Abenomics on McDonalds: Higher Prices, Lower Sales

According to the proponents of Abenomics, inflationism will bring about corporate profitability that would lead to economic boom.

In real life, inflationism has brought upon the opposite.

I pointed out earlier that in response to BoJ’s doubling of monetary base, McDonald’s Japan in April has increased prices of their products by as much as 25% for some items.

As expected, the result has been slumping sales.

From the Bloomberg:

Same-store sales at McDonald’s locations in Japan dropped 3.7 percent in April, the 13th straight monthly decline. Comparable, or same-store, sales are an indicator of a company’s growth because they include only older restaurants.

Basic economics: higher prices, lower demand.

Ironically booming global stock markets has also failed to generate strong growth in sales for McDonald’s outside the US.

From the same Bloomberg article:

McDonald’s Corp. (MCD), the world’s biggest restaurant chain, said sales at stores open at least 13 months fell 0.6 percent last month as growth slowed in its Asia-Pacific region.

Analysts estimated a 0.5 percent drop, the average of 11 estimates from Consensus Metrix. Sales at stores in the company’s Asia-Pacific, Middle East and Africa unit fell 2.9 percent, the Oak Brook, Illinois-based company said today in a statement. Analysts projected a 1.4 percent decline.

On the other hand, McDonald’s sales in the US marginally increased as sales in Europe plunged.

However, McDonald’s stock (MCD) continues to power higher. So we have a parallel universe between global stock markets and real commercial activities around the world.

Note that the stagnant McDonald’s global sales comes amidst record low interest rates for the world.

Ironically, India’s franchise holder of McDonalds has also declared coming price increases.

From Reuters (hat tip Zero Hedge)

An Indian franchise operator of McDonalds Corp (MCD.N) may increase prices for the second time this year, responding to rising inflation which, along with an economic slowdown, it expects to temper demand growth for at least the next 7 months.

The company, Hardcastle Restaurants, said on Tuesday it could raise prices by 5-6 percent. That follows a 5 percent hike after the government increased the service tax rate in February.

"There is pressure and it's a tough environment, no doubt. But inflation is at 8-10 percent so we have to hike our prices," said Amit Jatia, vice-chairman of Hardcastle Restaurants, which owns the McDonalds franchise for west and south India.

He said, however, that the company had no intention for now to raise prices.

Consumer spending in India has taken a hit in the past three quarters as rising food prices, meager salary increases and the slowest Indian economic growth in a decade hurt buying appetites for clothes, cars and eating out.

Inflationistas can't seem to grasp of the casual relationship between business commercial and entrepreneurial activities with changes in money supply.

 

They don’t see that price instability will not only crimp on the demand side but also reduce the incentives for the supply side to expand. This would account for as the economic calculation problem.

If inflationism is the elixir, then Venezuela and Argentina would now account for the most prosperous economies.

Cato’s Steve Hanke points out that black market rate of the Argentinian Peso now “sits 47.3% below the official exchange rate” which he adds represents “an implied annual inflation rate of 98.3%.” 

Wow Hyperinflation in motion.

The Argentinian Merval index is now seen picking up steam on the intensifying hyperinflation. Soaring stock markets based on hyperinflation could mean a purchasing power of only 3 eggs ala Zimbabwe in 2008.

What are the lessons to be learned from inflationist politics? The advocacy of the religion of inflationism signifies as deflation of intelligence and an inflation of the belief in fantasies and lies.

Iceland's Devaluation Toll: McDonald's

Recently we dealt with The Evils Of Devaluation. And Iceland should be a good example.

Last year's meltdown heavily devastated Iceland, an erstwhile prosperous nation but whose banking system recklessly engaged in intensive leveraged based speculation [see last year's post Iceland, the Next Zimbabwe? A “Riches To Rags” Tale? ]

The consequent losses in the banking system prompted Iceland's government to intervene and provide support even when there had not been enough resources to do so. This eventually took toll on its currency, the Krona.

The Krona has devalued or collapsed from 60 to around 140 (chart courtesy of ino.com).

This fueled domestic inflation even amidst a spike in unemployment.

chart courtesy of tradingeconomics.com

Nevertheless Iceland's crisis has prompted one of the world's most prolific fast food chain, McDonald's (NYSE: MCD), to withdraw.

This from Financial Times

``Iceland edged further towards the margins of the global economy on Monday when McDonald's announced the closure of its three restaurants in the crisis-hit country and said that it had no plans to return.

``The move will see Iceland, one of the world's wealthiest nations per capita until the collapse of its banking sector last year, join Albania, Armenia and Bosnia and Herzegovina in a small band of European countries without a McDonald's.

``The loss of the Golden Arches highlights the extent of Iceland's economic demise since the pre-crisis boom years when its "Viking Raider" entrepreneurs turned Reykjavik into an international finance centre and launched a buying spree of high-profile European assets."

The reason...

``McDonald's blamed the closures on the "very challenging economic climate" and the "unique operational complexity" of doing business in an island nation of just 300,000 people on the edge of the Arctic Circle.

``Most ingredients used by McDonald's in Iceland are imported from Germany - leading to a doubling in costs as the krona has collapsed while the euro has strengthened.

``Magnus Ogmundsson, managing director of Lyst, the McDonald's franchise holder in Iceland, said that price rises of at least 20 per cent were needed to produce an acceptable profit. That would have pushed the price of a Big Mac burger well above the $5.75 it costs to buy one in Switzerland, home to the world's most expensive McDonald's, according to the Big Mac index."

Of course somebody's else problem could serve as another person's solution:

It could be argued that this should be healthy as there would be less junk foods.

Or that Iceland will have to rely more on their own.

Again the FT, ``Mr Ogmundsson admitted that some customers were alarmed by the symbolism of such a recognisable brand abandoning Iceland but others have reacted positively. "People are pleased that we will be sourcing more goods locally," he says.

Overall, Icelanders would have lesser choice and diminished privileges from today's modern society. In short, Iceland's living standard has retrogressed.