McDonald’s Corp. says it wants to raise prices to manage inflation, but it will take small steps up rather than a big leap.
Speaking at the Evercore ISI Consumer & Retail Conference on Thursday, the fast-food giant said it’s keeping an eye on the consumer response to each of the price increases.
“I think we’re being very prudent that the landscape certainly has some headwinds in it and, I think, we’re being very conscious to ensure that we kind of stay on the side of the consumer as we make decisions through this to ensure those really important fundamentals of our business around value and affordability stay as strong as they can,” said Ian Borden, McDonald’s MCD, -1.97% international president, according to a FactSet transcript.
“[W]e have the approach that we want to do more frequent increases, but at smaller levels so that we try and […] make sure that we don’t get into doing substantive increases.”
Consumer companies of all kinds have put price increases in place to manage inflation that has reached a 40-year high and offset higher costs for things like transportation and labor. This inflationary environment has prompted companies to put a share focus on their pricing strategies.
For those companies catering to lower-income customers, the fine line between price and value is even thinner. Those consumers are already feeling the squeeze of inflation, even as higher-end shoppers are still able to manage.
“[W]e’re very conscious of getting the right balance between inflation recovery and not losing a substantial amount of customer traffic as part of that,” said Borden.
Among the data that McDonald’s is considering is inflation impacting food at home versus the impact on food away from home.
“I think what’s a little bit unique about this set of circumstances that we’re in is actually food-at-home inflation right now in a number of markets is actually growing faster than food-away-from-home inflation,” Borden said.
“And so, when normally some consumers may switch out from going out to eating at home, I think we may see some different behaviors just because of the different paces across some of the commodity or some of the basket of goods that people would purchase,” he said.
Pricing was also a consideration for Walmart Inc. WMT, +0.56% when it reported its earnings last month. A major source of food at home for many Americans, the retail giant is taking responsibility for keeping items priced within shoppers’ budgets.
“[W]e need to do more to keep costs low, and where we see the switching from brands to private brands, we’ll continue to watch that for a group of customers, but we’ve got to all work harder to keep prices low for the American consumer,” said John Furner, chief executive of Walmart U.S., on the earnings call, according to FactSet.
J.M. Smucker Co. SJM, +0.91%, which also reported its earnings recently, noted the pricing actions it has taken. Credit Suisse thinks retailers like Walmart may start pushing back on that in order to maintain value.
“When asked whether retailers might close the ‘window’ to higher pricing, management disavowed the concept of a pricing window and emphasized a prudent approach to offset future cost inflation using all available levers, including what we heard from Walmart about reducing cost and complexity,” wrote analysts led by Robert Moskow.
“Our view is that Walmart and other big retailers will pose more resistance to price increases going forward now that consumer spending is showing signs of weakness in the discretionary categories of their stores.”
The question of price is impacting companies selling a broad range of consumer goods.
Still, Gap is sticking to its value promise.
“Fundamentally, Old Navy has strong core assets that have long-term value. With a stronghold for a wide range of shoppers the brand wins by staying true to its value equation, which has proven successful since day one,” said Chief Executive Sonia Syngal on the company’s earnings call in May, according to a FactSet transcript.
“And our new price unlock initiative is a commitment to freezing the current price tag despite the rising prices across the industry on a selection of kids everyday fashion essentials labeled Everyday Magic.”
Wells Fargo analysts said in a note published Wednesday that clothing retailers serving consumers on the lower-end of the income spectrum felt the pain of inflation and higher costs during the first quarter. And looking ahead, analysts say the guidance and inventory at many retailers may still be too high.
“Thus far, what we’ve seen is that low-end demand trends have been extremely [volatile] in 1Q for even the most historically consistent companies, with a particularly cautious tone coming out of our lowest-end retailers, such as Gap (Old Navy), Ross Stores, and Burlington Stores—as their consumers are feeling more of the inflation pinch in their discretionary purchases,” analysts led by Ike Boruchow said.
“In contrast, in 1Q we’ve seen upper-income retailers (such as Lululemon, RealReal, and Nordstrom) speak to strength at the high-end, so no cracks at the high-end yet.”