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New, affordable menu offerings push McDonald's income up 5%

McDonald's ever-evolving mix of affordable menu items and new offerings like the Chicken McBites is helping the chain solidify its dominance in the fast-food industry.

The world's biggest hamburger chain said Friday that its net income rose 5 percent in the first quarter, in line with Wall Street expectations.

McDonald's Corp. said global sales rose 7.3 percent at stores open at least 13 months, driven by gains from all regions. The figure is key metric because it excludes the impact of newly opened stores. In April, the fast food chain expects the figure to increase another 4 percent.

A big part of the McDonald's success story in recent years has been the company's emphasis on affordability, combined with the rollout of popular items such coffee frappes and fruit smoothies that have high profit margins and attract diners throughout the day. Customers squeezed by the economic downturn also love them because it's a way to have a treat for a couple of bucks.

In the coming weeks, Chief Operating Officer Don Thompson said McDonald's plans to add to its lineup of specialty drinks with a new "Cherry Berry Chiller" iced drink.

Although McDonald's has consistently outperformed its rivals, the chain is facing the same pressures from rising commodity costs that are hitting the entire industry. Costs for labor and rent are also increasing in some overseas markets.

McDonald's expects costs for ingredients to increase 4.5 percent to 5.5 percent this year, which would be roughly in line with last year's increases. But rather than passing on those costs outright to customers, McDonald's is adjusting its pricing in a more nuanced way.

Last month, for example, McDonald's removed items like small soft drinks from its popular Dollar Menu in the U.S. To continue its emphasis on affordability, it introduced an Extra Value Menu with items that have higher profit margins, such as the chicken snack wraps.

Overall, McDonald's also nudged up prices by 1 percent in February. That's on top of the 3 percent price hike last year. Chief Financial Officer Peter Bensen said in a conference call with investors that the company would have to proceed cautiously with any additional price hikes.

McDonald's share of the market among hamburger chains was 49.6 percent last year, up from about 41.6 percent a decade ago, according to food industry researcher Technomic Inc.

For the first three months of the year, McDonald's reported a profit of $1.27 billion, or $1.23 per share. That compares with a profit of $1.21 billion, or $1.15 per share, in the year-ago period.

The total guest count, which is based on total transactions, rose 4.8 percent in the quarter, even as the broader industry has seen limited growth.

In the U.S., sales rose 8.9 percent at restaurants open at least 13 months, as new items like Chicken McBites, updated restaurants and warm weather drew customers. The results also benefitted from an extra day in the Leap Year.

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