by Adam Hartung | Nov 17, 2016 | Food and Drink, In the Swamp, Innovation, Marketing, Trends
(PAUL J. RICHARDS/AFP/Getty Images)
McDonald’s has been trying for years to re-ignite growth. But, unfortunately for customers and investors alike, leadership keeps going about it the wrong way. Rather than building on new trends to create a new McDonald’s, they keep trying to defend extend the worn out old strategy with new tactics.
Recently McDonald’s leadership tested a new version of the Big Mac,first launched in 1967. They replaced the “special sauce” with Sriracha sauce in order to make the sandwich a bit spicier. They are now rolling it out to a full test market in central Ohio with 128 stores. If this goes well – a term not yet defined – the sandwich could roll out nationally.
This is a classic sustaining innovation. Take something that exists, make a minor change, and offer it as a new version. The hope is that current customers keep buying the original version, and the new version attracts new customers. Great idea, if it works. But most of the time it doesn’t.
Unfortunately, most people who buy a product like it the way it is. Slower Big Mac sales aren’t due to making bad sandwiches. They’re due to people changing their buying habits to new trends. Fifty years ago a Big Mac from McDonald’s was something people really wanted. Famously, in the 1970s a character on the TV series Good Times used to become very excited about going to eat his weekly Big Mac.
People who are still eating Big Macs know exactly what they want. And it’s the old Big Mac, not a new one. Thus the initial test results were “mixed” – with many customers registering disgust at the new product. Just like the failure of New Coke, a New Big Mac isn’t what customers are seeking.
After 50 years, times and trends have changed. Fewer people are going to McDonald’s, and fewer are eating Big Macs. Many new competitors have emerged, and people are eating at Panera, Panda Express, Zaxby’s, Five Guys and even beleaguered Chipotle. Customers are looking for a very different dining experience, and different food. While a version two of the Big Mac might have driven incremental sales in 1977, in 2017 the product has grown tired and out of step with too many people and there are too many alternative choices.
Similarly, McDonald’s CEO’s effort to revitalize the brand by adding ordering kiosks and table service in stores, in a new format labeled the “Experience of the Future,” will not make much difference. Due to the dramatic reconfiguration, only about 500 stores will be changed – roughly 3.5% of the 14,500 McDonald’s. It is an incremental effort to make a small change when competitors are offering substantially different products and experiences.
When a business, brand or product line is growing it is on a trend. Like McDonald’s was in the 1960s and 1970s, offering quality food, fast and at a consistent price nationwide at a time when customers could not count on those factors across independent cafes. At that time, offering new products – like a Big Mac – that are variations on the theme that is riding the trend is a good way to expand sales.
But over time trends change, and adding new features has less and less impact. These sustaining innovations, as Clayton Christensen of Harvard calls them, have “diminishing marginal returns.” That’s an academic’s fancy way of saying that you have to spend ever greater amounts to create the variations, but their benefits keep having less and less impact on growing, or even maintaining, sales. Yet, most leaders keep right on trying to defend & extend the old business by investing in these sustaining measures, even as returns keep falling.
Over time a re-invention gap is created between the customer and the company. Customers want something new and different, which would require the business re-invent itself. But the business keeps trying to tweak the old model. And thus the gap. The longer this goes on, the bigger the re-invention gap. Eventually customers give up, and the product, or company, disappears.
Think about portable hand held AM radios. If someone gave you the best one in the world you wouldn’t care. Same for a really good portable cassette tape player. Now you listen to your portable music on a phone. Companies like Zenith were destroyed, and Sony made far less profitable, as the market shifted from radios and cathode-ray televisions to more portable, smarter, better products.
Motorola, one of the radio pioneers, survived this decline by undertaking a “strategic pivot.” Motorola invested in cell phone technology and transformed itself into something entirely new and different – from a radio maker into a pioneer in mobile phones. (Of course leadership missed the transition to apps and smart phones, and now Motorola Solutions is a ghost of the former company.)
McDonald’s could have re-invented itself a decade ago when it owned Chipotle’s. Leadership could have stopped investing in McDonald’s and poured money into Chipotle’s, aiding the cannibalization of the old while simultaneously capturing a strong position on the new trend. But instead of pivoting, leadership sold Chipotle’s and used the money to defend & extend the already tiring McDonald’s brand.
Strategic pivots are hard. Just look at Netflix, which pivoted from sending videos in the mail to streaming, and is pivoting again into original content. But, they are a necessity if you want to keep growing. Because eventually all strategies become out of step with changing trends, and sustaining innovations fail to keep customers.
