McDonald's warns of higher food inflation

By Lisa Baertlein and Phil Wahba

LOS ANGELES/NEW YORK (Reuters) – McDonald’s Corp (NYSE:MCD – News) forecast higher prices for beef, dairy and other items and said it would cautiously raise prices to keep attracting diners, who are grappling with higher grocery and gas bills.

Shares fell 1.5 percent after the world’s biggest hamburger chain said it planned to offset some, but not all, of its higher food costs, with small price increases throughout the year.

McDonald’s results landed a day after rival Yum Brands Inc (NYSE:YUM – News) reported strong China results that masked rising food and labor costs. Chipotle Mexican Grill (NYSE:CMG – News), which has nearly all of its 1,100 restaurants in the United States, saw higher food costs eat into margins.

McDonald’s and other restaurant operators are getting squeezed by accelerating food costs and must figure out how to raise prices without scaring away already skittish diners.

“It’s very hard to pass through price increase right now,” said Stifel Nicolaus analyst Steve West.

McDonald’s Chief Executive Jim Skinner said customers are getting “pinched everywhere. They should not suffer the same fate at McDonald’s.”

Chief Financial Officer Pete Bensen said the company would sacrifice some short-term margin to protect long-term growth. He added that McDonald’s has experience finding the right recipe for price increases in fragile economic times.

McDonald’s now expects food costs to rise between 4 percent and 4.5 percent in the United States and Europe this year. That is up from its prior call for a rise of 2 percent to 2.5 percent in the United States and an increase of 3.5 percent to 4.5 percent in Europe.

McDonald’s in March put through a 1 percent menu price rise in the United States, where it plans additional increases. Prices in Europe are up by the same amount and the company plans to raise prices in China.

When it comes to raising prices, West said McDonald’s has an edge because it attracts a higher-income diner than other fast-food chains. It could have the best luck raising prices on things like premium burgers and McCafe drinks that appeal to those customers, he said.

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