McDonald’s new CEO, Steve Easterbrook, accepted a huge problem as his to solve. The former darling of the fast food industry is losing customers. First quarter revenues fell 11 percent. And unlike IBM, which uses share buybacks to maintain earnings per share (EPS) growth in the face of declining revenue, McDonald’s EPS plunged over 25%. Meanwhile, McDonald’s ingredient costs, wages, and healthcare expenses are rising, thus making a quick turn-around challenging. As worrisome, franchise owners are rightfully upset.
So what happened?
McDonald’s failed to stay relevant to consumers, forcing the behemoth into catch-up mode. But being late to the party extracts a price. Former customers who had ruled the chain out as it fell behind might consider McDonald’s as a meal option again. But winning new customers’ will require more than closing gaps. McDonald’s is curbing antibiotic use in chickens, for example. It’s raising wages. But announcing the change after Tyson, Walmart, COSTCO, and others have set the standard reinforces McDonald’s as a profit-driven, uncaring laggard. This label is rarely good for a brand.
So what’s changed with the American consumer with whom McDonald’s longer-term issues are most serious? We’re pickier and more informed. Just like the desire for well-designed products moved from Fifth Avenue shoppers to Targét shoppers, food consumers today are seeking higher quality, healthier, and more environmentally friendly choices.
Culver’s Butter Burgers and table delivery won customers in Wisconsin. Chipotle Mexican Grill and Panera Bread have taken market share from McDonald’s in Wisconsin and across the nation. All offer higher quality ingredients and workers who appear to enjoy being of service. Smaller, local and regional burger chains are also growing rapidly and some have national ambitions, like In-N-Out. These chains offer burgers like I remember salivating over at the local burger shop on Main Street next to the miniature golf course in Williamsburg, NY where I lived as a child. (I can still smell those burgers!)
McDonald’s options are limited. Its opportunity to capture the high end (as Toyota did with Lexus) was lost when it foolishly sold its Chipotle shares. Perhaps it could buy a high-end burger chain with its own brand and outlets. There would be a lot of back-office synergies. Otherwise, McDonald’s needs to go back to its strength: a consistently good tasting and fast eating experience (and fun for kids if you want to stay) at an affordable price that meets today’s health demands. It should streamline the menu and make all its choices healthier (versus adding healthy options that only create kitchen complexity). Why is the King of Burgers for example not using whole-wheat (versus white) buns? Delete super-sizing and add Peanut Butter and Jelly on whole wheat bread for kids. And, to attract a new generation, move the tables and add a DJ for 9-12pm teen nights on Friday and Saturday. Teens and their parents will become loyal.
There is a larger story than hamburgers going on here. McDonald’s succeeded by turning fast food into a mass-produced manufactured product. Today, the American consumer seeks more authenticity and less mass-production. Craft is up; large brewery and distillery brands are down. American-made clothing is rising in popularity. Etsy, the global online craft market with 1.5 million active sellers and almost 20 million buyers raised a quarter of a billion dollars by going public. The inside aisles of the grocery store have less traffic, forcing a merger of Kraft Foods and Heinz.
Trends can make your business less relevant if you stick with the same old formula. Starbucks escaped this error by getting rid of its automated coffee drinks, helping it appear more authentic. (But when will it get rid of its stale-looking and tasting manufactured bakery products?) Capturing a trend early — or sensing an unmet need which, once addressed, will set off a trend — will make you look like a cousin of Steve Jobs.
To be fair, McDonald’s might have been lulled into complacency when the 2008 recession made its low cost meals an attractive choice. Post-recession, when taste matters more than cost for many, the brand lost its relevance to enough customers to create declining financials. At some point, fixing McDonald’s will require rightsizing — the corporation, not just the food.
Is your brand remaining relevant? Send an e-mail to firstname.lastname@example.org with WHITE PAPER in the message line. I will send back a white paper I co-authored with Bill Welter of Adaptive Strategies entitled, “How much business model innovation is enough?” The short read will help you keep your brand far more relevant as markets continue to change.
NYT article on franchises