MCD - Holding The Line On The $ Menu

05/22/08 02:34PM EDT
The news flow from the McDonald's annual meeting was consistent with past comments, but uncertainties remain.

Jim Skinner, McDonald's CEO, said the company remains committed to its low-price dollar menu. "This is not the time to be passing that on to consumers. They have long memories. We're the value leader. We always have been, and they expect us to continue to be the value leader. The company's low-price dollar menu, which offers items like double cheeseburgers for $1, has been popular with cash-strapped customers. The menu drives traffic to stores, and the additional volume has helped protect profits by knocking out some of the pressure from higher commodity costs.

Given the inflation pressures the company is seeing, holding the line on the Dollar menu puts the McDonald's system in a difficult position. In 1Q08, despite 2.9% same-store sales, higher commodity costs drove U.S. margins down 20 basis points for the quarter. In 1Q08, in the U.S. cheese costs rose 30% while beef and chicken both increased nearly 4%. For 2008, McDonald's expect U.S. chicken prices to rise nearly 6%, cheese up 14% and beef up slightly.

We understand the need to drive traffic, but at what cost and who is paying the price?
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