I. Background and Article Summary Its safe to say when we think of fast food, McDonalds certainly comes to mind. That is because the company has made a name for itself through its infamous golden arch and signature burgers. Still after 70 years, McDonalds is one of the largest fast food chain restaurants in the US and has growing worldwide recognition. They have reserved their title based on their huge customer base and increasing sales. The food giant has experienced increases of up to 80 percent of net profit in a year and 10 percent in revenues in a year.
Over the past several years, the launch of the “Dollar Menu”, introduction of McCafe, and primarily, continuation of low cost food are all the ways in which McDonald’s continually gains and maintains their customers. Currently, McDonald’s success is still on the rise. Global sales have climbed 6% in the third quarter. Their net income jumped to nearly 1. 5 billion, sales were up by about 4%, and the shares have risen about 26 percent this year. They attribute their growing success to maintaining low-priced items in comparison to other competitors such as Burger King and Wendy’s whose menu prices steadily increase each year.
However, the increasing cost of commodities such as meat and wheat are forcing the chain to raise menu prices in the coming year. Although McDonald’s initially refused to significantly increase prices, they have realized a slight jump in food price will help cover their heightened expenses. They are worried this price increase will have a negative effect on their customer base as the economy is still in recovery mode. II. Course Topic Connections Since its existence, McDonald’s has kept their menu prices at a lower rate to win market share in the fast food market (Ziobro, 2010).
With this technique, they have securely taken the market share from similar fast food chains. We have learned that market penetration pricing strategy is a company’s plan to set lower price levels on products in order to quickly build up market share. This pricing strategy has turned out to be truly effective, as they have seen large sales volumes and market shares in the past several years. Nevertheless, penetration pricing becomes disadvantageous when the cost of production increases because more income will be needed to cover the new costs.
In order to prevent loss and the increase of debt, McDonald’s plans to price products a bit different in 2011. It seems like the company is considering a cost-based pricing strategy, where prices for products are based on the cost of materials, labor, testing, etc. In this case, McDonalds is taking account of the increase in commodity costs. Gregory Hayes, a finance chief, says in 2011 “commodities will represent a 40 to 50 million dollar expense” for companies all around the world (Shipman and Cordeiro, 2010).
McDonald’s now understands that to maintain success they will have to keep up with industry trends and increase prices based on their incurred costs. Environmental influences also affect McDonald’s pricing strategy. Looking at their infamous rivals, Wendy’s and Burger King, McDonald’s refused to increase prices. They will now have to adjust their prices to match up to competitors as commodity costs increase. We have learned that competitive action plays a huge role in pricing decisions therefore pressure is on the food chain to now consider both competitive behavior and costs.
III. Recommendations and Predictions In the article “McDonald’s Intends to Raise Prices,” Paul Ziobro discusses the restaurant’s concern of success in European divisions. McDonald’s believes this increase in menu prices will make it difficult to maintain a significant customer base. This concern is reasonable as the European environment differs from that of the United States. McDonald’s will need to find alternative ways to attract and retain their consumers. They declare plans of remodeling restaurants to draw in customers.
I believe reconstruction, in addition to, an increase the number of value meals they offer are rational actions for their success in Europe. Also, referring to global pricing, McDonalds could consider geocentric pricing where the individual chain or region bases price on local costs, income levels, local competition, and local marketing strategy. This may be a viable option for McDonald’s as it struggles to maintain a huge customer base in comparison with its consumers in the United States. It may also be their chance to maximize profits in each national market.