McDonald’s, the long-time leader in the fast-food wars, faced a crossroads in the early 1990s. Domestically, sales and revenues were flattening as competitors encroached on its domain. In addition to its traditional rivals—Burger King, Wendy’s, and Taco Bell—the firm encountered new challenges. Sonic and Rally’s competed using a back-to-basics approach of quickly serving up burgers, just burgers, for time-pressed consumers. On the higher end, Olive Garden and Chili’s had become potent competitors in the quick service field, taking dollars away from McDonald’s, which was firmly entrenched in the fast-food arena and hadn’t done anything with its dinner menus to accommodate families looking for a more upscale dining experience.
While these competitive wars were being fought, McDonald’s was gathering flak from environmentalists who decried all the litter and solid waste its restaurants generated each day. To counter some of the criticism, McDonald’s partnered with the Environmental Defense Fund (EDF) to explore new ways to make its operations more friendly to the environment.
McDonald’s roots go back to the early 1940s when two brothers opened a burger restaurant that relied on standardized preparation to maintain quality—the Speedee Service System. So impressed was Ray Kroc with the brothers’ approach that he became their national franchise agent, relying on the company’s proven operating system to maintain quality and consistency.
Over the next few decades, McDonald’s used controlled experimentation to maintain the McDonald’s experience, all the while expanding the menu to appeal to a broader range of consumers. For example, in June 1976, McDonald’s introduced a breakfast menu as a way to more fully utilize the physical plant. In 1980, the company rolled out Chicken McNuggets.
Despite these innovations, McDonald’s tremendous growth could only continue for so long. Its average annual return on equity was 25.2% between 1965 and 1991. But the company found its sales per unit slowing between 1990 and 1991. In addition, McDonald’s share of the quick service market fell from 18.7% in 1985 to 16.6% in 1991. Plus growth in the quick service market was projected to only keep pace with inflation in the 1990s.
McDonald’s faced heightening competition on several fronts. First, its traditional rivals—Burger King, Wendy’s, and Taco Bell—were eating into its margins through promotions and value pricing strategies. Taking a leaf from McDonald’s own playbook, Sonic and Rally’s were using a very limited menu approach to attract time-strapped consumers. Finally, Chili’s and Olive Garden were appealing to diners looking for something a little more enticing that the familiar Golden Arches for their families.
In the late 1980s, McDonald’s began recognizing the importance of maintaining an ecologically correct posture with the public, which was becoming more concerned about the environment. For example, in 1989, 53% of respondents in one survey revealed that they had not bought a product because they didn’t know what effect the packaging would have on the environment. Closer to home, a 1990 study showed that each McDonald’s generated 238 pounds of on-premise solid waste per day.
It’s no surprise, then, that McDonald’s sought a way to reduce its solid waste while providing a more environmentally acceptable face to the public. Beginning in 1989, it partnered with the Environmental Defense Fund, a leading organization devoted to protecting the environment, to seek ways to ease the company’s environmental burden on the landscape.
Together, EDF and McDonald’s considered its impact on a wide range of stakeholders—customers, suppliers, franchisees, and the environment. The company gave its franchisees much autonomy in finding ways to eliminate environmental blight. The company’s hope was that from these divergent approaches, it stood a greater chance of finding solutions with broad applicability than if it had tried to pursue a one-size-fits-all approach from the outset.
Some of the environmentally inspired solutions that came out of the collaboration with EDF were the:
Introduction of brown paper bags with a considerable percentage of recycled content.
Solicitation of suppliers to produce corrugated boxes with more recycled content, which had the twin effect of reducing solid waste and building a market for recycled products.
Abandonment of polystyrene clamshell containers to hold sandwiches in favor of new paper-based wraps that combined tissue, polyethylene, and paper to keep food warm and prevent leakage.Analysis
McDonald’s Sustained Prosperity
The secret of McDonald’s success is its willingness to innovate, even while striving to achieve consistency in the operation of its many outlets. For example, its breakfast menu, salads, Chicken McNuggets, and the McLean Deluxe sandwich were all examples of how the company tried to appeal to a wider range of consumers.
The company has also made convenience its watchword, not only through how fast it serves customers, but also in the location of its outlets. Freestanding restaurants are positioned so that you are never more than a few minutes away by foot in the city or by car in the suburbs. Plus McDonald’s is tucking restaurants into schools, stores, and more.
The key threats to McDonald’s domestically are the lack of growth opportunities. The market is well saturated, and it would be difficult to achieve double-digit growth. Other concerns are a newfound emphasis on healthier eating. Most of McDonald’s most popular fare probably in some small way contributes to the increasing incidence of cancer, heart disease, and diabetes among the population.
But I feel the key threat to McDonald’s continued success is its very ubiquity. Because McDonald’s are everywhere, the dining experience is never special. And as Baby Boomers age and become more affluent, it is likely that they will leave behind their fast-food ways, if only to step up to moderately priced restaurants like Olive Garden, Bennigans, and Pizzeria Uno. These chains have the added advantage of serving higher-margin alcoholic drinks. McDonald’s, meanwhile, has to continually battle Burger King and Wendy’s, which leads to an erosion of margins for everyone. Even alliances with toy manufacturers, while popular with consumers, do little for the bottom line because the cost to run these promotions can be quite expensive.
Responding to Burger King’s October 1 Announcement
The October 1 announcement from Burger King that it would begin offering table service is not much of a threat at all. You can try to dress up fast food, but it’s still fast food. I couldn’t imagine this being a potent draw for consumers. McDonald’s best course is to ignore this development as irrelevant. As the market leader, McDonald’s does not need to respond to every competitor’s initiative. Indeed, doing so would have the effect of making McDonald’s look reactive and less like a leader.
