A Big Inflation Nothing Burger

Want to know where 2011's next big economic slowdown is coming from?  Go no further than your local Burger King.

In 2007, Burger King and McDonald's went head to head trying to attract cash-conscious folks with both fast food giants selling a double cheeseburger for just $1.  Both had two beef patties and two pieces of cheese on a bun and as the economy cratered, both restaurants sold a ton of them.

McDonald's blinked first by raising the double cheeseburger to $1.19 and introducing a one slice of cheese, two patty burger called the McDouble a year later.

But Burger King had to follow suit.  Their franchisees sued them, claiming Burger King was making them sell their double cheeseburger at a loss at that $1 price, and Burger King raised the price of their double cheeseburger to $1.29 and introduced their version of the "one slice of cheese, two patty burger" called the Buck Double.

Now last month, Burger King has been the one to blink.  They've dropped the Buck Double completely and now have introduced the Single Stacker for $1...a single patty with cheese, sauce, and bacon, far more profitable for the company to sell.  How will McDonald's counter?

That's the wrong question, of course.  The real riddle is why.

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.

The answer of course:  skyrocketing commodity prices.   Corn, wheat, oil, all up huge in the last 12 months.  Those price increases are now being passed along to consumers at the fast-food place and the grocery store (as well as the gas station).  Consumers are going to tighten up...and that's going to cause these prices to have to fall again if nobody's buying.

I expect another commodity crash as consumers skip the burgers.  It's 2008 all over again.  Don't believe the inflation hype.