Saturday, February 1, 2014

Is McDonald's cheap?

A friend and I were arguing about this today.  He felt that eating at McDonald's is more attractive to many people than cooking at home because McDonald's is cheaper.  I contended that McDonald's is in fact not cheaper than home cooking, for a few reasons:
  •  no matter how efficient McDonald's supply chains may be, they can't be much more efficient than most supermarkets.  Both are operating in a streamlined, low-margin industrial food chain.
  • Hence the difference between McDonald's or any other restaurant, and home cooking, is that a restaurant needs to pay labor costs and make a profit, while you don't.  Granted, when you cook you are not accounting for the opportunity cost of your own labor, so in that sense home cooking usually will be more expensive, unless you think your time is worth even less than the pittance McDonald's pays its employees.  Then again, if you really want to do a full accounting, you'd have to price the exercise benefit you get from being on your feet in the kitchen, the psychological benefit you get from being in charge of your own food and preparing something for your family, and especially the tax subsidy that we are all essentially paying to McDonald's by our taxes' going to food stamps and Medicare for the company's underpaid employees.  Plus you'd have to count as your own opportunity cost time the time you wait to get your order at McDonald's
But without getting into all these details of hidden costs, I mainly wanted to dispute the idea that eating out can ever really be cheaper than eating in.  So I set about doing some calculations.  Here goes:

A McDonald's double cheeseburger is on the dollar menu.  It contains:

price: $1


If you made the same thing at home, it might play out as follows (I use more beef to account for the weight loss after cooking, and I need to use 1.25 grocery store buns since they're lighter than the McDonald's ones):
total price: $1.09

In some ways I overestimated the homemade price just to be conservative.  You can play around with this price--you can lower the bun price by 8 cents if you shop at Costco.  Or you can cut 20% off your cheese price, and get better quality cheese, by buying cheddar in a block instead of pre-cut American singles.  Or 6 cents off the cheese if you go to Costco.  With that your homemade option would be even cheaper.  That said, the homemade beef I used here was fattier, and thus cheaper, than if I had used an 80% lean ground beef like McDonald's does.  So in that sense I'm underestimating the homemade price.  In any case, $3/lb for low-grade ground beef seems expensive to me, but I couldn't find any online grocery site that had it for less.  I'll bet that you could get better ground beef for a sight cheaper in the Midwest, especially if you could buy from a wholesaler getting the same industrial Cargill meat as McDonald's surely uses.

Okay, so even for the double cheeseburger, which I'd thought McDonald's won out on because it was using it as a $1 loss leader, home cooking is a much better deal.  And this is at Harris Teeter's, a generally more expensive grocery store, and without using any coupons or anything.  Let's see some other menu items:

French fries:

$1.79 minimum for a large fries consisting of about 130 g potatoes, and 25 g cooking oil

Homemade fries (fresh potatoes lose weight when you fry them, so you have to buy a bit more than 130 g of fresh potatoes)
140 g potatoes * $8.99/20 lb *1 lb/454 g = $0.14
25 g oil * $29.82/35 lb * 1 lb/454 g = $0.05

For fries, the homemade option is a clear winner, costing one ninth, or even up to one thirteenth, of the price of McDonald's fries.

Likewise for a Coke, a small (16 oz) pop at McDonald's will cost you a dollar or more.  Get 32 cans at a Costco, and you're paying 51 cents per 16 oz.  This is a 100% McDonald's markup.

I'm sure you could do the same thing with any menu item at McDonald's or any other fast food place.  The point is that, even though they cut costs by massive economies of scale and shamefully underpaying workers, no restaurant can compete with home cooking on a per-meal cost basis.  So why do people, especially poor people, eat at McDonald's and places like it instead of home cooking?  I don't mean here to add yet another contribution to our national pastime of shaming and scolding poor people for eating worse than the bourgeoisie.  Hell, I don't even know if the poor really do eat substantially more junk food than the middle class in the US, which certainly has some pretty bad habits itself.  My aim is to understand why anyone, in particular those who can least afford to overpay for food, would eat out instead of eating in.  I think there are a few things operating here:
  • By now "food desert" is a well-known term, and is the typical reason given for why the poor tend not to eat as well as the middle class or the rich.  It describes an area where there are few or no full-service grocery stores in convenient transportation distance.  If you have to spend lots of time and money on transport to go buy groceries, and then you can only buy what you can carry, then the grocery store's prices effectively rise for you.  But at least in Chicago, the food desert issue doesn't entirely explain bad eating habits of the poor.  In fact, some of the poorest areas, like Englewood or Altgeld Gardens (I choose these two examples because I've worked in both places) actually have decent grocery stores that are accessible to a large part of the geographical area.  Conversely, plenty of wealthy suburbs are in fact food deserts--you have to drive a long way to any supermarkets.
  • I think more important than this idea of physical access is money liquidity.  By definition, poor people don't have a ready cash supply.  So buying the 35 lb box of cooking oil that I used in my calculations here, or a 20 lb sack of potatoes, or even 3 lb of ground beef at a time may not be an option.  And certainly not the $55 Costco membership!  If you only have $5 to make a meal for your family tonight, it doesn't matter that the 20 lb sack of potatoes is a better buy per ounce than an 80 cent portion of french fries, because you don't have the $10 for that sack of potatoes.  So you pay a smaller absolute price right now (a few dollars at a time) instead of a bigger chunk up front that is cheaper per unit in the long run.  You're buying squares instead of getting the whole carton of cigarrettes.
  • Similar to the lack of money liquidity is the logistical impossibility of smart shopping for a poor person.  If you only have a few free hours at a time between your jobs and then sleeping, and especially if you don't have someone you can trust your kids with, when are you going to be able to block out 2 hours to dedicate to a shopping trip?  Even if you're unemployed, it's possible you can't find time for grocery shopping between taking care of kids (preschool isn't free in most places), or dropping them off at and picking them up from school, and you don't want to chance walking busy streets without having your hands free to grab an errant child.
All this shows that, though McDonald's is not cheaper than home cooking, in many cases a poor person is probably making the most rational choice by shopping there.  In both the money liquidity example and the logistics example, you know you're not getting the best deal, but you don't have the luxury of preparing ahead to get that deal.  Beyond the price per pound or per calorie (which, I repeat, IS NOT CHEAPER AT MCDONALD'S!), the poor are factoring in the issues of cash liquidity and time scarcity.  And when you do this, McDonald's, or junk food, or buying overpriced chips at the liquor store, may make the most sense.

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