American Companies Are Reaping Rewards From Price Rises

Companies like McDonald's, Starbucks, Pepsi and Kraft have all increased prices of some of their products in the past few years, repealing great benefits out of a move that was likely to be unpopular among customers—especially during a cost-of-living crisis.

McDonald's, a staple for millions of Americans, has increased its menu pricing by more than 100 percent since 2014, according to a recent study by FinanceBuzz. Medium fries used to cost $1.59 in 2014—now you can buy them for $3.79, depending on the store. The company raised prices so much, FinanceBuzz found, that their average menu prices increased more than three times the national inflation rate.

In a comment to the New York Post, a spokesperson for McDonald's described the research's findings as "inaccurate," saying that the 2024 average prices listed had been significantly inflated." But there's no doubt that, one way or another, McDonald's prices have increased.

Recently, the case of a Big Mac meal sold for a staggering $18 at a location off Interstate-95 in Darien, Connecticut, became viral on social media, generating outrage among users.

Instead of being punished by disgruntled customers, the beloved fast-food chain has been boasting about keeping sales undiminished. Global comparable sales for McDonald's grew nearly 2 percent in the first quarter of the year, according to the latest data made available by the company. McDonald's described this increase in profits as having "benefited from average check growth driven by strategic menu price increases."

"Brands can raise prices and still improve their satisfaction levels, levels of recommendation and financial performance as long as long as they either give something back in the experience, have maintained a good two way relationship over time with their consumers and have built up a residue of loyalty, or can demonstrate 'fairness'," Gary Moss of Brand Alignment Partner told Newsweek. "Of course, a brand may be so uniquely positioned, differentiated and special that consumers have no choice either emotionally or rationally than to spend money with them."

Newsweek contacted McDonald's, PepsiCo and Kraft Heinz for comment by email last week but received no response.

While no other fast-food chain hiked prices as much as McDonald's, according to FinanceBuzz, the company is far from alone in picking this strategy. Subway and Starbucks increased their menu prices by 39 percent in the last decade.

PepsiCo has increased prices in the past two years, citing the higher costs of its ingredients due to supply disruption following the pandemic and rising inflation. Similarly to McDonald's, PepsiCo benefited from this decision. The Associated Press reported that the fourth quarter of 2023 was the company's eighth straight quarter of double-digit percentage price increases.

Customers might have gotten fed up in 2024, as in the first quarter net pricing for PepsiCo was up 5 percent globally but volumes fell by 2 percent. According to the company, the volume decline is strategic, as Pepsi is shrinking package sizes to create more controlled portions and keep prices down.

Kraft Heinz's report for the first quarter of 2024 records that the company increased prices by 2.7 percentage points compared to the prior year period, "with increases in each segment that were primarily driven by list price increases taken to mitigate higher input costs." In the same period, the company reported gross profit margin increased 240 basis points to 35.0 percent; adjusted gross profit margin increased 170 basis points to 34.5 percent. Operating income increased 4.7 percent, while adjusted operating income increased 1.7 percent.

"Retailers have faced price increases for a variety of reasons: inflation, supply chain disruptions, demand, and supplier profit taking," Greg Silverman, global director of Brand Economics at Interbrand, told Newsweek. "However, their challenge has become far more complex because they have had to balance a new formula—quality over cost. This formula requires them to consider how their customers judge both the quality of the product and the experience that delivers that product. This heightened sense of quality is balanced by the actual price people pay and the tradeoffs they have to make to access the quality they want."

Silverman explains that companies were allowed to optimize profits in a declining market because of the demand for their products, though often at the expense of their market share. "This strategy works in the short term but lays them vulnerable to new entrants and new alternatives that provide better quality and better prices," he said.

If this strategy proved successful, are companies likely to continue hiking their prices? Silverman doesn't think so.

"It is hard to imagine that there is a lot of price headroom in any category," he said. "But there are brands who are developing brand strength that will allow them to maintain or improve their margins as long as their brands deliver the quality enough customers want."

"In an ideal world, companies wouldn't have to up their service charges at all," branding expert Matthew Hayes, managing director of Champions (UK) PLC, told Newsweek.

"Given the financial restraints of today's climate, navigating price increases for your business offerings and products can certainly be difficult. Business owners and decision makers, however, also need to remain up to date with market trends and fluctuations as to not under or oversell their products," he said.

"In my experience, building up a strong brand loyalty with consumers is an essential base for if price increases are required. Take McDonald's as a perfect example—their audience relationship has been established over decades, allowing for wiggle room when altering the prices of products we love," he continued. "But the caveat all businesses need to remember is that we're still in a cost-of-living crisis. Prices need to be chosen carefully, and with data-led research in order to back up the decision."