McDonald's makes money by McRaping your pockets

Here’s an interesting one: at the McDonald’s on Sycamore Lane in Maple Grove a hamburger is 84 cents. A cheeseburger is 94 cents. So, theoretically speaking, that’s a 10 cent slice of cheese that you’re buying for the cheeseburger, right?

Okay. So a slice of cheese at McDonald’s is 10 cents. So what’s my point? Let’s look at the Happy Meals. At the same McDonald’s a hamburger Happy Meal is $1.99. Now get this: a cheeseburger Happy Meal is $2.59! That right there is a 60 cent slice of cheese! You don’t believe me? Check it out for yourself. You’ll be amazed!

As I was pondering the situation one day, I began to ask myself what makes one slice of cheese so much more special than the next? What causes that subtle yet ever-present 600% increase in price? Do the normal cheeseburgers get all the reject slices of cheese that have been manhandled or dropped on the floor by inefficient employees? Or do the slices of cheese on the Happy Meals come from the finest cows living in the Swiss Alps drinking Evian bottled water and eating the world’s greenest, freshest grass?

Naturally, these questions led me to confront McDonald’s myself. I was on a mission. I wanted some answers.

I repeated to the clueless woman behind the counter what I stated in the first two paragraphs. My reply:

“So?”

“So McDonald’s is ripping off America! I just want to know why!”

“Uhh…I’m not allowed to tell you….”

So there I was, at the center of a national conspiracy! My next intuition was to call the corporate headquarters in Minneapolis. According to them, this is why a slice of cheese is 60 cents:

“It’s that expensive because the hamburger Happy Meal is actually a discounted price across the country.”

Why, then, are the prices for cheeseburger Happy Meals different, across the country? Where does all of this money go? I’m still, to this day, left in the dark, with no answers to show for my deep intellectual struggle. Woe is me.

McDonald's has the simple, yet efficient, policy of charging you exactly as much as you will pay: or rather, as much as the average buyer in that location will pay.

This explains why McDonald's prices are different all over the world, and also within the same country. McDonald's guarantees that its food products will taste the same all over the world, not that they will cost the same.

As an instructive example, consider Mexico. The cheeseburger here (as of the beginning of 2001) costs between 15 and 20 pesos. This converts (in USD) to between $1.80 and $2.40. Why ? Is food more expensive here ? No, and besides, McDonald's buys in bulk on a stunning scale (the only thing they import is the potatoes). Is labor more expensive ? No, in fact the minimum wage here is about one tenth that in the US. Location, taxes, insurance ... are all as much as in the US or much cheaper. So what's the deal?

Easy: McDonald's squeezes the Mexican as much as they suppose (and no doubt experimentally determine) it is possible. This is in fact a difficult problem, because the price is determined based on other local food alternatives, and on the class of people you want to attract.

But after all this is not so strange, because this is what capitalism is all about. About the same thing happens with consumer goods. Another master at this task (called pricing) is Coca-Cola - but they have it easier, since Coca-Cola is very very cheap to produce. In fact, it is estimated that about 60% of Coca-Cola total worth is its brand (that's to say, it is a share of people's thoughts).

It is interesting to notice that McDonald's in Mexico puts a heavy accent on the fact that they are clean and healthy. Their basic sandwich is priced just a tad more expensive than your basic torta at a torta stand. The complete meal is more expensive than a typical comida corrida, but less expensive than a lunch at Sanborn's or Vips.

McDonald's in Mexico is solidly middle class food.

McDonald's makes their money the same way any other big companies makes it: by centering their attention on their regional markets, setting prices to compete with other places in the market, and making as much money as possible while still looking attractive. McDonald's is better in that they have smaller pricing zones than say a gas station, which (notoriously) zone their prices according to where in town the gas station may be. Something just down the road, but more convenient for rich people may be 3 or four cents more than something in a poorer section of town. To the business-minded, this is a fair and sensible business technique.

McDonald's recently bought out the highway contract for the state of Massachusetts. What does this mean? It means that there are no more Burger Kings on this stretch on the Pike, but are all McDonald's. Are the prices higher on the pike than what they are simply right off the road on an exit? You had better believe it. However, McD's thinks that you are willing to pay for the convenience of food right there. They have you captive. Amusement parks are the same way.

In Holyoke, where I live, there are three McDonald's: One in a large mall, one in a suburban area, one in a poorer downtown urban section. The prices actually go in that order. You can get an entire meal downtown for about 4 dollars and some change. At the mall it can cost you up to six. Why? Because that's what the market can bear for that food.

McDonald's is lucky in that they do not have sit-down menus. Menus allow people to stare at prices and to gauge how much a meal will cost. You cannot tinker with menus too much, because patrons become familiar with them, and would know if they are being jilted into paying more.

McDonald's makes their money (at no matter what the prices are set) by the differences in profit margins between items. My girlfriend's father used to be a manager at a McD's. He told me that they don't make much on a burger. Maybe ten to twenty-five cents after everything on a hamburger; a little bit more than that on a cheeseburger. The specialty sandwiches are fairly profitable as they are higher-ticket items. The apple pies? Not much. The other small stuff? Not a heck of a lot. However, it is really the drinks that make it a profitable company. You pay a dollar for a drink that cost them roughly ten cents, if that. You super-size your meal, adding on between 40 and 60 cents, adding 5 cents in fries and two cents in drink. The drinks are where they make their money, even in free refills. To get your five dollars in soda, you'd need you and your entire thirsty soccer team for some time hitting those machines.

People don't really think about it, but fountain soda is one of the most inexpensive parts of a fast-food restaurant, and yet one of the most profitable. Regardless of what the price is set at, McDonald's uses its clever pricing to set a higher value on a meal with more drink and more fries, something that can be suggestively sold at a higher price. Suggestive sale and upsale are HUGE parts of any customer interaction job. That's where the money is made.

McDonald's doesn't McRape your pockets, you buy right into it, and they know it. They don't keep too many secrets about what they do, or about how much things cost. What does it matter to you? You are not going to go to Wyoming to get a cheaper burger if the one down the street in Western Mass is fifty cents more. You are stuck there, and you'll gladly pay their prices, because it's a value, but only because they tell you it is.