April 22, 2015 Zack Sionakides , , no responses

The cure for McDonald’s Ills

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:

  1. Focus on core competency products that actually make the restaurants money, and be the best and most efficient low cost, fast food provider in the industry – beat out the Burger King, Wendy’s, and Hardee’s of the world. Trim down the menu to the bread and butter items that customers actually buy and stop trying to be Panera Bread lite; since few of Panera’s customers are going to eat at McDonald’s regardless of what is on the menu. Additionally look at ways to get more utilization out of the workforce and automate more functions (e.g. ordering kiosks to reduce cashiers needed).  This will help reduce restaurant operating costs and speed up service.
  2. Expand the McCafe concept, particularly as smaller stand-alone stores, and win the coffee market. McDonald’s has done this at locations outside the US, and it’s a very attractive business that is competitive with other coffee shops. In the US, McDonald’s has let Starbucks, Dunkin Donuts, and other chains dictate this space with little response except increasing their existing restaurant menu options.  McDonald’s coffee doesn’t have the mediocre, unhealthy brand perception of its other offerings, so there’s no reason not to take advantage of McDonald’s inherent logistics, real estate, and cost strengths in winning this market space.
  3. Right size the company and restaurants to the marketplace and recognize that McDonald’s has saturated much of the market for low cost food. That may mean closing under-performing restaurants, reducing R&D and marketing projects that aren’t really going to transform McDonald’s, and streamlining corporate operations. Use the increased earnings to invest in complementary horizontal acquisitions (e.g. 5 Guys or In-n-Out Burger) that could provide synergies with the existing core business in a portfolio manner, or simply buy back shares and increase the stagnant stock price.

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.

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