McDonald’s needs a very different strategy. It has hit a growth stall, and has a very low probability of ever growing consistently at even 2%. The company needs a lot more than sriracha sauce on a Big Mac if it is to spice up revenue and profit growth.
by Adam Hartung | Jul 26, 2013 | Current Affairs, Food and Drink, In the Swamp, Leadership
Both Coca-Cola and McDonald's have produced good investor returns over the last decade. From stock lows in early 2009, Coke has more than doubled. After shutting many stores and investing heavily in upgrades as well as supply chain efficiencies, over the last decade McDonald's has risen 6-fold!
But recent quarterly returns have not impressed investors as both companies failed to meet expectations. And for traders with a short-term focus both companies are off their 2013 highs. The open question now, for patient investors with a multi-year focus, is whether either, or both, companies are going to go back to long-term valuation growth (meaning they are a buy) or if their value has fizzled (meaning they are a sell)?
This question cannot be answered by looking at historical performance. As all investment documents remind us, past history is no assurance of future gains. Instead investors need to look at trends, and whether each company is positioned to take advantage of major trends as we head toward 2020.
One major trend is obesity. And not in a good way. The USA is fatter than ever, and shows no signs of thinning as one in 3 people are now considered obese. For Coke and McDonald's this is not a good thing, since their products are considered major contributors to what some call a national epidemic.
Over the last few years this trend has led schools to remove fast food and soft drink dispensers. America's first lady has started a national campaign to fight childhood obesity. And the nation's largest city's mayor has tried to make large portion sizes illegal in New York. While all of this might seem like crank activity that isn't making much difference, truth is that soda consumption per capita has been declining since 1998, and 2012 declines now put soda drinking at the lowest level since 1987!
Even if this still seems like much ado about nothing, investors should be aware of the long-term impact when products are seen as unhealthy. Cigarettes were a common consumer staple well into the 1960s, but when that product was determined to have adverse health impacts advertising was banned, consumption was restricted to adults only, dispensing was severely limited as machines were eliminated, taxes shot through the ceiling creating a 20-fold price increase and consumption was banned in buildings and many public places. None of this happened overnight, but eventually these actions caused the sales and profits of tobacco companies to decline — despite their heroic efforts to fight the trend.
If the Centers for Disease Control takse the point of view that soft drinks are a major contributor to diabetes and other obesity-related illnesses, it is not out of the realm of possibility that Coke could find itself in a situation somewhat like Phillip Morris did. If the CDC made the same determination about certain fast food items (such as double-patty burger sandwiches or large french fry orders) the amount of advertising, free toys, discounted product and super-sized packaging available to McDonald's could be severly curtailed. It could become a requirement that Coke and Big Macs have warning labels educating consumers about the possibility of long-term illness from consumption. And product sales could only be limited only to people over 18.
This may seem extreme, even bizarre, and far off into the future. But this is the direction of the trend. There seems no solution for obesity at this time, so public policy is starting to point toward doing something about consumption.
Recall that when alcohol-related deaths showed no sign of decline it didn't take long for much tougher drunk driving laws to be enacted, then for a string of adjustments lowering the level at which people were considered drunk. Public policies that took direct aim at product consumption.
Looking at the tobacco and alcohol analogies, Coke and McDonald's are behaving a lot more like the R.J. Reynolds than Miller-Coors.
Tobacco companies fought the trend, and ended up in a very expensive and long battle they inevitably lost. They denied there was any public health problem, and denied they had anything to do with the nation's, and their customers', health issues. The fight lasted a very long time. Now their customers are often ostracized, and the industry is contracting.
Liquor companies took a different approach. While not admitting anything, they aggressively promoted "responsible" consumption levels. They promoted individual abstinence (non-consumption) in group settings so there could be a "designated driver" while actively promoting product bans for people under age. They did not fight drunk driving laws, but instead worked with organizations to reduce deaths. Though far from angels, the industry players did not fight the trend, and managed to find ways to avoid the kind of bans dealt tobacco.
Coke and McDonald's today are denying the obesity problem and their contribution to it. While they both have healthier products, they remain committed to the least healthy offerings. Watch a Coke ad and you'll always see the traditional, sweetened red label product receive top billing. Likewise, you can purchase a salad at McDonald's, but the ads and promotions always feature the far less healthy burgers and fried foods which characterize the company's history.
Neither company promotes responsible consumption levels, nor does anything to discuss the importance of limiting use of their products. To the contrary, both like to promote larger package sizes and greater consumption – often beyond what almost anyone would consider healthy. Neither works aggressively to improve the quality of healthy products, nor showcases them as preferred products for customers to purchase.
