Mickey D's — Eating Cost Increases for Customers

Even though in my opinion, McDonalds would do well by their typical customer's waistline to cut portions given that obesity has risen nearly as fast as commodity prices in recent years, the venerable fast food giant has decided to eat as many commodity price increases for its customers as it can. A recent article in my hometown paper The Chicago Tribune noted that "in the past nine months or so, food prices have been escalating at a rate not seen since the early 1990s ... McDonald's expects the price it pays for cheese to rise 21 percent this year in the U.S., while chicken costs may climb 5 percent to 6 percent ... the company said it expects its 2008 U.S. beef costs to be up 8 percent to 9 percent, well above its prior estimates of flat prices ... Beef makes up about 15 percent of McDonald's commodity costs." What's my suggestion? Cut back on the size of portions by equal amounts (and even charge a few cents less if they feel like they need to). Everyone -- including McDonalds' shareholders and customers -- would be the better for it. The problem is that McDonalds has never done the NPV calculation over the lifetime value of a customer based on health and longevity. If they contribute to killing off a typical frequent customer in their sixties or seventies, they're sacrificing a good ten to fifteen years of additional revenue relative to if they kept them healthy with smaller portions.

- Jason Busch

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