Why Did the Consumer Cross the Road to McD’s?
By George Anderson
McDonald’s customers do not live by burgers and fries alone.
That was the central theme of a speech given by Ralph Alvarez, president of McDonald’s North America, at the annual National Retail Federation convention.
Today’s consumers, said Mr. Alvarez, are not coming to McDonald’s just for its “tried-and-true core products.” They “want more choices in a more contemporary environment.”
Among the choices that they will have at McDonald’s in the near future will be more “freshly prepared foods,” including a new spicy chicken sandwich, an Asian salad and gourmet coffee. Some McDonald’s restaurants today, reports Forbes.com, are giving customers the option of adding Campbell’s Soup to a meal.
While it’s generally accepted that McDonald’s has been successful with its new expanded menu approach, some are questioning whether the chain is taking its eye off the business that made the company, namely burgers.
Brian Gorman, writing on the Motley Fool web site, concludes: “Menu expansion so far has clearly been good to McDonald’s — it has attracted a new set of health-conscious and premium-minded consumers to its restaurants. It’s notable, though, that the company has largely ignored its burger area when it comes to new offerings. That complacency could lead to customer alienation over the long run. After all, plenty of companies, from CKE Restaurants to Red Robin GourmetBurgers, are working hard to reach burger aficionados. If McDonald’s neglects its core products for too long, it may find that its next big project is winning burger fans back.”
According to the Forbes piece, McDonald’s is planning “a new hip-hop ad campaign, aimed at making the 35-year-old Big Mac cool to young urbanites.”
The same article says McDonald’s performance is benefiting at the restaurant level from a number of other initiatives, including: its Arch Card; restaurant remodels; employee education and quality control programs (involving mystery shoppers); bilingual training and e-learning.
Moderator’s Comment: Is McDonald’s straying too far afield from its burger and fries roots? What opportunities, menu or otherwise, do you see for McDonald’s
to grow its bottom line results? –
George Anderson – Moderator
McD’s does have to keep up with the changing tastes of their customers, however, the key to their success is not in their food but their service. Quick food establishments are dependent on their customer’s happiness with cleanliness, service and, lastly, their product. Unfortunately, most CEOs don’t realize that the cleanliness of their bathroom is more important than how many versions of a burger, taco or salad they have on the menu. Clean bathrooms and a basic, standardized menu made McD’s a success, and these items should not be forgotten as they continue their growth. Unfortunately, obfuscating the obvious with new foods, only confuses the focus of the company while the customer grows tired of waiting too long for poor service, or dirty bathrooms. These basics cannot be forgotten (again), lest they send McD’s into another stock drop.
I’m totally on board with Brian Gorman’s comments in the Motley Fool website. McD seems to be trying to create a new core – healthy eaters and women, and ignoring their old core – 18-34 males and children. (Some would say this is all the same group.) Where’s the Hamburglar? Why so few play areas? Where’s the tummy-filling man-food? (Sorry, McD, but the McRib just doesn’t cut it.)
Here on the Left Coast, Jack In The Box makes several kinds of hot burgers and chicken sandwiches. “You want that on a bun, ciabatta bread, pita bread, or toasted sourdough bread?” “You want our famous tacos or curly fries with that?” “How about some fish & chips, egg rolls, or stuffed jalapenos?” It’s a one-stop man-food destination, and everything is made fresh to order.
Still out here, Carl’s Jr. offers their hugely popular (and just plain huge) “Six Dollar Burger” for $4.28. In Texas, Whataburger will put grilled jalapeno peppers on your massive burger. And nation-wide, Wendy’s has a truly spicy, Spicy Chicken Sandwich.
We all know that the heartbeat of fast food restaurants is menu innovation. But, McD seems to be innovating away from the man-food core. Could it be that they’re trying too hard to please the Nutrition Nazis?
Balance seems to me to make sense. Keep the core products that so many people want and have always wanted but keep improving or alternating the non-core products for those who come in with the people gobbling the burgers and fries. Making themselves available to a wide audience and trying to adapt to different requirements while satisfying the customers who will always expect to get their favourite items really ought to be a winning formula. If they can also manage to keep the places clean, that is.
McDonald’s is a company that attracts customers and makes money and I can’t figure out how. Just about everyone has better burgers than McD’s. Service is almost always poor, a lot of the restaurants are dated, and the food is frequently not fresh. I won’t even order the Chicken Selects anymore. I can’t seem to get any that haven’t been under the heat lamp for a while. They do a good job on the breakfast items, but beyond that, it’s downhill. I was amazed to read that McDonald’s is experimenting with DVD rentals. It’s like they want to be retailers who, as a sideline, also sell some food. They’ve been told before (but apparently aren’t listening), it’s about the food, folks. Give us quality and selection. And please stop putting your worst employees on the front service line.