One would not expect Coke or McDonald's to fail any time soon. But the trends which made them huge companies have reached an end, and new trends are headed in a direction which do not support growth. Both companies seem unwilling to recognize the new trends, and find ways to align with them. Future revenue growth is up against a difficult environement, and historical cost reduction activities leave little opportunity to improve future earnings without revenue growth. While the valuation of both companies are unlikely to remain flat, it is hard to identify the bull case for either to provide long-term investors much gain.
by Adam Hartung | Dec 18, 2012 | Current Affairs, Defend & Extend, Food and Drink, In the Swamp, Leadership
How would you recognize signs of a troubled business? Often the key indicator is when leadership clearly takes "more of the same" to excess.
This week McDonald's leadership began encouraging franchisees to open on Christmas Day. Their primary objective, clearly stated, was to produce more revenue and hopefully show a strong December.
I nominate McDonald's for the 2012 Dickens' Award as the most Scrooge-est business behavior this season.
"Christmas is but an excuse for workers to pick their employer's pockets every 25th December" is I believe how Charles Dickens put it in "A Christmas Carol." Poor Bob Cratchet couldn't even have 1 day off per year. And in McDonald's case the company founder actually made it corporate policy to never be open on Thanksgiving or Christmas days so employees could be with family.
Bah! Humbug!
Now, there are a lot of trends McDonald's could legitimately cite when making a case for being open on Christmas – a case that could actually shed a positive light on the company:
- The number of single people has risen over the last decade. This trend means that many more people now have a need for at least one meal not in a family setting on 25 December.
- America has a large and storied Jewish community for whom 25 December does not have a special religious meaning. For these people enjoying their habitual norms such as eating at McDonald's would indicate an open-minded company supports all faiths.
- America is a nation of immigrants. While the founders were European Christians, today America has a very diverse group of immigrants, especially from Asia and the Indian sub-continent, who follow Islam and other faiths for which 25 December has, again, no particular meaning. Offering them a place to eat on their day off could show a connection with their growing importance to America's future. An act of understanding to their impact on the country.
These are just 3, and there are likely more and better ones (please offer your thoughts in the comments section.) But truthfully, this is not why McDonald's is urging franchisees to toil on this national holiday. Instead, it is just to make a buck.
But then again, what trend has McDonald's successfully leveraged in the last… let's say 2 decades? Despite the rapid growth of high end coffee, the "McCafe" concept was a decade late, and so missed the mark that it has made no impact when competing against Caribou Coffee, Peet's or Starbucks. And it has had minimal benefit for McDonald's.
To understand the dearth of new products just go to McDonald's web site where you'll see an animated ad for the "101 reasons to eat a McRib" – that mystery meat product which is at least 30 years old and rotated on and off the menu in the guise of "something new."
McDonald's had a very rough last quarter. It's sales per store declined versus a year ago. The number of stores has stagnated, sales are stagnant, new products are non-existent. Even Ronald McDonald has aged, and apparently moved on to the nursing home. What can you think about that is exciting about McDonald's?
Desperate to do something, McDonald's fired the head of North America. But that doesn't fix the growth problem at McDonald's, it just demonstrates the company is internally fixated on blame rather understanding external market shifts and taking action. McDonald's keeps doing more of the same, year after year; such as opening more stores in emerging markets, staying open longer hours at existing locations and even opening on Thanksgiving and Christmas in the U.S.
McDonald's Ghost of Christmas past was its great strength, from its origin, of consistency. In the 1960s when people traveled away from home they could never be quite sure what a restaurant offered. McDonald's offered a consistent product, that people liked, at a consistent (and affordable) price. This success formula launched tremendous growth, and a revolution in America's restaurant industry, creating a great string of joyous past Christmases.
But the Ghost of Christmas present is far more bleak. 50 years have passed, and now people have a lot more options – and much higher expectations – regarding dining. But McDonald's really has failed to adapt. So now it is struggling to grow, struggling to meet goals, struggling to be a kind and gentle employer. Now asking its employees to work on Christmas – and ostensibly eat Big Macs.
What is the Ghost of Christmas Future for McDonald's? Not surprisingly, if it cannot adapt to changing markets things are likely to worsen. No company can hope to succeed by simply doing more of the same forever. Constantly focusing on efficiency, and beating on franchisees and employees to stay open longer, is a downward spiral. Eventually every business HAS to innovate; adapt to changing market conditions, or it will die. Just look at the tombstones – Kodak, Hostess, Circuit City, Bennigan's ….
Take time between now and 2013 to ask yourself, what is your Ghost of Christmas past upon which your business was built? How does that compare to the Ghost of Christmas present? If there's a negative gap, what should you expect your Ghost of Christmas Future to look like? Are you adapting to changing markets, or just hoping things will improve while you resist putting enough coal on the fire to keep everyone warm?
