Competition | December 2013 | By Sam Oches

What’s Going On at McDonald’s?

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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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There were some other casualties on the McDonald’s menu this year as the company tried to accommodate the new additions. An early 2013 report from Bloomberg Businessweek cited Datassential numbers in stating that the McDonald’s menu expanded by 70 percent between 2007 and 2013, to about 145 items. To alleviate some of the pressures that had piled on store operators, McDonald’s not only cut the Angus burger line, but also Chicken Selects and a number of other fringe products, including a few salads. Thompson announced that the company would refocus its attention away from salad entrées, which constitute just 2 percent of sales, and more toward core menu offerings.

Despite that, McDonald’s announced in October that it would begin offering side salads as a substitute to french fries in value meals at no additional cost and start promoting water, milk, or juice as the beverage choice for Happy Meals. The move, which was made in partnership with the Clinton Foundation, will be implemented in the U.S. next year and globally by 2020.

Campbell says McDonald’s does pay attention to consumer demand for health and nutrition, but adds that the menu development team has found that customers want great taste first and foremost.

“They want to make sure that we’re still delivering on the great taste that they are looking for, and that the products are real and fresh,” she says. “So we do want to make sure that we are delivering healthy products; our core menu has healthy products, as well as many new products that we have out there. But overall, it’s really just a balance for us, and making sure that we deliver on great-tasting products that customers will love, as well as delivering on the health and nutrition.”

The commitment to nutritious menu offerings is on trend, but also a few steps behind many other quick-service and fast-casual players that have made similar commitments. Friend says McDonald’s has been slow to adapt to the new competitive landscape in foodservice.

“Throughout the recession, McDonald’s was definitely two, three, four steps ahead of everyone else just in terms of navigating things. That benefitted them hugely,” Friend says. “They had a really successful time throughout the recession even when everyone else was struggling. I think now what we’re seeing is, I don’t know if I’d phrase it necessarily that they’re following as maybe they were so far ahead, and now their competitors have caught up and they’re not really finding new ways to jump ahead again.”

Based on some of McDonald’s other 2013 moves, the company may be thinking more outside the menu as a way to reclaim its industry-leading position. For example, the company announced that it would be investing more heavily in customer service after customer feedback showed that component of the business deteriorating. A new dual-point ordering system, in which guests receive a number on their receipts and pick their order up when the number is called, is rolling out in an attempt to improve the employee interaction. McDonald’s is also testing a mobile ordering app to help streamline the customer experience.

New executives might also help McDonald’s climb out of its funk. Jeff Stratton replaced Jan Fields as president of McDonald’s USA, and Kevin Newell was promoted from global brand officer to chief brand and strategy officer of McDonald’s USA. Meanwhile, chief marketing officer Neil Golden announced in October he would be retiring, and former Amazon.com executive Atif Rafiq joined the brand as chief digital officer.

With much of 2013 in the books, sales were only so-so. Global comparable sales dropped in January, February, and April, and the company reported a 1 percent comparable sales drop in the year’s first quarter ending March 31. May, July, and August, however, showed global comparable sales increases, as did the second quarter ending June 30, with its 1 percent increase.

“McDonald’s has probably had one of the worst years they’ve had in recent history, in [2012 and] early 2013, but it’s always a little bit difficult to talk about them in these terms because it’s all relative,” Friend says. “I think we talk about them having much poorer results than they’ve had in the past and those past years we’re talking about are incredibly positive for the most part.”

Gordon also believes that same-store sales comparisons don’t do justice to McDonald’s position in the industry. When viewed over a five- or 10-year period, he says, McDonald’s growth has been hugely successful. But he says the company will struggle to build off that success in today’s limited-service marketplace.

“Their best days were when they were able to divest themselves of the other brands that they had and execute the Plan to Win and to really get focused on that,” Gordon says. “But McDonald’s may be approaching a point of … reaching our approximate sales plateaus. If you’re looking at $2.6 million in terms of U.S. AUVs, McDonald’s is up nicely, but how much higher can it go practically in a nation with a million restaurants?”

Friend says one potential route forward for McDonald’s is to look at the existing customer base and figure out ways to boost average checks and find more occasions throughout the day when customers visit the stores. For example, McDonald’s might consider more restaurants open 24 hours or with late-night menus, she says, or possibly expand daypart opportunities even further.

“That’s kind of doing what they can do that the Chipotles and the Paneras can’t do: offering extreme convenience around the clock—whenever you want us, we’re here,” she says.

Barish says McDonald’s may in fact be a victim of its own success. The effectiveness with which many fast-casual and other premium fast-food chains have grown looks remarkably similar to McDonald’s own near-flawlessness in the mid-2000s.

“I think the competitors have taken it up several notches when you look at the playbook that a lot have used,” he says. “It’s almost as if they got McDonald’s Plan to Win and the turnaround story from 10 years ago. You’ve got to upgrade assets, you’ve got to upgrade food quality, focus on operations, introduce new product platforms—whether it’s snack or treats or beverages—and try to market all of that with a budget that obviously is not going to be anywhere close to what McDonald’s budget is, but at least have some balance where you can look at multiple efforts at one time.”

He adds that McDonald’s main problem is its size. While independent and regional chains can be nimble in how quickly they adapt to consumer trends, he says, McDonald’s cannot. Most menu changes at the brand go through years of research and tests.

“I think it’s a little bit reactionary to the competitive environment, which has certainly been ratcheted up, but McDonald’s is still the player that dictates the category,” he says. “If they’re on their game, then everyone else is going to have to react to them, but I think they’re just trying to get back to that steady state where they can move the business forward from there.”

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