At McDonald's, Are Customers Still Lovin’ It?
Nostalgia is a powerful tool when it comes to food. Those who haven’t forgotten a certain Big Mac jingle can attest: “Two all-beef patties, special sauce, lettuce, cheese, pickles, onions, on a sesame-seed bun.”
But the nostalgia for McDonald’s appears to be waning. For a restaurant brand that’s woven into the fabric of America, it’s stumbled in its efforts to deliver what today’s consumer wants. (Just one in five millennials has tried a Big Mac, according to the Wall Street Journal, leading branding guru Donald Burns to try out a timelier, less-catchy jingle: “Is the fish in my Filet-O-Fish on the Monterey Seafood Watch list?”)
In the two years since Steve Easterbrook took the helm as McDonald’s CEO, the iconic chain has made some compelling moves, like introducing all-day breakfast and moving its longtime headquarters to one of Chicago’s most vibrant neighborhoods. But persistently sluggish same-store U.S. sales reveal some deeper issues that the brand is up against—namely, how it can attract the customers who’ve fled to upmarket competitors and more convenient meal-delivery options, and those who have simply decided to eat more at home.
Strong growth abroad has boosted McDonald’s results, but it continues to lag domestically. After six straight positive quarters, U.S. same-store sales fell 1.3 percent in 2016’s fourth quarter, even as the company posted its best annual sales growth on a worldwide comparable basis since 2011. It’s also seen its number of customers drop every year for the past four years.
Where are they going instead? To other limited-service brands that promise higher-quality food, ambiance, and service for just a few bucks more. Customers have also increased their grocery spending to the highest levels since 1984, as food prices fell for a record nine straight months last year, according to Bloomberg. Others are opting for the convenience of meal-kit deliveries. This $1.5 billion market—led by HelloFresh, Blue Apron, and Plated—is expected to double in the next few years.
“At this point, I really don’t know that there is anything McDonald’s can do,” says Motley Fool analyst Jason Moser. “I think part of their problem is, even if they’re able to up their game on the quality side, I think there is a brand problem at this point.”
That isn’t to say McDonald’s isn’t a powerful brand; rather, its success as a quick, consistent—and most importantly, value-driven—chain is rooted more in the past than future as notions about value are changing.
“Looking forward, they’re seeing competitors taking share in this space because they’re resonating more with today’s younger consumers,” he says. “That may be McDonald’s biggest problem. No matter what they do, younger consumers already have a prejudiced opinion toward the brand based on what they know of it as a fast-food restaurant.”
Millennials love dining out—to the tune of 44 percent of their overall yearly food spending, according to the Food Institute—and are frequent consumers of quick-serve restaurants. So how can McDonald’s capture their loyal business? Here’s a look at how the company is pivoting to remain relevant.
The progressive burger brand
McDonald’s outlook has at least brightened considerably since the U.K.-born Easterbrook, who was COO and a then-22-year company vet, took the reins from CEO Don Thompson in 2015. Analysts have given Easterbrook high marks for his progressive, innovative approach, from stripping unpopular menu items to testing fresh beef instead of frozen, overhauling drive thrus, and adopting self-serve kiosk ordering. His goal is to make McDonald’s the kind of modern burger brand that can compete with the likes of Shake Shack and Five Guys.
Technology has played a large part in trying to achieve that goal. The 500 or so revamped U.S. locations now armed with digital-ordering kiosks represent the kind of customizable, elevated experience Easterbrook envisions for the brand going forward. Once guests order their ideal burger at the sleek, vertical touchscreens, they receive a digital location device that the server uses to bring out their meal.
How quickly changes like this will permeate the brand remains to be seen. The vast majority (well over 80 percent, according to Motley Fool) of McDonald’s locations are owned by franchisees, and they will be responsible for paying for upgrades like the kiosks. With equipment and installation running upward of $30,000 for lower-volume stores, per McDonald’s, there would have to be a pretty strong incentive to convince franchisees to make that kind of investment in the face of sluggish domestic comps, says Mike Ganino, a Los Angeles–based restaurant consultant specializing in small and midsize brands.
