McDonald’s Corp. will raise prices in the U.S. this year to combat rising commodity costs, the company said in its fourth-quarter earnings call Monday morning.
The Oak Brook-based burger chain estimates that ingredient costs will rise 2 percent to 2.5 percent, with some of those costs passed on to consumers.
“As commodity and other cost pressures become more pronounced as we move throughout the year, we will likely increase prices to offset some, but not necessarily all, of these cost increases,” McDonald’s chief financial officer Pete Bensen said on the call.
He added that “growing traffic and market share has been a key to our success” in recent years, so the company will seek to balance a need for “strong traffic momentum with any strategic pricing moves.”
The company estimates the level of increases its customers can bear by looking at pricing at restaurants and grocery stores, as well as other factors, including inflation. Using this formula, chief operating officer Don Thompson said the company did not raise prices in the U.S. in 2010 because grocery prices increased an average of 0.2 percent, which McDonald’s read as a sign that customers would revolt against higher prices at its restaurants.
So, Bensen said, the company grew same-store sales and operating margins by increasing traffic. Average check amounts declined, however, as the popularity of items such as smoothies and frappes increased the number of single-item sales. This year, McDonald’s plans to build its business through price and traffic increases.
Talk of price hikes came as the company reported its fourth-quarter profit grew 2 percent, to $1.24 billion, as global same-store sales increased 5 percent, including a 4.4 percent increase in the United States. Earnings per share also increased, 5 percent, to $1.16.
“During 2010, we continued our efforts toward becoming our customers’ favorite place and way to eat and drink … and customers rewarded us by visiting our restaurants more often,” McDonald’s CEO Jim Skinner said in a statement. “As a result, we generated strong sales and delivered profitable market share growth.”
For the year, the chain, which serves 62 million customers each day, said same-store sales grew 5 percent, with growth in every segment during each quarter. Net income grew 6 percent, to $22.08 billion.
Full-year results were in line with expectations.
For the company’s performance in the U.S., which continues to outpace that of the restaurant industry, McDonald’s cited chicken nuggets, the McRib sandwich and efforts to build brand loyalty, through the Monopoly promotion, and the caramel mocha, now part of the chain’s McCafe line of beverages.
France and Russia were cited as key growth drivers in Europe, and Japan, Australia and China led the company’s Asia/Pacific, Middle East and Africa region.
The company added that McDonald’s is off to a strong start in 2011, with global same store sales growth expected between 4 percent and 5 percent.