McDonald’s has been in the financial news quite a bit lately, and not for good reasons (WSJ Article). The company has been struggling quite precipitously the past year and a half, with revenue and earnings drops that look to be a sign of bad things to come. Key metrics including sales and revenue are down markedly year to year, and more concerning are operating income and net revenue are both down over 10% from the prior year. This is despite a sizable increase in the number of restaurants system-wide, so the per-restaurant decreases are even more pronounced.
The major issues for McDonald’s have been the growth of higher quality fast food burger chains, rapid growth of the fast casual restaurant segment, and a shift in consumer preferences to healthier food. McDonald’s has recognized these issues in the past and made attempts to counter the trends through initiatives such as healthier food offerings (e.g. wraps and salads), refreshing the restaurants to look more attractive (a’ la Starbucks), and marketing initiatives to change McDonald’s brand perception.
Unfortunately, none of these initiatives really get to the core problem, which is that McDonald’s brand has been built up over decades, and is not going to change easily. McDonald’s is known as a place that serves cheap, mediocre food that is not healthy for you, and the reality is, that is McDonald’s core business and where they make most their money. Introducing sirloin burgers and anti-biotic free chicken, while seeming like they could broaden McDonald’s consumer base, will not change consumer perceptions about McDonalds, and more likely will simply increase operating costs on the restaurants and franchisees.
McDonald’s wants to be something they are not (i.e. Panera Bread) to meet changing consumer tastes, while still focusing on their bread and butter customers. The typical McDonald’s customer does not prioritize the health properties of the food, so there’s little benefit in increasing food costs for their benefit. Likewise, most consumers who are turned off by McDonald’s, wouldn’t eat there even if organic food was put on the menu. This is the same issue JCPenney had trying to reinvent themselves as a hip, upscale department store when in reality few of those target customers would ever set foot in a JCPenney regardless of the offerings. McDonald’s is trying to get new customers (or get customers back) who simply aren’t going to eat there regardless of what is being offered or how it’s being offered.
That being said, McDonald’s has a number of positives going for it, such as a large infrastructure, good real estate, and a large, dedicated consumer base. My strategy recommendation to get McDonald’s on the right financial track would be as follows:
McDonald’s can continue this attempt to re-brand itself in the fast casual realm which has had very limited results thus far, or keep trying to serve the new home run menu item that will go viral, which is also very unlikely.
The challenge is that it is extremely hard to change existing brand perceptions that have been ingrained over long periods of time. You can’t change external environmental factors and those factors can easily overrun the best laid strategic plans and marketing. If McDonalds can have an honest assessment of what they can and can’t do in the fast food market, they can steer their strategy in a manner that can turnaround decreasing sales and profitability for the company, and set themselves up in a sustainable manner financially for the future.