“The issue is going to be that they have a system that relies on keeping franchisees happy, but they’ll be asking them to spend thousands on equipment,” he says. “How do you navigate that?”
McDonald’s is also rolling out mobile ordering and payment to 20,000 stores by the end of this year. This will not only speed up the drive-thru process, but it will also enable customers to skip the line and opt for curbside pickup. Monitoring smartphone purchases will also help the brand track the actual behavior of the roughly 500 million customers coming into its U.S. stores each month, as global chief marketing officer Silvia Lagnado noted in a March 1 investor call.
Calling delivery “the most significant disruption to the restaurant industry in our lifetime,” McDonald’s chief strategy officer Lucy Brady announced that the chain is also aggressively testing proprietary and third-party delivery models. The goal is to replicate its success with delivery in developed Asian markets, where it accounts for up to 40 percent of overall sales. Brady didn’t disclose timelines for these rollouts.
Back to basics
Food-wise, one of McDonald’s most successful moves in the Easterbrook era has been introducing all-day breakfast, which the company did in October 2015. Giving customers their beloved Egg McMuffins and McGriddles all day long awarded the brand an almost instant boost of 5.2 percent in 2015’s Q4 comparable sales. The honeymoon continued through much of 2016, leading to an all-day breakfast rollout in Canada earlier this year. But McDonald’s has struggled to generate sustained positive comps since.
Refraining from the harried new-menu-item rollouts of years past, the chain has stuck mainly to line extensions in 2017. It’s unveiled two new limited-time Big Mac sizes—the Grand Mac and the Mac Jr.—and beefed up its beloved Shamrock Shake line with four new flavors, including chocolate-mint and chocolate-chip frappe. These items join other menu-staple riffs now being offered in limited tests, such as the Sriracha Big Mac, Garlic Fries, and Chicken McGriddles.
Analysts say the strategy behind these kinds of introductions is to allow the world’s largest burger chain to attract new customers while upselling existing ones without taking big hits on food cost or slowing down production. It’s also a great move from a marketing standpoint, as Burns, CEO of branding consultant Off the Range Ventures, points out.
“Everyone says McDonald’s needs to be more progressive; I say they need to be more retro,” he says. “They’re better off focusing on what they do best: burgers, shakes, fries, the Filet-O-Fish—things that have really built the brand. The thing McDonald’s has over a lot of the competition is nostalgia, which could play well with millennials, who love retro and nostalgia.”
Always catching up
Where the retro approach has worked less favorably for McDonald’s is in better-for-you upgrades. The company has made some big improvements in the past year, like completing a phase-out of antibiotics for human medicine from its chicken products and switching to cage-free eggs. But it has yet to set global targets and timelines for switching to naturally raised pork and beef, largely because of the complexity of creating reliable antibiotic-free supply chains.
Traceability is admittedly easier when you’re supplying only a few dozen locations as opposed to 14,000. So is accessibility to a consumer base that’s increasingly holding you accountable, as Anthony Pigliacampo, CEO of fast-casual chain Modern Market, recently pointed out.
“Big brands fall into the trap of having to create concise marketing messages,” he told this writer in a 2016 interview. “Small companies can suss this stuff out while remaining totally transparent with consumers.”
Moser says McDonald’s menu, ordering, and sourcing moves are just the kinds of small, reasonable steps it should be taking to execute its new vision. The question is, will those moves be enough to coax in customers who’ve already embraced the upmarket take on indulgence?
“There’s this mindset going on right now in American culture that tells us something’s different,” Ganino says. “We now have that trade-up option that says for two bucks more, you get better-quality food and a better experience.”
It’s not unheard of for massive food brands to pivot successfully toward relevance. Despite Starbucks’ persistent struggles to master the food component (in 2015 it closed all 23 La Boulange locations three years after acquiring the San Francisco bakery chain to jumpstart its food program), it’s relied on its coffee prowess to maintain customer loyalty as it slowly figures out food. The company’s five-year growth plan is centered around a new line of Reserve immersive coffee bars, which will incorporate items from Starbucks’ new Italian food partner, Princi.
