McDonald's absorbs some costs to keep customers

OAK BROOK, Illinois Thu May 22, 2008 1:55pm EDT

1 of 2. A young girl eats next to a fireplace at the newly designed interior of the McDonalds fast food restaurant in Wolfratshausen south of Munich in this June 27, 2007 file photo.

Credit: Reuters/Michaela Rehle

OAK BROOK, Illinois (Reuters) - McDonald's Corp (MCD.N) is willing to absorb some of the higher costs for ingredients such as oil, meat and dairy to promote customer loyalty, Chief Executive Jim Skinner said on Thursday.

"This is not the time to be passing that on to consumers. They have long memories," Skinner said.

U.S. consumers are weathering a perfect storm as the economy struggles, unemployment rates increase and costs rise for necessities such as gas and food.

"We're the value leader. We always have been, and they expect us to continue to be the value leader," Skinner said.

McDonald's low-price dollar menu items, which include a double cheeseburger, have been popular with cash-strapped customers.

The menu fuels store traffic and the additional volume has helped protect profits by knocking out some of the pressure from higher commodity costs.

McDonald's Chief Operating Officer Ralph Alvarez also said the fast-food purveyor will be very aggressive with value- priced food and beverages during the summer, when gas prices tend to rise.

COST CONTROLS

McDonald's, which has outperformed most of its U.S. fast- food rivals, has controlled for some commodity cost increases by buying contracts to lock in future prices. It has also offset some of the higher costs by raising its own prices.

Still, the world's biggest hamburger chain has not fully erased the impact of higher ingredient costs.

"If you just do the math, we don't mitigate all the costs," Skinner said.

On another front, Alvarez said the company has been somewhat shielded from the impact of higher fuel prices because many of its customers do not have to travel more than two miles to find a store.

"We are very close to all of our customers. That provides us some insulation," Alvarez said.

Earlier this month, McDonald's said sales at restaurants open at least 13 months rose 5 percent globally in April, boosted by strong results from China, Australia and Russia.

Same-store sales, a key gauge of retail health, were up 2 percent in the United States.

McDonald's forecast 2 percent or better U.S. same store sales growth later in the year, when it plans to roll out new beverages.

McDonald's shares were up 4 cents at $58.82 in afternoon trading on the New York Stock Exchange.

(Additional reporting by Lisa Baertlein; editing by John Wallace and Andre Grenon)

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