Sharing The Squeeze: Sacrificing Short-Term Profit for Long-Term Growth

May 28, 2008 | blog | By Mike Sullivan

With consumers being squeezed more than any time in recent memory, it seems companies are starting to wrestle with a very interesting question: what is the cost of doing the right thing? For the first time in a long time, it seems companies are beginning to consider whether not passing on rising costs to help customers save money is better for the long run than short term increases justified by the rising cost of everything.

Last Thursday, following its annual meeting in Oak Brook, Illinois, McDonald’sannounced that despite the increasing prices of virtually everything, they will not pass those increases on to their customers and that their cornerstone dollar menu will stay intact. McDonald’s estimates its U.S. cheese costs alone will rise 13 to 14 percent this year, yet they appear ready to take the hit in profit rather than passing those costs on to people already struggling to maintain their frequency of visits. “Commodity costs are rising more than we have seen in a dozen years,” McDonald’s President Ralph Alvarez said at a news briefing after the meeting. “[But] in today’s environment, we can’t pass on all our costs.”

Contrast that attitude with the heads of the major oil companies who, during the last few weeks, have spent considerable time in front of Congress trying to explain why they’re showing record profits quarter after quarter, despite the fact that gasoline has risen 77 cents a gallon in four months and people are struggling at the pump. According to a report by the California Energy Commission, on a $4.09 branded gallon of gasoline, the breakdown looks like this:

Distribution, Marketing and Profit: 4 cents
Crude Oil Cost: $3.15
Refinery Cost and Profit: 23 cents
State Underground Storage Tank Fee: 1 cent
State and Local Sales Tax: 30 cents
State Excise Tax: 18 cents
Federal Excise Tax: 18 cents

While there are certainly a number of costs involved with converting crude oil to gasoline and getting it to the stations, we’ve yet to see a gas company agree to make $20 billion a quarter profit rather than $40 billion so they can pass on the savings. Of course they’re not the only companies making news for passing along the costs of doing business.

Last week, American Airlines announced a $15 fee for each first checked bag and a $25 fee for a second one, albeit, just so they can try to make their financial model work again. In reality, many companies are simply in a position where they have to raise prices just to make ends meet. But that makes McDonald’s decision last week, all the more interesting.

The question that remains is how will McDonald’s spin the information? Will we see a new TV campaign talking about how they’re making it easier on America? Will there be a big PR push to get the news out? And if so, does that “taking credit” diminish McDonald’s decision to do the right thing, or at very least, the helpful thing? Hard to say.

That will be up to their customers.


Mike Sullivan

President at LOOMIS, the country’s leading challenger brand advertising agency


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