Pricing power is highly prized on Wall Street
Mcdonald’s has employed a “barbell” pricing strategy for decades, luring customers with low-cost items in the hope that they will then splurge on pricier fare. This balancing act is now at risk. On October 27th the fast-food giant said that, due to rising costs, prices at its American restaurants will increase by 6% this year compared with 2020. The burger chain says labour expenses have risen by 10% at its franchised restaurants and 15% at its company-owned locations. Add the rising cost of ingredients and the result is higher prices for burgers and fries. For now, it seems, customers can stomach it. Chris Kempczinski, McDonald’s boss, said the increase “has been pretty well received”. After digesting the news, investors have sent shares in the fast-food firm up by 6%.
A growing number of companies are raising prices as costs for labour and raw materials rise, often with no ill effects. This summer PepsiCo, an American food giant, lifted prices for its fizzy drinks and snacks to offset higher commodity and transport costs; it plans further increases early next year. Ramon Laguarta, the firm’s boss, suggested in an earnings call in October that customers do not seem bothered. “Across the world consumers seem to be looking at pricing a little bit differently than before,” he said. In September Procter & Gamble, a multinational consumer-goods giant, raised prices for many of its products. The effect on demand was minimal. “We have not seen any material reaction from consumers,” Andre Schulten, the firm’s chief financial officer (cfo), told analysts last month.