Arcos Dorados Faces Cost Pressures In Booming Latin America

Arcos Dorados Holdings Inc. (ARCO), which operates McDonald's restaurants in Latin America, said Tuesday that inflation in the region poses a challenge as it grapples with rising ingredient and wage costs.

Arcos Dorados is raising prices, increasing productivity and trying to slow the pace of wage hikes in response to cost pressures, Chief Operating Officer Sergio Alonso said in a conference call with investors Tuesday.

"We raise menu prices as fast as we can and then delay salary increases by a couple of months," he said.

This strategy has been especially useful in Argentina, where most private sector forecasts put 12-month inflation above 20%.

The annual salary increase agreed with unionized workers will be granted in two installments this year, he said.

In Brazil, the company's largest market, salaries are rising quickly, and the government is expected to lift the minimum wage 13.5% to 14% in January 2012, Alonso said.

Strong economic growth in Brazil and Argentina has been accompanied by high inflation.

Brazilians are paying the equivalent of $6.16 for a McDonald's emblematic Big Mac sandwich, over 50% more than a fast-food junkie pays for his fix in the U.S., according to The Economist's July Big Mac Index. Argentines pay almost 20% more in dollar terms for the burger than consumers in the U.S., while Mexicans are the regional winner of cheap eats, paying the equivalent of just $2.74, according to the Economist.

Arcos Dorados has managed to control its costs and keep them below the rate of inflation through agreements with suppliers and retail space owners, Alonso said.

At the same time, the company hasn't had problems raising prices, which it did in May and June.

"Prices are very dynamic and are revised every month," he said.

Arcos Dorados holds the exclusive right to own, operate and grant franchises of McDonald's restaurants in 19 countries in Latin America and the Caribbean.

The company's second-quarter net profit rose 5.6% on the year to $14.24 million, and sales rose 28.7% to $888.5 million.

On Monday, Arcos Dorados raised its full year 2011 guidance, forecasting 22% to 24% sales growth and a 35% to 45% increase in net profit as it picks up the pace of restaurant openings.

Arcos Dorados is reaping the fruits of the region's expanding middle class and rising purchasing power. "There's more money in peoples hands," Alonso said.

Arcos Dorados shares were recently trading 6.7% higher at $25.08 on Tuesday, well above its IPO price of $17 in April.

-By Shane Romig, Dow Jones Newswires; 54-11-4103-6738; shane.romig@dowjones.com

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