McEconomics: The price of McDonalds in China

Pettis over at China Financial Markets has a nice little comment on the role of McDonalds in China (and Asia generally). In my view he has it spot on making an excellent observation that I think deserves to be retold.

The rest of the article is also interesting.

Inflation? Or stagnation? [China Financial Markets]

Occasionally I like to bring foreign visitors to the neighborhood McDonalds, partly because it always generates a lot of outrage and partly because you are far more likely to find a McDonalds outlet replete with local residents conducting their everyday life than you ever would in Nan Luo Gu Xiang, which is much more likely to be peopled by European tourists and upwardly-mobile Chinese who like to eat and shop in the places foreigners do. McDonalds, on the other hand, is as local as it gets for young urban life in most Chinese cities, and it is rare to see one that is empty.

Sorry for that non-economic digression. I mention all this not because I own McDonalds stock or like the food, but rather as a prologue to the large headline in today’s China Daily: “McDonald's raises prices in ChinaOpen in a new window.” McDonalds, along with KFC and Pizza hut, is extremely popular in most major Chinese cities not just with students but also with middle class families and dating couples. The fast-food outlets are almost always full and often there are lines to get in. Right-thinking Westerners may deplore this, but one of the best young underground bands in Beijing even has a song about how many times McDonalds has saved the singer’s life (mostly because of the clean bathrooms, however). It is a fairly important place to many urban Chinese and so its pricing policies matter, as the China Daily headline indicates. According to the article:

There's no escaping rising inflation - signs of it are everywhere. The latest sign could be in your meal at a fast-food outlet. McDonald's, the world's largest fast food chain, yesterday raised its prices in China, for the second time this year, following measures to increase prices in January.

The US group is not alone in its decision. Many Western food chains are now increasing prices on their menus in China.

The article goes on to say that in the latest price hike, the cost of most items rose by RMB 0.5-1.5 per item (7-21 American cents). I don’t know what the typical item in McDonalds costs, so I don’t know what this means in percentage terms, but I am struck by the fact that they hiked prices in January and then again in May, even though food prices declined in May. This suggests to me that inflation, and possibly wage inflation, has become a serious enough problem for at least the fast food outlets. I don’t know how much of their costs consists of food purchases and how much is non-food, but I would have thought that two price hikes in four months is a lot.

.