No More Happy Meals From McDonald's?

McDonald's is having a spot of trouble with its profits.
Ah, the good ol' days.

McDonald's is having a spot of trouble with its profits.

It's still making them, to be sure. But profits have declined for four straight quarters. U.S. sales are being hit by competition from outlets such as Chipotle that deliver a fresher, more upscale product by stripping down the menu and making their limited offerings on an assembly line. McDonald's is still the king of the old fast-food giants, but that category is under assault from new business models and changing American tastes. Meanwhile, in Asia, where there's plenty of room for expansion, McDonald's got hurt by a supplier that was caught on camera repackaging expired food.

It's a little early to count McDonald's out, of course. There's a reason that minimum-wage campaigns have targeted the behemoth: It is omnipresent, with great brand recognition. It has been a leader in many of the fast-food innovations we take for granted: drive-thrus, value menus, breakfast. And it can bring a whole lot of firepower to any battle for market share.

On the other hand, there's also no reason to think that McDonald's will be king forever. Tastes change, and business models stop working. Take Jell-O: Jello-O consumption peaked in the mid-century, because expanding supply chains meant that Americans could eat fresh or frozen produce rather than encasing canned things in sweetened gelatin to enhance their appearance and palatability. No marketing wizardry or management change was going to fix that, and despite brand expansions, Jell-O is a minor factor in most Americans' diets.

Of course, Kraft is hardly hurting; changing tastes don't mean the company has to go down with product sales. But as I outline in my book, companies find that harder and harder to do over the years. You have a lot invested in the old model and a lot of internal constituents who want to keep it. Even if you go forward, you simply may not have the personnel or management expertise you need to execute a different strategy.

Consider two of the things analysts say that McDonald's needs to fix: speed of service and adapting the menu to changing American tastes. Problem is, adding new items to the menu, such as the McWrap, to suit changing tastes seems to be one of the reasons service has slowed down. The CEO announced today that the company will be simplifying the menu to speed things up, but this carries its own risks: People may get offended if they lose a beloved product.

Again, McDonald's still has a lot of formidable assets: good franchisees, a beloved brand, an extremely wide reach and a pretty good war chest. Four quarters of declining earnings are hardly enough to take it out of the game. But it does demonstrate that the game is getting harder.

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