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.    

How Growth Ambitions Lead to Complexity... and Perhaps Lower Revenues and Profits

The Wall Street Journal reported last week on McDonald's slumping sales.  The article was titled, "McDonald’s Menu Problem: It’s Supersized."  According to the Wall Street Journal, "McDonald’s doesn’t disclose historical data on its menu’s size, but Datassential, which tracks menu trends, says there were 85 items seven years ago, and McDonald’s says there are 121 today."   What are the negative consequences of this menu creep?  The article notes, "QSR Magazine, a trade publication that studies the drive-through performance of fast-food restaurants, reported last year that McDonald’s had clocked its slowest average speed of service in the study’s 15-year history: 189.49 seconds, more than twice the chain’s goal."   

The McDonald's story is not unique.  A firm has growth ambitions, and perhaps it is even worried about slowing growth.  What does it do?  Expand its product offerings.   However, the increase in product variety and selection adds considerable complexity to the business.  As a result, operational efficiency declines, and the company's fortunes actually worsen.  In some cases, it leads to excessive manufacturing and supply chain costs;  in other situations, it decreases customer service.   Consider what happened to Lego more than a decade ago.  A desire to increase growth led to an explosion in the number of different pieces that it produced and sold.  The added complexity became a huge burden for the company's operations.  It had significant negative consequences.  Many firms face this challenge.  Before they decide that new product offerings will be the answer to growth challenges, they have to think about the impact that additional complexity will have.  Are they prepared for that?  Can they cope with the strain that new products may create on operational processes? 

Service Challenges at McDonald's: Did Success Breed Problems?

The Wall Street Journal reports that McDonald's has launched an initiative to improve customer service.  Apparently, the company has recognized some significant problems in recent quarters.  Here is an excerpt from the article:

In a webcast McDonald's executives held with franchise owners last month, the company said 1 in 5 customer complaints are related to friendliness issues "and it's increasing," according to a slide from the presentation reviewed by The Wall Street Journal. The webcast identified the top complaint as "rude or unprofessional employees."  One slide said that complaints about speed of service "have increased significantly over the past six months." Another mentioned that customers find service "chaotic."  "Service is broken," said a slide from part of the webcast delivered by Steve Levigne, vice president of business research for McDonald's USA.

What could be causing the problems at McDonald's?  I have several theories.  First, the company has experienced many consecutive years of same-store sales growth.  The firm prospered during the struggling economy, as folks looked for value.   Moreover, McDonald's foray into coffee drinks turned into a blockbuster success.   One wonders if the growth simply began to tax many of its smaller restaurants.  Did crowds overwhelm the firm's processes and systems?  Second, McDonald's did expand its menu to offer more drinks as well as healthier food options.  Did the new options add so much complexity that they slowed down service considerably, or made it difficult for employees to provide food in an efficient manner?  In short, I wonder if success brought these problems upon McDonald's.  Perhaps there is a lesson there for every rapidly growing quick-service or fast-food restaurant chain.   Growth may be wonderful, but service deteriorates, you may have a major problem on your hands. 

Banning Ronald McDonald?

Ronald McDonald made big news this week after a corporate watchdog group encouraged approximately 600 health-care professionals to sign a letter asking McDonald's to stop using Ronald to appeal to children.   When I heard the news, I became a bit  perplexed.   I'm open to hearing a vigorous debate about the issue of the ethics of marketing certain products to children.  That's not my source of surprise.  My real question is this: Is Ronald really relevant to children these days?   Do my kids connect with him at all?  I don't think so.  He doesn't have a bad image.  He just doesn't appear very prominently when it comes to characters with which they resonate.  Put simply, I'm not sure Ronald is the reason my children, or most children in fact, want to go to McDonald's - I'm pretty sure it's the really tasty french fries!   At the end of the day, if we want to get our children to eat healthier, I'm not sure banning Ronald will have a measurable effect.

What's the lesson of this story for other companies?   Many firms have to think about the ethics of marketing to children.  They need to be ready for an increasing amount of challenges to their policies, especially around the issues of health and wellness.  For start-ups and younger firms, executives might even ask:  Do we have a clear policy yet as to what marketing strategies are allowed or not allowed in our firm?   Should we work together with our employees to outline such a policy before we have a public relations mess on our hands?

McDonald's and Beverages

McDonald's reported a remarkable 6% rise in same-store sales growth in the United States in April.  What drove the rise in revenue?  Drinks... smoothies and McCafe beverages not only appear to be selling briskly, but they are attracting customers, who also purchase food at McDonald's during those visits.

While the news appears very good for McDonald's, they will have to keep an eye on service within their restaurants.  As the drink business booms, McDonald's will have to focus on keeping wait times as low as possible.  With the introduction of smoothies and McCafe beverages, the menu becomes more complex.  McDonald's must avoid the downside of that complexity, which could be longer wait times, if the firm doesn't manage its operational processes effectively. 

That point brings us to a fascinating new article in Business Week about the operational processes at fast-food restaurants.  According to the article, "The big brands spend hundreds of millions and devote as much time to finding ways to shave seconds in the kitchen and drive-thru as they do coming up with new menu items. 'The majority of the business now happens around the back of the building,' says Blair Chancey, editor of QSR magazine. 'So much money and R&D go into perfecting the production system because there is so much money to be had.'"

That type of focus on operational efficiency has always been a hallmark of McDonald's.  It will only become more important as the drinks business continues to grow.   For a cautionary tale, McDonald's need look no further than their competitor in the coffee business, Starbucks, which suffered when complexity and process inefficiency began to harm customer service quality a few years back.