Fast food companies grapple with rising commodity costs

Fast food chains are facing a tough challenge these days as the cost of the ingredients in some of their best-selling menu items continues to rise.

Steve Hare, CEO of Wendy's/Arby's group, called the increase in the price of bacon, beef, cheese and other key hamburger ingredients "troublesome" - and the rise shows no signs of slowing down. According to the Atlanta Journal-Constitution, bad weather and strong demand have driven up the cost of corn, which is used to feed most commercial livestock, including cattle, pigs and chickens. Eventually, those price increases will be reflected in the cost of meat, although long-standing contracts specifying low chicken prices have helped many restaurants stay afloat.

Steve West, an analyst with Stifel Nicolaus in St. Louis, said that many restaurants - everything from McDonald's to Applebee's - will need to increase the prices of their fare in order to offset the rising commodity costs. But that could be a problem when the restaurants' images rely on special deals and deep discounting, such as offering two entrees and an appetizer for $20.

McDonald's seems to be doing the best job of managing rising costs so far, but Sanford C. Bernstein analyst Sara Senator warns that no company will be able to keep prices low forever.

"They may not feel it right away, but they will eventually feel it," she told the paper. "Contracting and hedging tends to smooth pricing, but unless you're very, very good - which few people are - you can't always have low prices."

It's not just restaurants that are feeling the squeeze. Starbucks recently announced that due to an increase in coffee bean prices, the cost of some of its more "labor intensive" drinks could soon be going up.