The advantage of not responding to Burger King’s initiative is that the company can preserve its resources for other marketing thrusts that may provide a bigger payoff. The disadvantage of not responding to Burger King’s initiative is that you allow the firm to establish itself in a unique way in the minds of consumers—that of a fast-food restaurant that provides sit-down service. But again, is this inherent contradiction of fast-food fare and upscale dining experience likely to resonate with consumers? I would say no. If Burger King’s initiative does prove popular with consumers—as evidenced by expanding sales and market share—McDonald’s would be forced into catch-up mode. But I think that this is a risk that the company should be willing to take.
Promoting Flexibility Through Its Operating Strategy
The key thing that McDonald’s operations strategy has to support is experimentation. Now somewhat long in the tooth, McDonald’s needs a breakthrough that will provide new avenues of growth. It has a long history of such experimentation, which has resulted in some new profit centers like Chicken McNuggets and the breakfast menu. Some later turn out to be duds like the McLean Deluxe, but inevitably experimentation in limited outlets offers McDonald’s a way to retain its key strengths—quality and consistency—while continuing to evolve for new palates and pocket books.
McDonald’s and the Environmental Defense Fund
In some ways, partnering with the Environmental Defense Fund was a masterstroke. It brought both respectability and valued expertise to its environmental efforts. It also provided a primetime venue for EDF to make a difference. Any successes, even if only incremental improvements, would have major ramifications because of the sheer size of McDonald’s operations.
McDonald’s should continue its partnership with EDF. With ecology a growing concern among consumers, it makes sense to be a good corporate citizen and get all the public relations accolades that go along with such an alliance. It also pays off in the bottom line by reducing shipping costs for supplies as well as garbage removal fees.
McDonald’s would do well to stay in the vanguard of corporations who have become environmentally aware. If it tries to shirk its responsibilities, it can foresee a public relations nightmare in the making. But if it does manage to come up with some breakthroughs through its collaboration with EDF, it can score a tremendous amount of goodwill with the public, which may even provide a halo effect to mitigate any other PR troubles.
How far should McDonald’s go on environmental issues?
There is definitely a public relations benefit in being seen as an environmental leader, and the collaboration with EDF goes a long way in making that happen. Still McDonald’s has had a lot of success in giving its franchises some latitude in developing new solutions.
The line in the sand in determining how far McDonald’s should go with its environmental efforts is determined by the cost of the initiative relative to the hard-dollar benefits and harder-to-quantify public relations buzz it gets from being in the forefront on environmental issues. The bottom line is that environmental efforts can’t detract the company from its primary mission of providing consistent quality to consumers. If environmental efforts start to be a drag on the company’s future profits, it’s time to ease up. Ideally environmental initiatives should pay for themselves by reducing other kinds of costs.
Dealing With the Product Range Explosion
McDonald’s had done well with a fairly limited product range. But falling per unit sales is a danger sign for the firm. With competitors gaining ground on McDonald’s, it may indicate a need to refresh its product line. Perhaps the best way to do that is by rotating in a couple highly promoted new menu items. This would have the effect of enlivening the product menu, without the need to go head to head with competitors on price.
This slackening of per unit sales might also indicate that McDonald’s critical success factors have changed. Perhaps in the new environment, fast, convenient service is no longer enough to distinguish the firm. At this time, a new critical success factor may be emerging: the need to create a rich, satisfying experience for dinner consumers.
To maintain consistency in new products as it expands the product line, McDonald’s must rely on test marketing new menu items in pilot locations. This approach will let the firm identify which items are likely to prove popular with consumers while ensuring that the company can deliver new products with consistent quality nationwide. McDonald’s already has a history of doing this so it will not require major changes to its operations strategy—at least initially. If the product line-up gets too large, then the task of maintaining quality becomes exponentially harder. The trick is to consider how to eliminate some of the existing menu items when you introduce new ones, while making sure the staff is fully trained in how to execute these products successfully.
Because McDonald’s has pretty well saturated the U.S. market, it’s only real opportunities for growth lie abroad, where the competition is not so cutthroat or by introducing new restaurant concepts under brands other than McDonald’s. After all, McDonald’s is known for fast food. It’s not really a pleasant dining experience, just a cheap and convenient one. I feel that McDonald’s has reached the point of diminishing returns with the McDonald’s brand and now needs to roll out new types of restaurants.
Indeed, McDonald’s has the opportunity to apply its core competencies—scrupulous adherence to quality standards and continual promotion of experimentation—in new venues. Imagine, if you will, McDonald’s opening a new casual dining restaurant under the name of Splendor. It could then franchise that concept nationwide and get some of the dollars from consumers who have grown past fast food. But its fastidious approach to operations would ensure that consumers everywhere would experience the same dining experience—a tremendous advantage for consumers who don’t want to be surprised with a bad meal.
McDonald’s could try a number of concepts simultaneous in different parts of the country. Those that seemed promising could be rolled out further. The duds could be left to die quickly. While this will be an expensive undertaking, it holds the potential to unleash new areas of growth in a maturing market.
McDonald’s faces some difficult challenges. Key to its future success will be maintaining its core strengths—an unwavering focus on quality and consistency—while carefully experimenting with new options. These innovative initiatives could include launching higher-end restaurants under new brands that wouldn’t be saddled with McDonald’s fast-food image. The company could also look into expanding more aggressively abroad where the prospects for significant growth are greater.
The company’s environment efforts, while important, should not overshadow its marketing initiatives, which are what the company is all about.
Contributed by: Our Special Correspondent
City: San Francisco
Date: March 15, 2010