11/30/2011

Fast Food Making Fast Cash

A quick stop into a McDonald’s restaurant got me thinking. First, I don’t care for fast food. And lastly, they capitalize on the American market. Fast Food

Since the 1980’s, McDonald’s has been bringing in and out the McRib. When looking at the American prices for pork it is no wonder that the McRib enters and exits the market. The prices of pork are cyclical in nature and the introduction of the McRib follows this pattern too. When the price of pork falls, McDonald’s buys up meat and brings back the McRib capitalizing on the low pork prices and the seemingly insatiable American hunger for fast food.

Although a better diet may be more expensive and less convenient, a healthy lifestyle should be worth the extra costs.

9 comments:

sjenn said...

Very interesting. I was just wondering the same thing yesterday. It is amazing to me the way large corporations pay that kind of attention to details such as the future price of pork. I guess this is one reason Mcdonalds has been so succesful. Also interesting to me is the comment that "[Mcdonald's] menu decisions quickly become global agricultural concerns." This just demonstrates the sheer size of Mcdonalds and its influence in global markets.

Dr. Tufte said...

-1 on Locke for an uninformative link.

The idea that McRib availability is wholesale price related is a new theory, and a hot meme on the internet over the last month. I emphasize that this has not been rigorously tested.

To me, it does not ring true. McDonald's could use futures markets to lock in pork prices and eliminate this risk (and explanation).

Dr. Tufte said...

sjenn: what should surprise you is not that big corporations pay so much attention to prices, but that smaller firms pay so little attention.

Locke said...
This comment has been removed by the author.
Locke said...

Dr Tufte
You emphasize that this hasn't been rigorously tested and that to you it doesn't ring true. Perhaps McDonald’s decisions are just a coincidence but according to agriculturists pork prices drop dramatically during the winter months wrote M. McGinnis in “Winter to chill hog prices economists says” (10/19/2011).
In addition to this, W. W. Smith and R. A. Craig authors of Pork-production (1920) say that pork producers require more capital to take care of pigs in the cold weather. With this in mind, it makes sense economically and from management’s point of view to get rid of your inventory before inventory costs rise by selling more pork at lower prices in order to avoid increased overhead.
The elimination of risk and ‘explanation’ could be overlooking Porters 5 Forces. Although McDonald’s is a global company it might not have the power over their pork suppliers to use futures markets. What can be seen from the original article is the reality of the pork cycle. Although the author of the article may not be an economists his ideas point out that pork prices decrease towards the end of the year and McDonald’s reintroduces its only pork offering at the same time.
Whether the link was uninformative or not, it’s food for thought.

Thomas said...

As Dr. Tufte said, perhaps McD's decision as to when to reintroduce the McRib is just coincidence in relation to pork prices. However, the author's graph (yes...I like the visual) is quite convincing. He did touch on briefly part of my theory. That is: McD's introduces the McRib for a limited-time, i.e. limited supply, to increase the demand for an item with a lower average demand than the standard every-day menu items. I'm sure McD' has the benefit of viewing the data associated with the peak in sales of the McRib at introduction followed by a more dramatic decline than other items. The demand does not stay constant enough for advancement to the everyday menu. The limited-time promotion caught me a few years back...line and sinker. However, I didn't like the McRib, and after reading the authors description I know why now. But in the long-run it got me back in McD's and spending money on fries and drinks that keep my loyal today.

Cameron said...

I agree with Dr. Tufte regarding the fact that small businesses don't seem to pay much attention to prices.

I remember working at a restaurant that had the same prices for the same menu items for over five years. Although food supply prices fluctuated the owner never offered a variation to the menu to capitalize on market changes.

Windwalker said...

Dr. Tufte's comment about the lack of attention paid to these prices by small businesses is a very important point. Small businesses and their owners often grow too fast and are incapable of, or simply lack the time or energy to properly research prices and their trends.

Dr. Tufte said...

Locke: I think the points you raise are excellent. Same to Thomas.

My only rebuttal is what I should think that given the futures markets available to hedge changes in pork prices in the (20th and) 21st century, that the explanation offered is very 19th century.

Cameron: you are not the first to spot this. Greg Mankiw (the Harvard economist and best-selling text author) got his start by writing an undergraduate thesis about how the fixed costs of changing menu prices might be large enough that it was rational to leave them unchanged for long periods of time. This is the foundation for what is now known as New-Keynesian macroeconomics, although Mankiw has been tarred as a Republican hack for having the temerity to work in the Bush White House.

Windwalker has made a broader point. Dealing with information has huge economies of scale. Many small businesses never get big enough to see that much return on the investment in data.