McDonald's, U.S. restaurants losing food fight with grocers

Tue Jul 26, 2016 4:44pm EDT
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By Lisa Baertlein

(Reuters) - McDonald's Corp (MCD.N: Quote) said the U.S. restaurant industry will raise prices far more than supermarkets this year, sending a chill through a sector that is searching for ways to protect itself from higher worker wages.

The forecast and weak quarterly sales at domestic McDonald's restaurants sent shares in the world's biggest restaurant company down 4.5 percent to $121.71 and pulled down most of the restaurant sector. The Dow Jones U.S. Restaurants & Bars Index was off 2.2 percent. The world's biggest fast-food chain gets roughly one-third of its revenue and 40 percent of profits from the United States.

The food service industry is harder hit by state and local minimum wage increases because it employs more minimum wage workers than any other occupation. Some planned minimum wage hikes will more than double the prevailing wage to $15 per hour over time.

The second-quarter report from McDonald's landed after chains such as Dunkin' Brands Group Inc (DNKN.O: Quote), Starbucks Corp (SBUX.O: Quote) and Wendy's Co (WEN.O: Quote) also reported disappointing results for the latest quarter in large part due to weak customer traffic.

Restaurant food inflation is outpacing the increases at supermarkets and the gap is widening, McDonald's Chief Financial Officer Kevin Ozan said on a conference call with analysts.

Food-at-home inflation is expected to be flat to up about 1 percent for this year, while food-away-from-home inflation is expected to be up 2.5 percent to 3.5 percent, he said.

Bernstein analyst Sara Senatore said restaurant companies, which are grappling with profit-squeezing minimum wage increases, use more labor than grocery stores and have the extra burden of trying to convince franchisees to hold back on price increases aimed at offsetting higher labor costs.

"Food prices are coming down, but labor is not. That's doubly bad for restaurants," Senatore said. "It's hard to convince everybody to operate in lock step."   Continued...

The logo of McDonald's (MCD) is seen in Los Angeles, California, United States, April 22, 2016. REUTERS/Lucy Nicholson/File Photo