if the plan has changed.  The issue is further convoluted by the current acquisition of Wendy’s by Triarc Companies Inc. (TRY).

So what’s causing the price hikes?

The biggest commodity cost for fast-food burger joints is beef.  McDonald’s CFO Pete Benson said that he expects cost increases in 2008 of up to 9 percent for beef, 5-6 percent for chicken and up to 21 percent for cheese.

Because beef is the main cost factor, one option for the burger giants is to encourage customers to buy meals which combine smaller burgers with higher profit-gathering fries and drinks.  Another option to keep prices low is to skimp out on toppings.  However, customers would be less than thrilled with smaller burgers and less toppings, so most restaurants are going the other direction and raising prices.

The value of the value meal.

Fast food industry experts know that they can’t drop the value menus all together - these are the deals that keep customers coming.  QSR Consulting Group Inc. President Stuart Morris told MSNBC that McDonald’s Dollar Menu is key for it’s strategy.  The Dollar Menu may only account for 14 percent of sales, but he says that it could account for 30 percent of McDonald’s transactions.  His opinion: raising the price of the $1 double cheeseburgers could send customers off to competitors.

Bucking the trend.

A fast food counter-trend can be seen at YUM (yUM) subsidiarys Taco Bell and KFC.  Both of them are offering NEW value menu items that are even lower than 99 cents.  Taco Bell is understandable: their staple commodities are cheaper: beans and rice.  What is KFC’s secret?

August 19, 2008 by admin · Leave a Comment 

Headlines everywhere are focused on the inflation, or rising prices, which we are all experiencing right now.  However, not everything is going up.  Here is a list of what is rising, what is falling, and what it all means.

RISING:
Wholesale prices rose so much in July that they broke the record for “fastest pace of inflation” for the past 27 years.  The rise of 1.2 percent (reported by the Labor Department on Tuesday (Aug 19) was due for the most part to the rising costs for motor vehicles, energy and core materials for manufacture and production.  Although economists expected prices to rise, they had projected only a 0.5 percent increase.

If we exclude food and energy prices from the calculation, then we are left with “Core Prices.”  Core prices rose 0.7 percent, which only beat the record since November 2006.  Still, it was a significant surprise to economists who had forecast a minor 0.2 percent increase.

Consumer prices also rose significantly this July, the most in 17 years.  The 0.8 percent increase was also due in large part to the record surge of crude  oil prices.

FALLING:
Crude oil prices have actually begun to fall by more than $30/barrel since they reached their peak price in July of $147.27.  The hope is that now that energy prices are falling again and the dollar is strengthening, prices should stabilize over the next few months.

The housing slump is not showing any real improvement in most parts of the country, meaning that housing prices are way down.  In fact, MDA DataQuick reported on Aug 18th that July saw the most house sales in San Diego county in more than a year.  The median price was down $6000 from June and 25.6 percent ($125,000) down from July 2007.  This was the biggest year-to-year drop for the 20 years that DataQuick has been tracking the market.

Unfortunately for contractors, low real estate prices and the high costs of building materials have led to a plunge in housing construction.  The Commerce Department reported new construction at the lowest pace since 1991.

WHAT IT MEANS:
When energy prices were going up, it took a little while for it to effect the consumer in places other than the gas station.  The same is true on the way down.  Manufacturers and wholesalers need to see that they are able to turn a profit even with high production costs - once they see those costs drop, it might take a month or so for those savings to reach the consumer.  Experts project that by fall we should see a drop in, or at least a slowing of, inflation.

Let’s hope that economists are underestimating again and that inflation slows three times faster than they are projecting - we could all use lower prices sooner!