Word of the Day
Promissory (adj., PROM-ih-sore-ee)
Communicating that something is promised, like an advent calendar or a Rube Goldberg machine.
Gif of the Day
AnimalsCheetahOh, that's adorableLicking lipsAre you crying?My, what large eyes you have?
Link of the Day
The Awl - A Conspiracy of Hogs: The McRib as Arbitrage
At the end of this month, The Awl closes its doors. The venerable website has been a launching pad for many, many talented writers, offering a place for intelligent and sometimes pointed writing. The Awl made its mark with quality; even if you didn't have interest in what it was writing about, you always knew you were getting something good.
Perhaps the best-known Awl article is A Conspiracy of Hogs: The McRib as Arbitrage, where Willy Staley examined the economics of the McRib sandwich, looking at how it works for McDonald's:
The one thing we can say, knowing what we know about the scale of the business, is that McDonald’s would be wise to only introduce the sandwich (MSRP: $2.99) when the pork climate is favorable. With McDonald’s buying millions of pounds of the stuff, a 20 cent dip in the per pound price could make all the difference in the world. McDonald’s has to keep the price of the McRib somewhat constant because it is a product, not a sandwich, and McDonald’s is a supply chain, not a chain of restaurants. Unlike a normal restaurant (or even a small chain), which has flexibility with pricing and can respond to upticks in the price of commodities by passing these costs down to the consumer, McDonald’s has to offer the same exact product for roughly the same price all over the nation: their products must be both standardized and cheap.
Back in 2002, McDonald’s was buying 1 billion pounds of beef a year. (As of last year, they were buying 800 million pounds for the U.S. alone.) A billion pounds of beef a year is 83.3 million pounds a month. If the price of beef is abnormally high or low by 10 cents a pound, that represents an $8.3 million swing (which McDonald’s likely hedges with futures contracts on something like beef, which they need year-round, so they can lock in a price, but this secondary market is subject to fluctuations too).
At this volume, and with the impermanence of the sandwich, it only makes sense for McDonald’s to treat the sandwich as a sort of arbitrage strategy: at both ends of the product pipeline, you have a good being traded at such large volume that we might as well forget that one end of the pipeline is hogs and corn and the other end is a sandwich. McDonald’s likely doesn’t think in these terms, and neither should you.
It's a solid, smart critique (so say actual economists). Go read the whole thing.
The AwlMcRibEconomicsArbitrageSupply and demandRichard Gere runs McDonald's?