It's Not Price Gouging, It's Survival

The Democrats are trying to sell the idea that businesses are price gouging their customers. Of course, we all know that's not true. But it's a nice and easy way to pass on the debilitating effects of inflation and put the blame somewhere other than on their policies which are at the root of what's causing it.

The rising cost of labor, which the Democrats have long been pushing for, are not without their own contribution to the higher costs we are facing everywhere. It's not the only reason for the inflation, of course. But it doesn't help.

Fast food operators, for example, in California are being slaughtered by the $20 minimum wage.

The reality is that price gouging can't occur. That's not to say it never happens or even that it can't happen. It simply has limits. So, the reality is that it isn't happening, and that is evidenced by fast food businesses in particular having to do all sorts of things to ramp up business since customers are not eating at their restaurants as much due to the higher cost to do it.

In other words, you can't just charge whatever you want and expect customers to automatically pay it. If that were the case, the fast-food chains wouldn't be seeing their sales suffer.

As a general rule, the markets dictate what things cost, outside of external factors of course. Inflation, for example. But generally speaking, a business can only charge for its goods and services what the market is willing to bear.

It wasn't that long ago when a family of four was out and about on a weekend and stopping by for a quick bite at McDonald's was a reasonable proposition. Now that quick stop might cost upwards of $100. So, it's much more of a consideration than it was before, and many people are simply saying no.

It's just not worth it.

As a result, instead of gouging customers, fast food chains are revisiting value menu concepts. But those come at a cost. Even though when these value menus first arrived on scene, they were very profitable business drivers, that's not the case now.

The difference is we didn't have inflation and people had more disposable cash. People were more willing to upgrade their orders and buy higher margin menu items on top of their $1 McChicken sandwich, for example, that helped to defray some of the costs of offering cheaper menu items to customers.

Almost all of the fast-food chains are rolling out some type of value offering. McDonald's offers a $5 value meal, Burger King is rolling out a $3 offering and Wendy's has an offering of their own as well. 

It hurts the business, as most franchisees will say. These items are being sold at cost and sometimes at a loss, and so the hope is that customers will do the same as before when considering value items and add higher margin items to their order.

But again, with inflation, they may not be as willing to do it.

The bottom line is that businesses are dealing with the impact of the rising costs of doing business just like everyone else is dealing with the higher cost of living on everything else. There's no gouging going on here. Because again, the market is not willing to bear any cost. Businesses are at the whim of their customers, not the other way around. And in many ways, while it is painful at least in the short term, in order to keep customers walking through their doors, they are willing to lose a little money in the process.

The last thing these restaurants want is for customers to opt for staying home for lunch rather than considering what was before a fairly economical prepared one.

When my wife and I could opt for a quick bite out when we were running some errands and it only cost around $10, it was rarely a second thought. But when that same trip costs $30, you think twice about it. "Is it worth it?" Most people are saying no. Not when I can go home and make a sandwich and maybe even toss a few chips on my plate for under $2.

Businesses are out to make a profit. It's the whole point of being in business of course. And in order to do that, you need customers, and you won't get them at any cost. The villains are not the operators. They are victims just like the rest of us of the impact of higher wage demands and inflation—and they are running out of workarounds that work.

If price gouging was a thing, businesses would not be having to consider loss leaders to keep customers coming in.

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© 2024 Jim Bauer

Plummeting McDonald's Sales May Be An Economic Signal

A couple of years ago I wrote that one thing about downturns in the economy is that it causes people to, of course, scale back their purchases, and that means low-end retailers such as Dollar Tree, Dollar General, Walmart, and even thrift stores like Goodwill will tend to do very well since consumers are more concerned about value than necessarily quality, or customer service. That is not to disparage any of those companies on either quality of product, or quality of service, but simply to suggest that price becomes king in that kind of an environment. In that commentary I suggested that when the economy begins to fire up a bit, retailers to look at to buy shares in are slightly higher end, or steps up from the deep discounters. Places like Target and Kohl's, for example.

During the same period I also wrote about how well McDonald's stock performed throughout the entire recessionary period. To put it literally the stock was on fire, and that was because people were flocking to McDonald's stores, particularly interested in their value menu which offered consumers the best bang for their buck when it came to dining out. Even when it came to coffee, a cheap cup of what is arguably a noteworthy brew was just what the hurting consumer needed to get their coffee fix at a price that went easy on their wheezing wallets.

Interestingly enough, Starbucks did not fare all too poorly during the recession either, but that's another story. There's a different dynamic going on there.

McDonald's sales have taken a turn for the worst, having seen percentage decreases for nine straight months, and even Walmart has been seeing some declining sales.

With gas prices lower and jobs numbers higher, the shortfall in sales at McDonald's may actually be a lagging indicator of better times ahead. What it suggests is that people may be stepping up to slightly
higher end operators like Wendy's, Chipotle, and Panera Bread to name a few. Five Guys burgers are a strong competitor in this sector as well, and have been one of the fastest growing quick serve hamburger chains for some time now.  My gosh, if they went public, I would be one of the first guys in line.

Shake Shack may shake things up a bit as well for McDonald's. And actually Wendy's stock has been seeing new highs, so to my mind these are very clear signs that there is a paradigm shift in where consumers are spending their dollars.

And the begging question? Could it be that with lower gas prices and better job prospects, consumer confidence may be rising, and consumers are now willing to spend a little more elsewhere?

If that's the case, it could well be a signal that the economy may be getting better. I think it is too soon to tell for sure. Certainly I am not going to use hamburger sales alone as any indicator in the macro-economic picture. But in the micro it seems to at least make a suggestion which I think is worth taking a close look at.

People are beginning to make a shift in their spending, and McDonald's horrible sales numbers are making that all too clear. Stocks that I think are ripe for this environment are Wendy's and Chipotle (I'd stay away from Shake Shack), Whole Foods, Target, and I will go ahead and throw Darden Restaurants into the mix as well. These are companies I want to own right now. I think these companies are primed to benefit from any improvement in the economy, and I think stocks to avoid right now are stocks like Dollar Tree, Walmart, and yes. McDonald's. But do watch the company very closely. McDonald's has historically been able to weather many storms and has an uncanny ability to right its ship eventually. I do not recommend writing it off completely in the short term. But these other companies, I think, have a lot more going for them as it currently stands, and that is where I would put my investment dollars.

We're up for a ride, and the ones who will win are those who are treats to the American consumer if it becomes all too clear that we are headed for better times. In this case playing the value play is not as good a bet as playing the upgrade play.