McDonald's, which stand among the American capitalism’s greatest success stories is now losing market share, losing sales, and suffering one heck of a identity crisis.
McDonald’s CEO Don Thompson finally ran out of time to fix the restaurant chain’s deepening problems.Thompson would step down as CEO and board member on March 1, 2015 and be replaced by Steve Easterbrook, its chief brand officer who is responsible for fixing the fast-food operator’s marketing and menu. In addition to Thompson’s departure, the company also announced that Chief Financial Officer Pete Bensen will take on the newly-created role of Chief Administrative Officer, overseeing functions that support operations.The move comes a week after McDonald’s, the world’s biggest restaurant company, reported fourth-quarter and full-year results that made 2014 the first with a decline in same-store sales in a dozen years. So what has gone wrong?
1. Perception: McDonald’s is the quintessential quick-serve restaurant. It has risen to the top of the fast-food chain by being “fast” and “convenient.” Neither of these selling points, however, is as high as it was even a decade ago on Americans’ list of dining priorities. A growing segment of restaurant goers are choosing “fresh and healthy” over “fast and convenient,” and McDonald’s is having trouble convincing consumers that it’s both. McDonald’s has forgotten over the past decade that the consumer makes emotional decisions. When consumers choose you based on convenience and price, you’re just a commodity. McDonald’s should not confuse frequency with loyalty. For McDonald's it is a battle over perception, and they’re losing the game pretty fast.
2. Menu Management: One of McDonald's operational failures is to do with the menu creep. In 1990 McDonald’s menu, the restaurant offered 33 items and that was up 25% from 1980. Today the menu has 121 items, a 75% increase from 2004. Overall, McDonald’s brings in about $20,000 in sales per offering, per restaurant, on average. Compare that with high-end burger joint Shake Shack. Each of its 44 menu items average about $66,000 in sales per store—more than three times the average for McDonald’s. Menu management is like organizing a closet. When one new item comes in, another must go out or chaos ensues. McDonald's is trying to be all things to all people who walk in their doors. In truth, McDonald's thirty percent of sales come from just five items—Big Macs, hamburgers, cheeseburgers, McNuggets, and fries. The drawback is that both a new menu and a big menu slow down operations.
3. Pricing: McDonald’s business model is to incrementally grow average check and guest counts. Each year the company raises its menu prices to cover increasing food costs, but it generally keeps those price hikes below the rate of inflation for “food away from home” to stay competitive.When the company nudged up prices above food-away-from-home inflation in the first quarter of 2014 (a rare move for McDonald’s), the average check grew, but the number of customers dropped.To get around this constraint, McDonald’s employs a barbell strategy for pricing—Dollar Menu items on one end of the spectrum and premium items (the McWrap, Mighty Wings) on the other. The hope is that customers will be drawn into the restaurant by the Dollar Menu and then tempted to buy a product with better margins. That kind of trading up was easier for customers in 2002, when the Dollar Menu launched and a Big Mac cost $2.49. But over time the weights on the barbell have moved further and further apart refer to the chart below
Today the average Big Mac in America costs $4.80, which many believe is too much of a jump. As the premium products creep closer to the pricing of restaurants like Panera Bread and Chipotle—a relatively new class of eatery labeled “fast casual”—and even approach designer burger joints like Shake Shack and Five Guys, McDonald’s risks losing customers.
The other option is to adjust the weight on the low side. About 15% of the company’s sales came from its traditional Dollar Menu—where for years everything cost a buck. To improve margins there, the chain in 2012 carved out a new roster (called Extra Value Menu), where some food cost more than a buck. No surprise, it flew as well as the Mighty Wings. However, after eliminating the Extra Value Menu last year, it launched the Dollar Menu & More, which is another hodgepodge of offerings by McDonald’s. Pricing, still remains one of the biggest conundrums for McDonald's.
4. Health Scares and Geopolitics: McDonald's business in Asia—where it makes nearly a quarter of its global revenues—has been hit by several health scares. Sales in China fell sharply after one of its suppliers was discovered last July to be using expired and contaminated chicken and beef. More recently, several Japanese customers have reported finding bits of plastic and even a tooth in their food. Geopolitics has not helped, either. Last year, some Russian outlets were temporarily closed by food inspectors, seemingly in retaliation for American and European sanctions against Russia over its military intervention in Ukraine. Some politicians in Russia have even called for the chain to be thrown out the country completely. Though, McDonald's has not much control on geopolitics but it can certainly put a hold on the health scares through stringent quality assurance.
So what does McDonald's stand for and it's quest for Future?
A survey in Consumer Reports showed that McDonald’s customers ranked its burgers significantly below those of 20 competitors. McDonald's food is still genuinely good food. McDonald's needs to tell it story well...feeding 70 million people a day is no mean feat. McDonald’s classic offerings may have less fat and calories than some of its leading competitors’, but consumers still aren't buying that the restaurant is “healthier.” Consider Chipotle, a chain in which McDonald’s was an early investor (it sold its stake in 2006). Chipotle’s burritos actually have more calories than a Big Mac, but the company’s fare is seen as being natural, unprocessed, and sustainable—qualities that matter more to today’s consumers than “low fat” and “low calorie,” according to a recent survey by Technomic. That’s particularly true for two key demographics McDonald’s absolutely needs to woo: families with kids under 12—Technomic found that this group’s share in the McDonald’s visitor pool declined to 14.6% in 2014, from 18.6% in 2012 and the millennials. Read the story here McDonald's real problem: It is loosing millennials
At McDonald's restaurants you can engage younger customers through mobile and other technology, but if you don’t give them something that more closely aligns with what they want to order, it doesn't matter if they’re buying it on their iPhone or iPad or using Apple Pay. Chipotle uses a more pragmatic approach, a the lowest-tech method for ordering: pointing with your finger.
The competitive landscape for McDonald's is fast changing. Meyer’s sparkling Shake Shack chain, founded in 2004 and set to go public perhaps as early as this year, has entered the burger wars. So have niche players like Five Guys, Smashburger, Umami Burger, Elevation, and an ever-fattening roster of competitors in a new category called “better burger.”
The twin ascendance of the "better burger" and "fast casual chains" [like Chipotle and Panera, Potbelly Sandwich Shop and Noodles & Co.) already accounts for more than $30 billion in annual sales, and it is likely to hit $100 billion in less than a decade.
McDonald's is not oblivious of these challenges. In fact, it is taking lot of actions that include
- simplifying the menu
- giving more autonomy to regional heads to make their own product choices
- has brought in Boston Consulting Group to examine its pricing strategy
- commissioned two consulting groups to look for $100 million in savings that McDonald’s can then put toward digital initiatives and a program the company is grandly calling “Experience of the Future.” Through this initiative, restaurant goers can build their own burgers, choosing from 22 toppings that they select on an in-store iPad or kiosk. Will it be a success, only time will tell.
I know that McDonald's is trying to reinvent itself but it has to do it very fast. Let's hope that McDonald's get its magic back and will sizzle up in the near future.
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