BIG MAC

No series of blogs on retailing would be complete without some focus on McDonalds: that doyen of the food retail sector. I recently read an article on this venerable operator in the Financial Times*. The author made an assessment of its re-designed strategy that it has rolled out across the US food retail sector. It raised a number of observations that I thought could be useful in helping us to see the challenges and opportunities involved in repositioning a retail brand.

If we carried out a snap street survey asking people the most-recognisable brands in the world: I would bet a pound to a penny that McDonalds would feature in the top five iconic global brands.

Since it opened its first outlet back in 1955 arguably McDonalds has attracted massive publicity world-wide. Much of the media coverage has tended to polarise opinions. Some people argue that the concept of convenience food at relatively low prices revolutionised the way we eat. The global growth and expansion of McDonalds is arguably a testament to this viewpoint. It is estimated that McDonalds feeds over seventy million people per day.

On the other hand many people feel that McDonalds has spawned the growing levels of obesity – leading to unhealthy eating, overweight individuals and ultimately the precursor to health problems.

In response to these criticisms McDonalds in the early noughties revamped its food menu – focusing on healthier elements of food such as salads and chicken. While this partially addressed its overall image, its reputation undoubtedly took a hit. More importantly from a revenue perspective it began to lose out to its competitors. This was graphically demonstrated by the loss of over half a billion customer orders between 2012 and 2015. This rammed home to senior management that an overhaul was required to reverse the decline in its home market: the USA.

Let’s look briefly at the structure of the retail food sector in this market.

The US restaurant industry has remained stagnant over the past three or four years (in terms of visits to restaurants). This has been caused mainly by grocery price deflation, which has made a stronger argument for people to cook and eat at home.

McDonalds had fallen into the problem of a lack of focus and relevance for many US consumers.

As of 2014 in the USA the structure of the food sector was changing. Established food retailers such as McDonalds and Burger King were being threatened by new competitors such as Chipotle Mexican Grill, Chilli’s and Applebee’s. Such entrants were typical of a new sub-sector of the food retail sector – referred to as “fast casual”. Their main value proposition emerged from the financial crisis of the early part of this decade. They positioned themselves at a few dollars per meal higher than McDonalds and Burger King. In so doing they appeared to “catch a wave” which resonated with consumers who had a little more in their pockets and were attracted to this slightly more premium offering. A focus on healthier options on the menu also appealed to a more health-conscious individual.

Zero growth across McDonald’s outlets across the US, Europe and Asia also set alarm bells ringing among senior management.

In 2015 it recruited Steve Easterbrook, an English accountant to oversee a revamped strategy to arrest the decline in sales and reputation and re-establish McDonalds in the US market.

Faced with such apparent major threats and a shift in eating habits, one might assume that McDonalds would opt for a radical approach to change. Did this happen?

Not really. Easterbrook adopted the mantra that his mission was to re-invent McDonalds as “a modern, progressive burger company”. In assessing one of its main Chicago stores (which was seen as a pioneer for the revamped approach”, the author of the Financial Times article made the following observation.

A glass case displays freshly baked apple pies and croissants. Smiling employees, dressed all in black, carry trays of burgers and fries to minimalist tables.”

This represents a change in approach to store and menu design. However it does not represent a radical change. Its overall value proposition still revolves around low prices and convenience.

Easterbrook availed of the services of the BCG Group (Management Consultancy Firm) to assess the eating habits of the US consumer. Interestingly the study indicated that the missing McDonalds customers had shifted to other burger chains such as Burger King and Wendy. This was critical because it suggested that consumers were not deserting the fast food segment in favour of the fast casual sector: rather they had deserted McDonalds.

While this might suggest a long-term problem, Easterbrook took the view that these customers could be enticed back to McDonalds, provided it came up with a relevant value proposition.

The strategy focused on the need to adopt a less aspirational focus and address the “day-to-day basics” of fast food.

It came up with the following adjustments.

  • Cutting prices for coffee and sodas
  • Serving breakfast all day
  • Offering mobile ordering and delivery
  • Improving the quality, if not necessarily the nutritional value of its food options on the menu.

The FT article describes this as an approach which is based on “fixing the familiar”. This advocates the need to avoid tampering too dramatically with the menu. It is a case of “sticking to the tried and trusted” with minor amendments where appropriate (in terms of menu design, outlet design and service delivery).

Lower prices was essential as well. In response to rising commodity costs and wages, many franchisees raised prices and the concept of the dollar value menu quietly disappeared in 2013. The combined impact of this move damaged McDonald’s value reputation. By contrast Wendy’s and Burger King consistently focused on deals for its customers.

Easterbrook adopted an interesting approach to pricing. He focused on discounts as a core component of the menu, typically offering $1 and $2 for coffee and soda. It also offers more variety at the high-end of the menu spectrum.

Making a genuflection to its health-conscious segment, he has promised to take out antibiotics from its chicken meat and corn syrup from its bread buns. It is also beginning to introduce fresh beef to its quarter pounders and replacing butter with margarine.

In summary this new approach has attempted to capture a balance between low price and higher quality. In 2018 the new approach to pricing will feature items on the menu at $1, $2 and $3 dollar price-points.

At the higher end the focus is not necessarily on healthier options. In other words it does not result in lower calories. It is more about using wholefoods across the menu. I suspect this will still antagonise critics of McDonalds. However arguably its does not lose its authenticity as a brand. In the USA at any rate, people still like fast food.

The results of this change in strategy have been impressive. In the USA many restaurants ensure that supply always exceeds demand. However in 2017 McDonalds has experienced a rise in customer visits in the second and third quarters of 2017 with comparable sales increasing between 4to 7 per cent in each quarter.

The article focuses on the US market. What is happening in your country? How is McDonalds performing relative to its competitors? As an exercise I challenge you to check out the situation in your part of the world.

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