|
|
|
|
This was originally published in Focus, Cap Gemini's E-zine, in May 2003
How would you fix McDonald’s? May 2003
In March 2003, McDonald’s stock price hit its lowest level in 8 years. It reported its first ever quarterly loss -- none in 47 years before Q4 2002. Its CEO was ousted by the board at the end of 2002.
As McDonald’s head of strategy noted in a recent Business Week:
"We are clearly living through the death of the mass market."
But, of course, McDonald’s has been all about the mass market – selling “billions and billions” of the same product all around the world, with an integrated system tuned to provide hamburgers and fries.
Now the company is stuck in all kinds of tough dilemmas:
Ø Growth or Income? Its franchisees want growth while its shareholders want dividends and predictability.
Ø Top-Down or Bottom-up? The company has been successful in the past by emphasizing consistency and “one best way.” Now, as McDonald’s struggles with attacks from market niches, many franchises can’t make money by following one set of rules – their customers are too varied. So some franchisees are ignoring or disobeying the mandates from the top, as the Business Week article points out.
Ø Bottom-up or Top-down? Other McDonald’s franchisees are not capable of independent action. For 47 years, they’ve depended on Corporate for guidance in all things, from kitchen layouts to menu promotions. It’s too late to try to make them change.
Ø Success or Subsidy? McDonald’s has tried many times to develop new concepts over the past several years. None of them have made it beyond regional rollout. One explanation: It owes first refusal rights to existing franchisees, yet existing franchisees are poorly suited to implementing these new concepts – they have bigger businesses that are in trouble and will spend more time with those. It would be better to give new concepts to new managers, but that would upset existing franchisees even more.
In the past several weeks, McDonald’s has indicated that it will focus on its base business and sell most of its interest in its new business ventures to outside investment companies.
Many analysts have looked on this development favorably, and McDonald’s stock has recovered from its low of $12.00 a share in mid-March to currently trading at $17.50.
At the same time, demographic, social, and political trends do not bode well for McDonald’s core business of burgers and fries. The rise of “fast casual” dining in the US and concerns about the health of a fast food diet make the current situation in the core business particularly delicate.
Here are a few of the directions that McDonald’s has taken in the past several years:
What would you do? Pursue one of these strategies, or take a different approach?
Answers / dialog on response
July 13
Hi Scott -- Here are some answers to the questions:
1. Anu, thanks so much for your posting. These are all great questions, with difficult answers.
One thing to watch out for in this or any other innovation work: when you say:
I want an interesting & relevant experience when I go to a restaurant,
you are ....
Mistaking yourself for the market.
There is no mass market anymore. Chances are, the part of the market that will make money for McDonald's and your part of the market don't have a lot of overlap.
That said, I really like the proposal in the second paragraph because it gives McDonald's some ability to penetrate the micromarkets. I don't know if they can do it, however.
2. Aselz, can you imagine a McDonald's "r&d department" going crazy? I can't. "Going crazy" is a muscle that these guys have not exercised for years. McDonald's tried the "going crazy" thing with its previous CEO, Jack Greenberg, and it became obvious that the company couldn't do two things at once: maintain its core and strengthen new businesses. So it's very focused on its core right now.
"Taking some risk" and "Thinking outside the box" may be useful to some, but not McDonald's: they invented the box!
Quick Poll: When was the last time you ate at McDonald's? Was it enjoyable?
For me, I can't recall the last time I ate at McDonald's -- could be January, 2003, on the drive between New York and Boston. It was enjoyable.
My primary memory of McDonald's are safe and functional -- like a utility. So I use them in Airports and there's one in a shopping mall that has a bathroom, so my kids have used that. I have good memories of McDonald's, but I don't like the food very much. Username: anumanchi Post: What is the global share of McDonald's? If my gut is right, it should be a few percentage points! If the market opportunity is huge, why is McDonald's unable to grab more of the customers? It would be interesting to see what percentage of its customer base is returning customers and what are the churn trends. What kind of segmenting have they done? For example, if I need a quick lunch during weekdays, I want a predictable, standardized and simple menu which is served quickly and cleanly. On the other hand, if I go for a night out with kids, I need some entertainment, wider variety and kids-friendly decor. If McDonald's has to be a sought-after destination for food, then a standardized menu will not do. I want an interesting & relevant experience when I go to a restaurant.
Given this, I would support option 2 with a change that each store be adapted to the local demographics, location specifics (for example, if McDonald's is in a pubbing area, what kind of food, facilities and service do patrons need?) and time specifics. This would mean a lot of flexibility is built into franchises, operations and supply chain. Can it be done? I believe so.
Username: ASelznicki Post: I think they need to do some serious innovation to come up with new products. Look at how fast Taco Bell infuses its menu with new products. There’s always something new on that menu. Many of the new items they’ve introduced, like Gorditas, have been a huge hit. McDonald’s should let their R&D department go nuts, and come up with some creative, daring products that just might really take off. It seems like they’ve been playing it safe lately, and safe just doesn’t cut it anymore. It’s time to take some risks, and think outside the box.
Username: Rakeshsinha Interesting !!! Some questions which flash... How serious are these issues in terms of group worldwide/regionwise operations ? Is this applicable to operations of all countries/region ? Will it be wise to come up with highly innovative solutions ? If yes, at what risk/cost/benefit ? How much drop/hike is in percentage of walk-in (customers) countrywise ? What I like most in McDonald is -- Quick delivery, quality Burgers at great locations. Are you going to affect any of these ? I would support option 1 with restricted experiments and use of option 2, without effecting brand and capitalising its great locations. What are your views ?
