McDonald’s has had a tough time of late, with investors questioning whether it has become irrelevant and out of touch with today’s health conscious, millennial, environmentally aware consumer. Has the McDonald’s brand become disconnected from its customers and consequently, ceased to appeal to investors?
McDonald’s is a globally recognised brand. Brand performance is vital to McDonald’s as their product is essentially a commodity. McDonald’s therefore has to win the emotional battle to place “the intangible sum of a product’s attributes” in its diner’s minds. McDonald’s is currently losing that battle to fast casual burger brands that are perceived to deliver tastier, healthier food in a more pleasant environment.
Before we delve into the current challenges that McDonald’s faces, it is worth contextualising the scale and power of the McDonald’s brand. McDonald’s is the largest restaurant group in the world. With over 35 000 locations worldwide in over 118 countries and, McDonald’s serves 68 million customers daily and has a 50% market share in the US fast food sector.
Despite the fact that the McDonald’s brand is in decline it is still larger than the next 8 largest fast food brands in the US combined.
|#||Brand||Brand Value||2013 vs 2014|
|5||Pizza Hut||7 535||25%|
|7||Tim Hortons||4 050||20%|
|10||Burger King||2 664||9%|
Source: Brandz Report
According to the Brandz Report, McDonald’s Brand value has declined by 5%.
Source: Brandz Report 2014
The same report shows the Fast-Food category cumulative brand value increasing by 10%. Chipotle and Starbucks are the fastest growing brands in the fast food sector with increases in brand value of 48% and 44% respectively.
McDonald’s Brand Performance in 2014 is the worst in 9 years. Over the last 2 brand valuation periods, McDonald’s has lost over $9,4 billion in brand value and is falling in global rankings. So, what’s ailing McDonald’s? McDonald’s has challenges to overcome and is no longer fulfilling its promise to its customers.
Let’s look more closely at the key elements of the brand promise that McDonald’s is making to consumers.
Quality ingredients matter, and McDonald’s has been at the receiving end of a number of negative media reports in this regard. McDonald’s has been reactive rather than proactive in its management of quality – improving ingredients to allay concerns when they are raised. McDonald’s has also suffered some short-term quality and hygiene challenges that have reduced sales in its Asian markets dramatically.
Despite the fact that the public continues to air doubts about McDonald’s ingredients, the company has made a public commitment to quality:
Speed is a key element of service and McDonald’s has not excelled in this regard of late. Service speed at the drive-thru is most important as customers cite speed as the biggest reason behind using the drive-thru. QSR Magazine did a drive-thru speed of service study. McDonald’s came in at 3 minutes, 9 seconds – the slowest time on record for the chain and slower than the industry average, which is unacceptable for the market leader. McDonald’s derives 70% of sales through drive-thru. McDonald’s is experimenting with a 3rd drive-thru window in a number of locations, which seems like a capital-intensive way to address a symptom rather than the complex menu which is the most likely cause. That being said, McDonald’s is a world champion as making these kinds of investments work to improve speed and efficiency for their customers.
McDonald’s complex menu of 100+ items is one of the main causes for wait times and decreased customer service. In response to this challenge, McDonald’s has stated it will remove 8 items from the menu, which is a start, but is yet to confirm which items will be removed. The firm has also stated that the menu will be further simplified in time.
The business finds itself in a quandary in this regard: simplifying the menu will speed up the order (and therefore output) process, which is a key underpinning of McDonald’s offering. But it would also be ignoring a current consumer trend, where buyers are showing a preference for more “sophisticated” (and therefore complex) menus.
McDonald’s has rolled out the Apple Pay strategy in record time. While this is not a significant innovation in its own right, it has shown the food giant’s ability to move quickly and the service will be a value-add for customers. In addition, improved payment processing will reduce the demand on cashiers and therefore direct labour costs.
24 hour Delivery
McDonald’s has had 24-hour delivery in China for a number of years. Expanding this service to core US and other areas with high store and customer density would create an additional convenience factor and differentiator for the brand. There is no immediate evidence that 24hr delivery will come to the US anytime soon.
McDonald’s “Create your taste” initiative is an answer to the customisation trend. “Create your taste” allows customers to create their own gourmet burger by selecting from a range of ingredients. This idea is supposed to promote more choice with decreased complexity. While “Create your taste” ticks the customisation box, it needs simultaneously not impact on the rest of the operations surrounding the existing menu. Custom preparation will require new digital ordering kiosks, prep stations and processes. The success of the 2000 restaurant trail rollout will become evident in the next few quarters. The initial 900-restaurant rollout has achieved some positive feedback.
Consumers have become more concerned about health. McDonald’s competitor Chipotle emphasises healthy ingredients and Subway emphasises freshness. It is important to note, that these brands are perceived as “healthier” thanks to their brand positioning rather than the fact that their products are intrinsically healthy.
McDonald’s has likewise experimented with a healthier menu and introduced salads and wraps that have largely seen very limited popularity. The McDonald’s brand is too well entrenched in the mind of the consumer as a provider of traditional fast food to succeed with healthy menu options.
As mentioned earlier, McDonald’s will be rolling out its premium Create Your Taste initiative. This will potentially increase the order size and the tableside service provides diners with a different experience. A typical meal ordered from the Create Your Taste programme averaged $8.29 during the California tests.
Digital Innovation is a key to McDonald’s growth. Even before Steve Easterbrook was announced as the new CEO, he had initiated a focus on digital innovation by opening new digital creative hubs in San Francisco and Chicago to revamp digital marketing. Since digital marketing competency and relevance is so essential to connecting with consumers as they spend more time online, this new focus and investment is vital and encouraging. The future success of McDonald’s marketing will depend on its ability to connect with customers on digital channels.
Thus far, McDonald’s has distinguished itself by providing a very standardised and specific customer experience. A McDonald’s patron can expect to step into a McDonald’s anywhere in the world and find a fairly similar menu, receive quick service and eat their meal in a brightly-lit, sterile environment aimed at moving customers through quickly.
Unfortunately, this flies in the face of consumer trends, which are moving towards “fast-casual” dining. This new movement is championed by restaurants which do not offer full table service, but offer higher-quality, fresher ingredients and a more upscale ambience. Fast-casual restaurants are also perceived as healthier options. Popular examples in the US are Chipotle and Panera, and Nando’s in South Africa. According to The Economist, profits at fast-casual restaurants rose by 10.5%, whereas profits in traditional fast food restaurants only rose by 6.1%.
McDonald’s, as the quintessential traditional fast food joint, will find it difficult to evolve with this trend. The Create Your Taste initiative could be seen as its effort to respond to the movement.
McDonald’s is a brand in decline that is currently failing to meet its promises to consumers. The public has lost interest in the brand and has evolved into seeking healthier, more customisable options. McDonald’s has shown signs of responding to these new needs by pioneering new initiatives. Time will tell whether enough is being done to effect the drastic change that is necessary to reignite growth.
McDonald’s can change; it has done so in the past. However, the turnaround is not likely to be quick or guaranteed. We will watch quarterly, but it is likely to take 12 to 24 months to see management changes translate to improved financials. If we like what we see, then the current price will represent an ideal entry point for the shareholder. If you would like to chat to our fund manager about good investment brands, click here..