This is the key question that most retailers face who are long-standing in the market. And, it’s hard to answer until we have a better understanding of their strategy.
That said, our guess is that McDonald’s has decided to try to grow their business by expanding incrementally from their core products of hamburgers and fries through up-sizing, new flavors, etc., versus creating a major splash with a radical, new “superburger.”
Ultimately, however, there are at least four objectives tests that can be used to judge their approach, e.g., have they:
>Attracted more of their targeted eating occasions?
>Increased loyalty, i.e., share of requirements for target shoppers?
>Improved their profit mix?
>Grown unit profitability?
Only time will tell.
Restaurant profits are built on margins. Anything McDonald’s does to improve its menu margins helps the franchisees survive the horrible costs of rent, waste, franchise fees, ad fees, labor, utilities, etc. The salads are winners because they don’t just add sales, they add to the margin. My guess is that the burgers are the lowest margin items on the menu and the fountain drinks are the highest. Selling more burgers helps only if more drinks are sold with them. Upgraded coffee has excellent margins. Breakfast items have decent margins. Margin engineering is built on menu creativity.
McDonald’s problem is not its product offering, it’s the sorry state of its stores. Dirty bathrooms, unkempt staff and slow service, to name a few.
About a year ago, I read a quote from a McDonald’s exec who said something to the effect of “it’s hard to have pride when you’re in a slump.”
I about went crazy! How can someone make it through the ranks to upper management with such a fundamental misunderstanding of reality? Pride is the cause of success, not the result of success.
This exec has it backwards and, judging from my visits to their stores, it’s a problem with the whole company. Until there is a culture shift, introducing new product offerings is just a band-aid on a deep wound.
The number one thing driving everything else is the quality of labor. Nothing impacts a fast-food operator’s top and bottom line faster than their ability to hire and retain quality labor. As long as fast-food is geared around a heavy concentration of business during lunch and dinner, they will never be able to attract labor anywhere close to what a Starbucks can hire. McD’s needs to develop their off-peak menu, which means probably a strong focus on beverages, hot and cold, and “quick-fill snack items” to build hours beyond the traditional lunch and dinner times. If they can build traffic count throughout the day, they will have a greater ability to schedule longer shifts, thus opening themselves up to being able to hire a more competent individual. By building beverage sales, they will also be pushing items with a much higher margin than food.
Hard to improve on Bill’s list of metrics for success above. In terms of the strategy itself, however, McDonald’s is attempting to move from owning a product positioning (burgers and fries) to owning a “shopper mission” (convenience meal). The real question is whether consumers will give them that permission. Making that sort of transition in consumers’ minds becomes very fundamental. For example, the name. “McDonald’s” may have some limitations based on consumers’ experiences — but at least it isn’t “Burger King”!
To add to Mr. Negen’s comment above, all McDonald’s executives should be required to use the same toilet paper in their office that is used in their restaurants. Perhaps only then will we see meaningful changes made.
It seems like the same old broken record is repeating itself– McDonald’s wants to make some menu changes. One thing for sure, they are not taking cheeseburgers and Big Macs off the menu. It seems like they keep all the successful offerings and constantly rotate all the new cute sounding items. McDonald’s has tried to reinvent the chicken sandwich without much success. Perhaps they should just copy Chik-fil-A. Next, I hear they are going to reinvent coffee, even though they already have good coffee. To me, every time they stray from their roots, they return to the center. Perhaps every 20 or 30 years they might come up with a new item that works.
Mr. Alvarez gave a great presentation, and McDonald’s is hitting on all cylinders at the moment. Some of the other things he mentioned they are doing included:
– An 800# on their bags for customer feedback, with direct restaurant notification.
– Bi-lingual e-training at the restaurant level for employees – enabling learning during down times.
– Commercials targeted to changing the perception of working at McDonald’s.
– Expanded hours.
– Refreshing, rebuilding, or relocating 50% of its U.S. stores by the end of 2006.
– Keeping the dollar menu so as not to alienate the 1/3 of their customer base that is very price sensitive. (The double cheeseburger is their number one item by far, and is on the dollar menu.)
– Embracing diversity – 33% of store employees are Hispanic while 20% are African American. 58% of store-level management are women. Many of the very top execs at McDonald’s are from minority groups.
– Working on more on the go packaging options.
– Improving their coffee, and its packaging.
– Driving growth through innovation, replication, and consistency. The net result has been 32 consecutive months of positive comparable growth.
Not bad for an old company learning new tricks.