“They’re upping their game on the food side, slowly but surely,” Moser says. “Now someone can go to Starbucks, find decent-for-you breakfast, interesting lunch options, and items like protein packs. This is a big problem for McDonald’s.”
He similarly calls Panera “one of the most fascinating turnarounds of the past four years in the food space.” The chain owned up to its chaotic throughput issues in 2014, unveiling a 2.0 digital-ordering plan to let customers order online or with their mobile devices to have their food ready at set times. It also deployed in-store touchscreens, enabling guests to more easily customize their sandwiches. Meanwhile, Panera shifted its focus to healthier menu items and pledged to clean up ingredient decks—efforts that have rewarded the brand with better-than-expected same-store sales in corporate and franchise-owned stores for several months running.
A symbolic leap forward
McDonald’s hopes to siphon off some of downtown Chicago’s chef-driven energy and younger corporate talent when it unveils its new corporate headquarters in the city’s West Loop next spring. The nine-story, 485,000-square-foot headquarters at Randolph and Carpenter Streets (the former site of Oprah Winfrey’s Harpo Studios) will house all 2,000 employees, as well as training center Hamburger University. The first floor will house a yet-to-be-revealed restaurant concept that Easterbrook says will fit the neighborhood vibe.
The move is symbolic of Easterbrook’s “rethink everything” approach. Indeed, the West Loop is home to some of the city’s most renowned restaurants, from Au Cheval with its famous burger to Stephanie Izard’s perennially packed Girl & the Goat, Rick Bayless’ brewpub/taqueria Cruz Blanca, and pork-and-shellfish haven The Publican. Its growing reputation as a tech hub—jumpstarted by Google moving its Chicago headquarters there—is attracting a wealth of young startup talent as well.
“It’s the right move and hugely symbolic,” Ganino says, noting that, unlike older generations, today’s young professionals are flocking to cities and staying there. “Having the headquarters in the suburbs 45 minutes away was definitely something that would have inhibited young, talented people from working there.”
Jim Graziano, fourth-generation owner of JP Graziano’s, a wholesale grocer-turned-counter-service sub shop a few blocks east of McDonald’s new HQ, applauds the move as bold. “It shows that being a multi-billion-dollar international company doesn’t mean you stop thinking, taking chances, and making moves,” he says. “I obviously welcome it from a business perspective, too—bringing more construction guys and a lot more employees to my shop, and in general more attention and legitimacy to the neighborhood.”
Facing a fast-gentrifying West Loop in the early 2000s, Graziano himself pivoted his 80-year-old brand away from its wholesale distribution roots into a retail shop that sells Italian sandwiches. (He’s now renting out the former wholesale arm to his first tenant, a bi-level Sichuan restaurant and karaoke bar concept.) “We’re a company with deep roots, but we’ve also progressed because we had to, to reflect the changing neighborhood,” he says.
The 62-year-old, soul-searching McDonald’s now faces a similar—albeit far larger-scale—task. As Easterbrook told investors in March, it all comes back to connecting with the consumer at a gut level.
“In order to bring customers back into our restaurants more often, we must reconnect on an emotional level,” he said. “Our future depends on making McDonald’s matter to people.”
Burns suggests the brand recapture the human connection through nostalgia-heavy campaigns—for example, encouraging guests to share their first McDonald’s memory, or highlighting longtime staff-member stories. Indeed, one big advantage McDonald’s has as it engineers its massive pivot is that it already holds a place in our collective hearts.
“For some reason, McDonald’s feels like ours, and we want it to win,” Ganino says. “It’s an interesting advantage.”
But it might not be enough at this point.
“It’s the nature of competition,” Moser says. “McDonald’s was the big player in the space for so long and helped define it for so long, but nothing lasts forever.”
He compares it to the e-commerce battle playing out between Amazon and Walmart in the fast-growing online retailing sphere. “I don’t know if there’s anything Walmart can do,” Moser says. “It’s like looking at a long, slow train wreck. Of course I wouldn’t say the same about McDonald’s, but I would not be buying their stock today, either.”
This story originally appeared in QSR's May 2017 issue with the title "Still Lovin' It?"