Tuesday, May 02, 2017

Strategy at McDonald's: Cheaper or More Premium?

Venessa Wong has written an interesting article about McDonald's for Buzzfeed.  Here is an excerpt: 

McDonald's spends a lot of time and money rolling out "premium" products like design-your-own burgers and ambitious, leafy wraps. But time and time again, the chain is rewarded most when it goes cheap.  It's a tough reality for a restaurant giant whose CEO loves to share his vision for "a modern, progressive burger company," and invests in store remodeling, digital technology, and ingredient overhauls like upcoming switch from frozen to fresh beef by 2018.

Yet amidst this much hyped transformation, guest numbers have been declining for years. "When value is customer-focused and locally-relevant, it drives guest counts, period," McDonald's CEO Steve Easterbrook recently said on an investor call. Even as the chain tools around with guacamole and artisan grilled chicken sandwiches, it needs to focus on value, he said, "whether customers have a couple of bucks in their pockets or a few more than that."

It raises questions about how far McDonald's can really innovate. The McDonald's "concept succeeds best when leaning into core competencies," analysts at Cowen and Co. wrote in a report in April, such as selling Egg McMuffins all day long, or offering bigger and smaller versions of the Big Mac. Going upscale was not on that list, and few people think of McDonald's when they're craving guacamole. They think of it when they want ten chicken nuggets for $2.

Consider some recent flops. McDonald's launched Premium McWraps in 2013, and they failed. Mighty Wings — which cost almost $1 per wing — failed in 2013. The chain made a splashy foray into build-your-own burger territory with the Create Your Taste menu in 2014 — and that will be pared down to a smaller menu with fewer choices this May.

McDonald's faces a thorny strategy challenge.  It is a low cost player faced with erosion of customers and revenue, as more premium fast casual players have entered the market (think Five Guys, Smashburger, Panera, etc.).   People have criticized the firm's food as unhealthy and unnatural.  Should it try to enhance quality and offer more premium products in response to this trend?  Some would say yes; they should follow customer and societal trends.  Yet, those trends cut against much of what they do well.  They have been a successful low cost player for decades, emphasizing speed of service and low prices.  Of course, if they just "stick to their knitting," they must end up a dinosaur.  What can a firm in such a predicament do?   

What they certainly don't want to do is straddle... i.e get caught stuck between a low cost position and a more premium, high quality position in the market.  They will have to make tough choices.  If they don't, they'll lose to fast food places offering more value at the bottom end, and fast casual chains offer more quality at the higher end.  One interesting question:  Could a corporate strategy move be the solution?  In other words, what about launching a new business unit that leveraged the company's core strengths, but enabled it to find new growth?  That's a tough move too perhaps.  They did own a large stake in Chipotle after all, and they divested that stake because it was difficult to manage the tensions between the two very different operating models.  Still, a separate chain might enable them to experiment without confusing customers who have a fixed view of the McDonald's brand.  It will be interesting to watch the firm's next moves.