Rakesh -- what a great set of questions! The first two relate to the scope of the problem. Over the past several decades, McDonald's has globalized; unfortunately, the problems faced by McDonald's are across all regions. In the last quarter, Europe was the only region to post good growth numbers, and that was because revenues the prior year were hammered by fears of Mad Cow Disease. The McDonald's issues are not isolated regionally -- they are much more about how McDonald's fits into our 21st Century.
I agree with you in questioning the wisdom of innovation at McDonald's. This is not a company that was built on exploration and new products. It was built on a system of manufacturing that turned out a limited range of popular products at very low cost. Innovation is not one of its strengths, and its history of failure here makes each new innovative attempt more difficult. It's no wonder that its efforts to diversify have been so disappointing.
But this is part of the McDonald's dilemma -- the market it serves is not growing, so to get growth it must attract more revenue from new or existing customers, and the best way to do this is via new products.
As I write this, I think of Henry Ford and his most successful product, the Model T (the auto equivalent of a Big Mac...). When Ford Motor Company was forced to abandon the Model T to avoid bankruptcy in 1927, it shut down its River Rouge plant for a year, taking the largest write-off in corporate history. It couldn't survive without innovation. In the long term, I don't believe McDonald's can either.
Username: jmartinez I don't have the ultimate answer to fixing McDonald's, but there's something they've done recently that I don't understand at all. I really don’t understand why they chose to feature a dollar menu when other restaurants have $.99 menus. It’s not that a penny really makes a difference to anyone these days, but it seems like if they’re going for the “value consumers,” they should offer an even better value than other fast food restaurants. Perhaps they should have introduced the $.89 menu instead. When you’re struggling, you have to be willing to take big risks like this. When you enter a competition, enter to win.
The fast food business in the US is ferociously competitive. When different chains try for value menus, they are contributing to a price war that hurts everyone's margins. Imagine what Burger King or Wendy's would do if McDonald's offered an .89 menu.... They'd probably come back with an .85 menu, and we'd be on a downward pricing spiral. I'd recommend that McDonald's fashion a solution that is impossible for its competitors to imitate rather than racing them to the bottom of the price ladder.
Username: ASkamelson72 I think they should pull back on expansion, which I believe the new CEO is trying to do, and focus on improving things for the stores already in existence. Adding more is not always better. They should also work hard to help struggling restaurants, or just close them. They’re of no use when it comes to pulling themselves out of the current predicament.
Aska72 hits on two of the major issues facing companies in strategic peril. First, they need to focus. In McDonald's new regime, that focus is on improving same store sales rather than on developing new offerings. Second, they need to cut. This is a much more difficult activity to do when many of your operations are franchised -- a franchisee has made a significant investment, and McDonald's would need to buy them out to close the store. But I agree with Aska -- for McDonald's now, less is more.
By the way, since I wrote the McDonald's piece, the stock is up over 30%. It had a low near $12 a share in April, and it's now trading at around $21! Back to basics seems to have significant appeal to investors... at least in the short term...
Username: KristiaanR Forgo improvements to the interior of the restaurants. Instead spend all that money on improving the taste and quality of the food. People go to McDonald’s for the food. They don’t go for the décor. I’ve never heard anyone say, “I’d rather go to McDonald’s because it has a nicer décor and atmosphere.” It’s about the food. Serve the best-tasting fast food, and you’ll get the fast food customer.
Both Kristiaan and RDryden emphasise the importance of the customer. There is no one type of customer for McDonald's. There are some who do in fact go to McDonald's for the decor, or as a place to hang out. There are others who are fiercely loyal, and who see McDonald's as a vital part of their lives. The problem is that there are not enough of these fiercely loyal customers to drive the business results that McDonald's has come to expect. So the company must get new customers, or get more money from its existing ones.
Username: RDryden As in most industries these days, the most important thing to do is to listen to your customers and give them exactly what they want. Now I realize in an organization as large as McDonald’s, that’s easier said than done, but the fact is, they must. If people want great-tasting, hot, food served quickly, then that’s what McDonald’s has to figure out how to accomplish. They may have to spend some dollars initially to figure out how to get back to this point, but they will reap the rewards in the end if they succeed. If customers get what they want, they’ll come back. If they don’t, they won’t. It’s quite simple really.
So long as customers *can't* get what they want someplace else, they'll come back. And many customers want variety, which leads to a natural churn. The markets that McDonald's competes in are ferocious, and customers are attracted to many different restaurants and formats, as well as menu items.
This is what economists call a "dynamic problem," because today's solution creates tomorrow's challenges. There is no magic combination that will give McDonald's the answer for a long time, but there are systems and approaches which can help them adapt continuously.
Username: lnewland McDonalds uses unbelievably complex algorithms for labor efficiency -- but healthier food is time-consuming food (slicing & washing salads, handing out plasticware, e.g.) I can't believe they'd ever become incrementally more efficient with a more varied, healthier menu. And at McDonalds, time is always money. I can't believe complex salads, yogurts, and the like would yield them incremental dollars... to beat their speed numbers they've got to hit the basics in the core markets. How does Chipotle do for efficiency, anyway? Didn't they just get sold?
Inew -- if Chipotle didn't get sold yet, it soon will. McDonald's has signaled that it wants to get new ownership in the whole new initiatives division.
You highlight here one of McDonald's fundamental problems -- efficiency (which is what fueled the company's growth for so many years) and innovation (which was the cause of so many recent problems) don't mix. Innovation involves exploring, trying, failing, retrying. Efficiency is all about the one best way. But more and more people want different food from burgers and fries. This is what makes McDonald's problems so challenging!
|
|
All content on this site licensed under a Creative Commons License.
|
