Wednesday, September 11, 2002 5:03:37 PM
It is unlikely that raw commodity prices are having that much of an effect on MCD. Beef is probably their biggest food expense, but live cattle are trading at the center point of their five year range. The company has a hedgeing program, so the cost is mainly fixed. The grains are breaking out of multiyear lows, mainly due to drought conditions and low inventory levels. The wheat contract is making daily contract highs and is close to a five year high. However, it takes a relatively long time for prices to increase at the wholesale and retail level. #2 yellow corn is also breaking out. It is used as animal feed and eventually could affect the price of beef. On the whole though, a certain amount of volitility is expected in food prices and they are anticipated and managed.
Of equal importance to the MCD cost structure are real estate/occupancy costs and labor. These are big drivers of margins. Perhaps most important is the competitive nature of the fast food industry. Market share is constantly shifting among the players, as Wendy's or BK pick off a point or two. Overall growth in the industry is slowing.
What you saw today is probably a response to the less than lovely news from Jack in the Box. Sympathy reaction.
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