Barely Makin’ It. How McDonald’s can Break Out of its McSlump.

mcdonalds-corporation-mcd-comparable-sales-slump-for-ninth-consecutive-montThe once iconic golden arches of McDonald’s restaurants are crumbling. The company’s sales have been steadily declining for the past 6 quarters, and cost a former CEO his job. What was once seen as a juggernaut in the fast-food industry has faltered in recent years due to a variety of factors.  Steve Easterbrook, current CEO of McDonald’s Restaurants, recently unveiled a plan to halt the international restaurant chain’s recent struggles and turn the company around.

These include refranchising more locations to cut costs at headquarters, restructuring the management of the territories McDonald’s serves to reduce cumbersome decision-making, and finally, improving food quality to better compete with fast casual chains like Chipotle or Shake Shack. Other improvements discussed by Mr. Easterbrook include increasing employee wages, as recent widespread protests against the low minimum wage paid to fast food industry workers seemed to almost exclusively target McDonald’s, who are often conflated with the entire fast-food industry.

Steve Easterbrook attends the annual Confederation of British Industries (CBI) conference in Islington in central London, in this file photo taken on November 26, 2007. REUTERS/Toby Melville

Steve Easterbrook attends the annual Confederation of British Industries (CBI) conference in Islington in central London, in this file photo taken on November 26, 2007. REUTERS/Toby Melville

Like any face of an industry, whether its Coca-Cola, WalMart, or McDonald’s, these corporations are often the first to be subject to intense criticism and ridicule. Unless dealt with appropriately, public outcry can negatively impact sales. Walmart decided to redesign their logo to invoke a more environmentally friendly response and increase their overall environmental stewardship. Because the Coca-Cola company’s presence is more product-based than storefront-based, the criticisms against Coca-Cola have been less scrutinous, so the company has yet to undergo any radical changes, especially considering that the company’s sales haven’t taken a serious hit in recent years.

McDonald’s Restaurants has experienced the most growth in emerging markets like China, Japan, Poland, and the Middle East, while growth in the United States have been relatively stagnant, which is alarming considering that 40% of the company’s revenue comes from its American restaurants. At present, McDonald’s is caught in awkward position. Not authentic or focused enough like Chipotle, no sense of luxury or class like Starbucks, not progressive enough with technology or key mergers & acquisitions like Burger King, and no perceived health benefit like Subway. The key to success for McDonald’s has always been a combination of convenience & price, with food quality taking a back seat. It’s the Wal-Mart principle: no one actually wants to go in there, but sometimes you do because it’s cheap and you know they’ll have what you’re looking for.

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If you examine the regular clientele of a typical McDonald’s location, you’ll see a familiar combination: teenagers who can eat whatever they want and not pay the price (yet), low-income individuals who are drawn by the low prices and convenience, families who get pulled to the store by their children’s desire for toys, and the occasional walk-in of a customer who knows that McDonald’s is awful for them, but they just need a quick bite to eat. We’ll call these groups teenagers, unfortunates, families, and occasionals hereafter.

What McDonald’s has lost is the market that competitors like Starbucks and Chipotle have captured. Coffee is big business anywhere you go, and by offering a product that gives the impression of high status, you attract individuals who are indeed high-status or who aspire to be. With their recent re-branding and introduction of the McCafe additions to stores across North America, McDonald’s tried to capture an atmosphere of vague sophistication, but what they forgot to alter was the actual product itself. Starbucks can get away with charging $5 for a latte because the whole atmosphere of a typical store is designed to elicit a high status response: warm furnishings, jazz music softly playing, free wifi to attract people to sit and enjoy the experience of the store. Effectively, Starbucks has created community hubs with many of their locations, not just a place to grab a coffee.

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Chipotle has chosen a different route, opting to promote the merits of their products instead cultivating a complete upscale atmosphere like Starbucks. The ingredients used in Chipotle’s products may be a little healthier, but the meats and legumes used in their products are still heavily processed and high in sodium. Their recent move to remove ingredients that are genetically modified was another step in that direction, despite the fact that their is no scientific evidence that demonstrates any health concerns related to GMOs. Be that as it may, health conscious consumers will still respond positively to this strategy and continue to choose Chipotle over McDonald’s when given the choice. This is the same strategy Subway used to rapidly expand during the 2000s, albeit with rather aggressive franchising options. Healthy eating sells, even if the health aspect stops at the public’s perception.

McDonald’s largest direct competitor is Burger King, who recently merged with Canadian coffee giant Tim Horton’s in 2014. In addition to making smart investments to benefit the global presence of both companies, Burger King has also succeeded in developing the hi-tech end of its operations with the successful launch of an app used to order food, which in fact has increased the average customer’s spend by 20% according to Bloomberg. Starbucks and Taco Bell have also gotten into the app game, and like Burger King, have the numbers to demonstrate the revenue-generating power of an app.

While Easterbrook’s strategies are outlined in his recent company address, there is still the issue of retaining alienated customers who are choosing options perceived as healthier or indicative of higher status. McDonald’s will have no problem retaining unfortunates due to price point, teenagers due to price point and lack of health concern, families because of Happy Meal toys and playgrounds offered at select stores, and occasionals because of price point and convenience. What McDonald’s needs to focus on is recouping the lost individuals: health conscious trend-seekers and luxury conscious status-seekers. Here’s how they can do it.

