The Chief Financial Officer of the fast-food chain giant, McDonald’s, recently remarked that the average menu item in the company’s U.S. restaurants currently costs around 40% more than it did in 2019. The increased price is a result of a combination of factors including inflation, labour cost rises, and ingredient price hikes.
As seen in the broader market, the inflation rate has been going up at an unprecedented pace, with the consumer price index, a key indicator of inflation, standing at a 30 year high in the U.S. The knock-on effect of this inflation is penetrating deeply into every sector of the market, including the fast-food industry. McDonald’s is not immune to this situation. Over the past two years, the prices of commodities and goods have increased, making it more expensive for McDonald’s to purchase supplies to run operations effectively.
Inflation is not the only contributing factor to the rising costs at McDonald’s. The fast-food behemoth has also been grappling with escalating labour costs. Fast food chains like McDonald’s rely heavily on their workforce to ensure smooth operations. As a result of various worker movements and changing labour laws, McDonald’s has been prompted to increase worker wages to retain their employees. In several states in the U.S, minimum wage laws have changed, and businesses are legally required to pay their employees more.
Additionally, the ongoing global pandemic has further amplified these issues. Covid-19 has disrupted supply chains around the world, leading to an increase in costs that are inevitably passed on to consumers. Certain ingredients that the company depends on became scarcely available or more expensive to acquire due to supply chain disruptions. This has put added pressure on McDonald’s, causing them to raise prices even further to cover these unforeseen costs.
Furthermore, it’s noteworthy to mention that McDonald’s decisions to innovate and upscale their menu offerings over time also play a role in the increased costs. The introduction of improvements to enhance the quality of food, as well as the debut of premium items such as the new chicken sandwich, comes with an uptick in prices.
Even though the escalating prices aren’t unique to McDonald’s and many other brands in the fast-food industry are experiencing similar challenges, the size of the price increase at McDonald’s is noteworthy for its sheer scale. The 40% increase dramatically outpaces the general inflation rate, causing some unease among market watchers and consumers alike.
In response to the situation, Kevin Ozan, CFO of McDonald’s, stated that the company has been particularly cautious about these price increases. He further expressed that they are keeping a close eye on the potential repercussions on customer traffic. The dilemma McDonald’s faces is a complex one: balancing the need to maintain profitable operations while ensuring they don’t lose their customer base due to prohibitive costs.
In closing, the substantial surge in McDonald’s menu item prices over the past two years is a direct result of broader market deadlocks. External factors such as inflation, increased labour costs, interrupted supply chains, and an intention to provide higher quality food have all contributed to the cost escalation. Amid these challenges, the ultimate test for the company will be how they manage to maintain their affordable reputation while confronting the economic realities of the post-pandemic world.