Competition | December 2013 | By Sam Oches

What’s Going On at McDonald’s?

Experts weigh in on the past year’s ups and downs at the Golden Arches—and what they suggest for the future.

McDonald's is the largest fast food company but is struggling to grow in 2013.
McDonald’s is the biggest quick-service company by far, having collected nearly $36 billion in 2012. But it witnessed a string of disappointing sales quarters in 2013. Istockphoto.com / Kenneth C. Zirkel
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The last decade in quick service was a transformative one. Fast-casual restaurants moved from novel ideas in urban markets to competitive powerhouses with seemingly no ceiling. Health and nutrition became critical filters through which brands vetted their new menu items. And the Great Recession reset growth strategies, with limited-service players shifting their focus to more efficient, streamlined, and calculated expansion.

If there was one sure bet in the last decade, it was McDonald’s. Year after year, the burger behemoth defied economic odds and kept ahead of consumer demand, surviving the recession with innovative product offerings and forward-thinking business acumen. U.S. sales grew from roughly $22 billion in 2004 to almost $36 billion in 2012 as the corporate team adjusted the company’s focus from rapid expansion to a maximized McDonald’s experience.

But something happened in 2012. Or rather, two very distinct things happened in 2012: CEO Jim Skinner, the architect of McDonald’s early-2000s turnaround, retired in June of that year, replaced by the company’s chief operating officer and long-time brand veteran, Don Thompson. Then, in October 2012, the brand witnessed its first global monthly sales drop since 2003, a 1.8 percent month-over-month tumble that very likely cost McDonald’s USA president Jan Fields her job.

Fast forward to 2013. Fresh off the sting of the October 2012 sales fall and with uncertainty surrounding the “Thompson era,” McDonald’s pinballed through an up-and-down year that included a spate of new menu offerings, moves toward evolving the company’s value and service platforms, and evidence that the competitive landscape may finally be catching up to the biggest quick-service brand in the world.

“I’d say it’s sort of trying to get back on track,” says Andrew Barish, senior restaurant analyst at Jefferies & Company, a global securities and investment banking firm. “Not that the train jumped the tracks or anything. It’s just kind of starting to get a little wobbly. All of the initiatives of that past decade have kind of run their course, if you will, whether it’s beverages or better-for-you [items] or all of the product quality upgrades or McCafé, coffee, and the store remodels.

“Part of the company’s challenge right now,” Barish adds, “is just a reflection of the success really going back to when the turnaround started for Brand McDonald’s in 2002 and 2003.”

That turnaround was the highly praised Plan to Win, a Skinner-led strategy that included five core tenets, or “the Five P’s”: People, Products, Place, Price, and Promotion. Starting in 2003, McDonald’s set about divesting itself of the ancillary brands accumulated during the late-’90s boom (brands that included Chipotle, Donatos Pizza, and Boston Market), slowing down unit expansion, and doubling down on menu innovation and store upgrades.

Despite the recession that crippled much of the foodservice industry, McDonald’s chugged along under the Plan to Win banner, churning out success after menu success, including snack wraps, smoothies, and the mega-popular McCafé beverage line.

By 2012, however, things slowed; more consumers were paying attention to premium menu options and the nutritious makeup of fast food, and some critics and McDonald’s franchisees were complaining about the sheer size of the McDonald’s menu. Further, aside from Chicken McBites, the Extra Value Menu, and a Happy Meal refresh that cut the kids-meal fries portion size and added apples as the default side, McDonald’s menu innovation in the year and a half leading up to 2013 failed to drum up much widespread attention.

“There is no doubt in anyone’s mind that in and around the period of time that Jim Skinner retired and handed off to Don Thompson, that for a variety of reasons, there was a new-product and concept-development hole, a blockage,” says John Gordon, principal with Pacific Management Consulting Group. Gordon believes the blockage could be attributed to a number of factors, including company politics and franchisee-franchisor relations, famously a roller coaster for McDonald’s, which is approximately 85 percent franchised in the U.S.

If blockage was the case in 2012, then 2013 was nothing short of a surge in menu development news coming out of corporate headquarters. The cornerstone of McDonald’s strategic shift in 2013 was a new attitude toward its menu platforms, one that Elizabeth Campbell, McDonald’s USA’s senior director of menu innovation, says stemmed from the company’s intense evaluation of customer preferences.

“What the consumers have been telling us that they want is they want us to stay true to who we are as a brand by providing them with good food—real, fresh food, food that they enjoy,” Campbell says. “They’ve also been telling us that they would like to have bold flavors that can go across either their beverages or their food, and that we can provide them with products they can eat any time of the day. So it really boils down to bold flavors and real, fresh food—that’s what they’re looking for from us.”

A host of new products answered that call in 2013, starting with the January launch of the Fish McBites limited-time offering and rolling into April’s Premium McWrap and Egg White Delight, June’s new Quarter Pounder lineup, and September’s Mighty Wings LTO. A new smoothie, Blueberry Pomegranate, also made its way to the menu, as did a Pumpkin Spice Latte LTO in September.

“We have seen a better year of new-product news,” Barish says. “Whether or not it’s moved the needle is up for debate, but when you have your four product categories with breakfast, chicken, beef, and beverages, you saw the Egg Whites in the breakfast daypart, you saw the new Quarter Pounder builds in hamburger beef, you saw Premium Chicken McWraps in the chicken category, and you saw some twists on beverages. So they’re trying to refill that pipeline.”

The Premium McWrap, which has three iterations—Chicken & Bacon, Chicken & Ranch, and Sweet Chili Chicken—may hold the most significance to McDonald’s 2013 brand evolution, as the product involves a more complex build and more ingredients than most other items on the menu, going so far as to add cucumbers to McDonald’s mix for the first time. The McWrap also signals McDonald’s attempt to grab more market share from the Millennial demographic and to provide an alternative to sandwich chains like Subway.

But what the Premium McWrap also represents is one end of a so-called “barbell strategy” that many traditional quick-service brands are adopting to compete in today’s marketplace, one in which companies offer both discounted and premium items. So far, McDonald’s has struggled to secure a reliable premium menu offering; Angus burgers were cut from the menu in May after underperforming, and Campbell says the McWrap line is a platform the company hopes to
build upon.

McDonald’s is also tinkering with the other end of the barbell strategy. The Dollar Menu has driven traffic since it debuted in 2002 as a means to rejuvenate lagging business, but the Extra Value Menu, which launched in 2012 as way to gain more market share over the long term and encourage guests to trade up from the $1 price point, has not been as successful. McDonald’s tested a new value menu, Dollar Menu & More, this year that featured items at $1, $2, and $5 price points, and at press the new menu was rumored to be near a national roll out.

Elizabeth Friend, a global foodservice analyst with market intelligence firm Euromonitor, says McDonald’s is attempting to drive traffic through value items while establishing an updated brand position and opportunity for higher check averages with the premium menu items. But she says the company’s main challenge is remaining profitable while relying so heavily on discounted products—something even more difficult today as the Affordable Care Act applies pressure on businesses and popular opinion pushes for better employee wages across the industry.

“If anything has become clear in the last six months, it’s that this move toward trying to make everything premium, trying to be like the fast casuals, trying to be everything to everybody, is great in terms of branding, but when it comes down to it, I think customers made it clear that what they really want from McDonald’s is the Dollar Menu,” Friend says. “They really want the value, and they really want that everyday convenient value item.”

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