The Chicago Tribune today ran a feature on growth at McDonald’s (see chart here) the last 5 years. Of course McDonald’s grew, does no one remember the program McDonald’s launched in the mid-1990s to close stores? Over 5 years McDonald’s closed hundreds of stores in the U.S., Japan, U.K., Europe and almost every other country in the globe. Admitting to "saturation" claims made by franchisees, McDonald’s management set about reducing the number of units. By 2003, the closures had largely stopped – and magically McDonald’s is able to set out on a slow growth trajectory. And after the most massive stock buyback in company history, using funds from asset sales, the share price rose to new heights as well. Imagine that!
Now McDonald’s is trumpeting it’s coffee launch (read article hear). As the company prepares to roll-out lattes and cappuccinos, does anyone think this is the result of White Space – and the beginning of a new McDonald’s prepared to retake the high growth path? Hardly. The company has greatly automated the specialty coffee making process so its franchisee’s employees, let’s call them non-baristas, don’t need the skills of a Starbucks company employee. You won’t get the specified drink so made fun of by the Dunkin’ Donuts ads (fritalia anyone?) And despite some remodeling, you won’t have the same atmosphere in which to drink your elixir – it will still be a McDonald’s with its focus on speed over service pleasant surroundings.
Investors should face the truth that this is just another effort by McDonald’s to get you into the store for an Egg McMuffin, or Big Mac. Just as salads were introduced so moms would stop in for a happy meal for the 5 kids in the car pool. McDonald’s isn’t trying to upscale their environment so that businesspeople stop in to discuss a potential out-of-town deal. Nor attract the working women on their way to their next sales call. Nor the soccer moms taking a 20 minute break between the next exhausting task. This is about selling some additional beverages near the carry-out window – and hopefully getting a few extra sandwich sales. But do we really think that’s what the world wants – more Big Macs? Is the lack of a latte the only thing keeping us from going to McDonald’s more often?
I’d predict this wouldn’t work at all – except the returning Starbuck’s CEO has recently taken to Defend & Extend Management himself. His latest declarations to return to a coffee focus, and diminishing recent introductions of other products – including quality lunch foods – is playing right into McDonald’s hands. While McD’s may not be Starbucks, pretty soon Starbucks may not be either. Yet, in the end, tastes have shifted. This isn’t 1965. We may want a lot of things fast and consistent, including the vast bulk of coffee purchases from 7-11 and Dunkin, but that isn’t how Starbucks became a modern legend. And it isn’t the road to growth for Ronald McDonald.
McDonald’s isn’t really changing. And the long-term road to growth and above-average profits is still unclear. Nothing about a McDonald’s iced coffee indicates the company will soon be the next cache. Until management realizes that Chipotles is where customers are heading – toward new products in new service formats – McDonald’s results will, long term, remain uninteresting. Up for a while, but just waiting for the next innovation to push them back down. It can all sound so good….. but Locked-in management is not the route to prosperity. And these coffees are all about maintaining Lock-ins at McDonald’s.