After a long run of
success, the world’s largest fast-food chain is floundering—and activist
investors are circling
Jan 10th 2015 | CHICAGO |
IN A
brand-new McDonald’s outlet near its headquarters in Oak Brook, Illinois,
customers do not have to queue at the counter. They can go to a touch screen
and build their own burger by choosing a bun, toppings and sauces from a list
of more than 20 “premium” ingredients, including grilled mushrooms, guacamole
and caramelised onions. Then they sit down, waiting an average of seven minutes
until a server brings their burgers to their table.
The
company is planning to roll out its “Create Your Taste” burgers in up to 2,000
restaurants—it is not saying where—by late 2015, and possibly in more places if
they do well. McDonald’s is also trying to engage with customers on social
media and is working on a smartphone app, as well as testing mobile-payment
systems such as Apple Pay, Softcard and Google Wallet.
All
this is part of the “Experience of the Future”, a plan to revive the flagging
popularity of McDonald’s, especially among younger consumers. “We are taking
decisive action to change fundamentally the way we approach our business,” says
Heidi Barker, a spokeswoman.
After
a successful run which lifted the firm’s share price from $12 in 2003 to more
than $100 at the end of 2011, McDonald’s had a tricky 2013 and a much harder
time last year. When it announces its annual results on January 23rd, some
analysts fear it will reveal a drop in global “like-for-like” sales (ie, after
stripping out the effect of opening new outlets) for the whole of 2014—the
first such fall since 2002.
In the
past year Don Thompson, the firm’s relatively new boss, has had to fight fires
around the world, some of them beyond his control. Sales in China fell sharply
after a local meat supplier was found guilty of using expired and contaminated
chicken and beef. Some Russian outlets were temporarily closed by food
inspectors, apparently in retaliation for Western sanctions against Russia over
its military intervention in Ukraine. And a strike at some American ports left
Japanese McDonald’s outlets short of American-grown potatoes, forcing them to
ration their portions of fries. (More recently several Japanese customers have
reported finding bits of plastic, and even a tooth, in their food.)
However,
the biggest problem has been in America—by far McDonald’s largest market, where
it has 14,200 of its 35,000 mostly franchised restaurants. In November its
American like-for-like sales were down 4.6% on a year earlier. It had weathered
the 2008-09 recession and its aftermath by attracting cash-strapped consumers
looking for a cheap bite. But more recently it has been squeezed by competition
from Burger King, revitalised under the management of a private-equity firm,
from other fast-food joints such as Subway and Starbucks, and from the growing
popularity of slightly more upmarket “fast casual” outlets (see article).
In
response, McDonald’s has expanded its menu with all manner of wraps, salads and
so on. Its American menu now has almost 200 items. This strains kitchen staff
and annoys franchisees, who often have to buy new equipment. It may also deter
customers. “McDonald’s stands for value, consistency and convenience,” says
Darren Tristano at Technomic, a restaurant-industry consultant, and it needs to
stay true to this. Most diners want a Big Mac or a Quarter Pounder at a good
price, served quickly. And, as company executives now acknowledge, its strategy
of reeling in diners with a “Dollar Menu” then trying to tempt them with
pricier dishes is not working.
McDonald’s
says it has got the message and is experimenting in some parts of America with
a simpler menu: one type of Quarter Pounder with cheese rather than four; one
Snack Wrap rather than three; and so on. However, this seems to run contrary to
the build-your-burger strategy it is trying elsewhere, which expands the number
of choices. That in turn is McDonald’s response to the popularity of “better
burger” chains, such as Shake Shack, which has just filed for a stockmarket
flotation.
Some
analysts think that McDonald’s should stop trying to replicate all its rivals’
offerings and go back to basics, offering a limited range of dishes at low
prices, served freshly and quickly. Sara Senatore of Sanford C. Bernstein, a
research outfit, notes that Burger King, having struggled against its big rival
for years, has begun to do better with a simpler and cheaper version of the
McDonald’s menu. For the third quarter of 2014 Burger King reported a
like-for-like sales increase of 3.6% in America and Canada compared with a
decrease by 3.3% of comparable sales at McDonald’s. That said, sales at an
average McDonald’s in America are still roughly double those of an average
Burger King. So the case for going back to basics remains unproven.
So
far, McDonald’s looks as if it is undergoing a milder version of its last
crisis, in 2002-03. Then, an over-rapid expansion had damaged its reputation
for good service, its menu had become bloated and customers were drifting to
rivals claiming to offer healthier food. Now, once again, “McDonald’s has a
huge image problem in America,” says John Gordon, a restaurant expert at the
Pacific Management Consulting Group. This is in part because of its use of
frozen “factory food” packed with preservatives. In 2013 a story about a
14-year-old McDonald’s burger that had not rotted received huge coverage. Even
Mike Andres, the new boss of the company’s American operations, recently asked
bemused investors: “Why do we need to have preservatives in our food?” and then
answered himself: “We probably don’t.”
McDonald’s
doesn’t seem to be cool any more, especially among youngsters. Parents say
their teenage children have been put off after seeing “Super Size Me”, a
documentary about surviving only on McDonald’s food; and “Food, Inc”, another
about the corporatisation of the food industry; and by reading “Fast Food
Nation: The Dark Side of the All-American Meal”. It is hard to imagine the new
McDonald’s initiatives getting the reaction Shake Shack got when it opened its
first outlet in downtown Chicago in November: for the first two weeks it had
long queues of people waiting outside in the freezing cold.
A lot
of the negative PR that McDonald’s gets is the flipside of being the world’s
biggest and most famous fast-food chain. This has made it the whipping-boy of
food activists, labour activists, animal-rights campaigners and those who
simply dislike all things American. In America it has been the focus of a
campaign for fast-food workers and others to get a minimum salary of $15 an
hour and the right to unionise. Last month the National Labour Relations Board,
a federal agency, released details of 13 complaints against McDonald’s and many
of its franchisees for violating employees’ rights to campaign for better pay
and working conditions. The alleged violations relate to threats, surveillance,
discrimination, reduced hours and even sackings of workers who supported the
protests. McDonald’s contests these charges, while arguing that it is not
responsible for its franchisees’ labour practices.
Not
all the criticism McDonald’s gets may be merited—or at least it should be
shared more fairly with its peers. However, the company’s troubles have begun
to attract the attention of activist shareholders, who may prove somewhat
harder to brush aside than labour or food activists. In November Jana Partners,
an activist fund, took a stake in the firm. Then in December its shares jumped,
on rumours that one of the most prominent and determined activists, Bill
Ackman, intended to buy a stake and press for a shake-up.
McDonald’s
says it welcomes all investors and is focused on maximising value for its
shareholders. Even so, Mr Thompson’s new strategy needs to deliver results
quickly. Mr Ackman’s Pershing Square Capital has done well out of its 11% stake
in Burger King, because the chain’s main shareholder, 3G Capital, has pushed
through a drastic cost-cutting programme and a merger with Tim Hortons, a Canadian
restaurant group. “If McDonald’s were run like Burger King, the stock would go
up a lot,” Mr Ackman mused recently. It looks like Mr Thompson may soon have to
fight on another front.