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Let’s start with the trend-seekers. The health conscious are drawn to places like Chipotle because of the ingredients and visibility of the food preparation. These consumers are generally more knowledgeable (or at least take pride in thinking they are) so a transparent food preparation system, otherwise known as a sneezeguard, is the key to reconnecting with these customers. Additionally, choice is also extremely important to these customers, as it couples with their knowledge of healthy food choices (or perception of it). While giving customers more control over their order does impact time, items from restaurants like Chipotle or Subway often have a higher average price to compensate. Healthier items often come with a higher price, so consumers do not mind paying a bit more for healthier food as long as they feel they are getting their money’s worth.

McDonald's Golden Arches are seen at the Union Square location in New York January 29, 2015. REUTERS/Brendan McDermid

McDonald’s Golden Arches are seen at the Union Square location in New York January 29, 2015. REUTERS/Brendan McDermid

Another reason Chipotle has gained ground on McDonald’s is because of the perceived lower carbohydrate content of their products. Despite the fact that rice is just as high in carbs as a hamburger bun is, consumers are comparing a hamburger bun at McDonald’s to a tortilla at Chipotle or even wrap at Subway. Low carb diets are always popular despite no clear consensus if they are in fact healthier or aid in weight loss. Same goes for followers of the Paleo diet. At Chipotle, I can order a “naked” burrito, and forego all carbs from my order and simply get meat and vegetables; same goes for a salad at Subway, but at McDonald’s, my choice and control over my order is much more limited due to pre-packaged notion of their salads. Dieters like to feel in control, so the prospect of choice and transparency of their meal preparation provides reassurance.

What McDonald’s needs to do is incorporate transparency and more choice to their menu. While one of Easterbrook’s goals if improvement was to streamline the menu and eliminate poorly selling items, all that needs to be done is eliminate the variety of meats that need to be prepared, as they are the most time-consuming part of the meal prep. You don’t need to cook vegetables in a food warmer to serve them. Offer a greater amount of vegetables on sandwiches and wraps, and offer customers desirable healthy food choices like avocado or kale. Consider gluten-free options, or at least the promotion of items that already are.

*UPDATE May 7th, 2015* Apparently McDonald’s is set to introduce a new line of healthy salads with ingredients like kale, pumpkin seeds, and couscous. While salads are a step in the right direction, McDonald’s is in the burger business, so salads alone will not save them. The consumers McDonald’s needs to reclaim want staple items that are healthy: this means more vegetables offered on their sandwiches.

What most people are eating for breakfast has also drastically changed, and consumers desire more protein with their breakfast. McDonald’s breakfast is still a staple item for many consumers, but it has become outdated and needs a revamp to align with consumer tastes. Consider more items involving the two top-selling protein items for breakfast, yogurt and eggs. Offer more fruit at breakfast as well. McDonald’s still has the power of convenience; all they need to do is tweak their menu and streamline their protein offerings.

Now let’s consider the status-seekers, who can often be conflated with the trend-seekers; the tastes of the two often overlap. In Australia, McDonald’s has recently piloted a number of concept fast-casual locations know as “The Corner”. As this article in Business Insider describes, these locations offer a more upscale approach to the traditional burger & fries game, complete with a trendy layout, fresh ingredients, and the transparent meal preparation I spoke of earlier. The article is a little misleading, as it implies that all McDonald’s locations in Australia are like this, which is not true. However, if McDonald’s can investigate future renovations to some existing locations in areas where status-seekers are prevalent, the fast-casual approach may alleviate the stigma of McDonald’s being a dining location for the impoverished.

An Australian location of  McDonald's fast casual concept restaurant

An Australian location of McDonald’s fast casual concept restaurant “The Corner”.

The Corner does not have overt connections to the traditional McDonald’s brand, and locations would draw in clients willing to pay a bit more for a heightened experience and a higher quality product. Corner locations would also have the advantage of McDonald’s superior real estate holdings, vast supply chain, and purchasing power with suppliers. These locations could out compete other fast-casual locations that offer gourmet diner style food by virtue of price alone.

One other approach McDonald’s can employ is the strategy that Tim Horton’s has built its success on: national pride and nostalgia. Despite its international reach, McDonald’s generates 40% of its revenue in the United States. Americans are notoriously patriotic, yet McDonald’s seems to have lost touch with its roots, recently burgeoned by minimum wage protests by many of its domestic employees. One other strategy McDonald’s could employ is to try and reconnect with its American roots. The success of this approach is evident in the lasting success that Tim Horton’s enjoys across Canada.

Tim’s, as it is affectionately known in Canada, is one of the most prevalent chain restaurants in the country, but because Tim’s has tapped into Canadian national pride, it remains a cherished part of Canadian culture. Because Tim Horton’s has united its Canadian customer base on one thing they all have in common, their nationality, they have tapped into an almost universal appeal.  Customers who are of the status-seeker variety may choose Starbucks for a coffee, trend-seekers may avoid the baked goods-heavy menu, but overall, the perception of Tim Horton’s is quite positive. Perhaps to reclaim some of its lost success, McDonald’s needs to tap into the patriotism of its American customers. After all, the appeal of Americana is what made McDonald’s such a revered international powerhouse.

It will be an uphill battle for McDonald’s. Thanks to the internet, consumers are far more informed than ever before, and as a result, healthy eating is on the minds of more consumers today than ever. A challenge that comes for chains like McDonald’s is the digital spread of misinformation and rumours that can produce damaging effects on the bottom line of a company. These digital wildfires will continue to be a problem for companies into the future, so in addition to changing consumer tastes, McDonald’s will need to ensure a controversy-free future if they hope to bounce back from their recent sales slump.

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