A 99-Cent Hamburger Isn't Deflation
But the real problem for McDonald's is a saturated market for a product that has remained essentially unchanged for years -- and a management that insists it can fix things by tinkering with the menu and trimming a few underperforming restaurants.
The Sinking Feeling in Detroit
There wouldn't seem to be much similarity between making cars and flipping burgers, but the two industries share a basic business problem. You've got to pay for factories and burger stores, pay workers and meet debt payments, even if nobody is in line for a Whopper or kicking tires in the auto showroom. This explains why General Motors(GM Quote) and rival car makers started to offer zero-money-down, 0% loans and zero-payments-for-90-days deals as soon as 0% financing offers showed signs of fading appeal. Even these incentives might not be enough. Sales of cars and light trucks fell 27% in November from a year ago. Granted that sales in October 2001 set an all-time record; still, the trend isn't reassuring. The automakers face a one-two punch: Deflation in their industry means they can't raise prices (the average selling price of a GM car is down 2% from 2001), and a lack of inflation increases the burden of the liabilities they carry. Take GM, for example. The company has 460,000 retirees -- about 2.5 for every active worker -- all drawing pensions and health care benefits, whether the company sells any cars or not. GM pension liabilities now stand at about $75 billion, and at the end of 2001, the company's pension plan was underfunded by about $9 billion. So far this year, GM has put about $2.2 billion into the plan. But that pension obligation grows with every turn of the deflationary screw. At an 8% return, the company will wind up having to pony up another $13 billion through 2007, estimates UBS Warburg. If rates of return stay roughly where they are now -- with 10-year Treasury notes yielding 3.5% -- then GM would have to put as much as $17 billion into its pension plan by 2007. And that would essentially eat up all the company's cash flow during the period.- Loading Comments...
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